Monday, 9 May 2016

How markets work ?- Microeconomics

How markets work ?

A warm welcome and hello from everyone here at Designing Brilliance. It been quite a while since we last posted however we are in the process of putting a new team together. So we look forward to posting more posts on our blog!

So in today's post we will be looking into education and microeconomics in particular.

The first topic we will be looking at is how markets work. We will be taking a look at the basics on supply and demand and the determinants of price.

Lets get started with a quick definition of price mechanism- the price mechanism is the means by which consumers and producers interact to determine the allocation of resources between different goods and services. In essence this basically means that consumers and producers decide where resource (e.g oil, wheat etc...) are used.

There are three types of functions of price mechanism which can be remembered using the acronym SIR

I- incentive
R- rationing


 Now moving onto demand. What is demand? It is an insistent and peremptory request. That is the google definition; however demand in economics is the wants and the needs of the consumer. Demand is shown in a graph known as the demand curve which shows the relationship between the price of and item and the quantity demanded over a period of time. The demand curve is shown below in red.

There are some factors that cause a shift in the demand curve as shown by the movements of the demand curve from the red to the blue as shown in the graph above. These factors include

Income- So for example an increase in income would suggest or imply that the consumer has more disposable income and therefore may demand more of product thus increasing demand (shift of demand curve to the right)

Tastes/ trends- Tastes and trends are one of the most common factors that cause shifts in demand. This is because a sudden change in rend for an item can cause demand for a product to change. For example lets say a new craze of converse shoes comes into fashion or trend then more consumers will be requesting or asking for the product and in essence will cause the demand curve to shift to the right. A shift to the left would occur if the trend became negative (e.g a bad review or health impact causing demand for the product to reduce).

Substitutes- What are substitutes. Well this can be kind of hard to explain so I am going to give an example. So different brands offering the same product. E.G Heinz baked beans Vs Tesco baked beans.

Competition- Between brands competing can change demand for one or more products.

Price- The price of a product can determine whether the consumer would want to buy one good over another. For example I would probably buy a can of beans costing £0.50 rather than £0.51 or any more expensive. Therefore the demand for the beans costing £0.50 would increase theoretically and the demand for the other beans would theoretically decrease.


Finally onto the last part of today's article we will look at supply. What is supply? Supply is the quantity of a good or service that a producer is willing and able to supply to a market at a given price in a given time period. Supply is shown on a graph using the supply curve as shown in the diagram below.

There are some factors that cause a shift in the supply curve as shown by the movements of the supply curve from S to S1 in the blue as shown in the graph above. These factors include:

Weather- If there was good weather then it could potentially mean that a farmer may have a larger yielded crop resulting in a shift in supply to the right where as if there was to be a natural disaster such as a drought it would most likely result in a decrease in supply (shift to the left).

Subsidies-  Subsidies are amounts of money that are given to individual firm in order o help boost their production in order to supply more and the subsidies do not need to be paid back. Subsidies allow producers to reduce over all and cost per unit item; therefore allowing producers to supply more goods and services.

Technology- Technology can play a part in increasing the supply. If better technology is used for example using machine to make a product and making the process automated rather than having workers making items it will reduce costs as well as increase productivity and thus increase quantity supplied.

Cost of production- If costs of production are high it is very likely that producers will only be able to produce a limited amount of products or services whereas if costs of production are kept low then the amount that is supplied is considerably higher. resulting in a shift in the supply curve to the right.

That's all for today guys. Hope that the information was helpful. Don't forget to subscribe and leave comments below and share share share !  :)

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