the interaction of markets

• Ceteris paribus


  Providing all other conditions remain the same
• Equilibrium price and quantity

  When supply meets demand, shown as P1 and Q1. At market equilibrium, price has no tendency to change, and it is known as the market clearing price.

  
• Disequilibrium


  • Excess demand: Price is below equilibrium, causing a shortage and pushing prices up

  Excess supply: Price is above equilibrium, causing a surplus and pushing prices down
• New market equilibriums


  When the demand or supply curves shift due to the PIRATES or PINTSWC reasons, new market equilibriums are established
• Commodity prices


  • Food producers face unstable prices

  Incomes have fallen due to better technology, new market entrants, and increased buying power of supermarkets
• Cobweb diagram


  In the short run, supply is less than expected, pushing price up

  The following year, farmers plan higher output, but prices have fallen

  This continues until producers are forced to leave the market, largely due to information failure
• Changes in one market

  Can impact related markets, e.g. a poor cocoa bean harvest increasing chocolate prices, or an increase in margarine price shifting demand to butter
• Demand for agricultural produce

  • Tends to be stable in the long run, but supply is unstable due to poor technology, geographical distance, supply shocks, price elasticity, and imperfect information
• Housing market


  • House prices are important as they make up most consumer wealth, affecting the rest of the economy through the wealth effect and interest rates

  In the long run, house prices increase, but in the short run they are volatile, making supply and demand diagrams less effective
• Transport market


  • Demand varies with times (off peak and peak), and there is often a disequilibrium with demand exceeding supply during periods of congestion

  Demand and supply are affected by other markets, such as the price of petrol, train tickets, and substitutes
• The models of supply and demand can only show certain markets, and assume perfect information and rational behaviour, which is not always the case in reality

  
• The supply and demand model is useful for competitive markets with many buyers and sellers, but has limitations in explaining real-world problems