✅ Equilibrium is when there is no tendency for the market price to change. At this point, the quantity demanded equals the quantity supplied.

👉 But what happens if something changes?

👉 Changes in the conditions of demand and supply can shift the equilibrium price and quantity, causing a temporary market disequilibrium until a new equilibrium is established.

Situation: Due to a significant shortage of sunflower oil and extremely dry weather conditions in Spain, the production and availability of Spanish olive oil are impacted.

Question: "Draw a diagram to show the effect on the market for Spanish olive oil due to the reduced availability of sunflower oil and abnormally dry weather in Spain.”

Situation: The government has introduced a 'fat tax' on unhealthy food and imposed stricter restrictions on advertising unhealthy food, impacting its market dynamics.

Question: "Draw a diagram to show the effect on the market for unhealthy food as a result of the introduction of a ‘fat tax’ and increased restrictions on advertising unhealthy food.”

Situation: Both the EU and US governments have introduced subsidies to support the aircraft industry. However, there has been a worldwide suspension of most air travel due to the COVID-19 pandemic.

Question: "Draw a diagram to illustrate the effects of these subsidies from the EU and US governments, combined with the global suspension of air travel, on the market for aircraft.”

• Consumers decide how much they are willing to pay for a product.
• Businesses decide how much they want to charge for that product.

These decisions interact in the market, and the price is determined by the forces of supply (how much of a product is available) and demand (how much of a product people want). Essentially, it’s the buyers and sellers together who determine the price of a product.

👉 In short, the price mechanism is the system where supply and demand decide the prices of goods and services.

• Prices act as signals to show where resources are needed.
• Prices rise and fall based on scarcity (shortage) and surplus (extra supply).
• 📱Example: If the price of smartphones goes up because everyone wants one, this signals manufacturers to make more smartphones.
• 🍊Example: If there are too many oranges and not enough buyers, the price of oranges will drop to encourage people to buy more.

• Prices provide incentives for consumers and producers.
• Consumers’ choices send information to producers about what they need and want.
• 🚙 Example: If more people start buying electric cars, it tells car manufacturers to make more electric cars.

• Prices help ration scarce resources when demand is higher than supply.
• When there is a shortage, prices go up, so only those who are willing and able to pay can buy the product.
• 🎮 Example: If there is a limited supply of a new video game console, the price may increase, and only those who are willing to pay more will get one.

→ Price assigns a specific value to a product or service, making it easier to understand how much something is worth.

• 🍭 A candy bar priced at £1 means that the candy bar is worth £1.

→ Prices enable buyers and sellers to agree on the terms of exchange.

• If you have £1 and want a candy bar, you can exchange your £1 for the candy bar because both you and the seller agree on the price.

For example:

The Scottish Government supports energy price caps to protect consumers from excessive energy prices. By capping the prices that energy companies can charge, the government helps ensure that energy remains affordable, particularly for low-income households. ⚡️

Energy Price Guarantee Changes in Autumn Statement | FAI

Energy prices had previously been frozen for two years from October 2022 in the “mini budget” at £2500 per year for the typical household. While the price cap is remaining in place this winter it has…

fraserofallander.org

→ Prices of accommodation for the 2024 Fringe Festival has increased by up to 1500% due to the excess demand!

Edinburgh Fringe Festival accommodation' costs soar by as much as 1,500 percent

Landlords and hotels have been branded 'greedy' by performers with Jason Manford saying he is making a loss even after selling out.

uk.news.yahoo.com

🎮 Similarly, if you buy a new video game console, you will also need games to play on it to make the most of your purchase.

These are examples of complementary goods, which are products used together. Complementary goods automatically have joint demand. For instance:

• You use a smartphone and a phone case together.
• You use a video game console and video games together.
• You use milk and tea to make a great morning drink.
• You use lipliner with lipstick to create the perfect lip combo.

Think about the name “competitive demand.” The word "competitive" suggests rivalry, tension, and competition.

What goods/services are normally in competition with each other? Can you think of any?

💭 Did you know that during the processing of cotton to make fabrics, cottonseed is a major by-product? Cottonseed can be used to produce cottonseed oil, which is used in cooking and food products.

So, when we talk about joint supply:

• An increase in the production of cotton for fabrics results in more cottonseed being produced.
• This demonstrates joint supply, where the production of one good (cotton) leads to the production of a by-product (cottonseed).

Let's use a supermarket sstrategic decision to introduce a new line of vegan products amidst a growing trend: 8.6 million people in the UK are following a meat-free diet:

→ Taxes alter the prices consumers pay and the costs producers incur, affecting consumption patterns and production decisions across the economy.

When taxation reduces producer surplus and consumer surplus, it means:

• For Consumers: Prices increase, reducing their purchasing power and satisfaction from consuming goods.
• For Producers: Profits decrease, lowering their motivation to produce more goods and invest in production.

Overall, this reduces economic efficiency and welfare in the market.

Summary:

🔍 Think of a subsidy as grants/aids from the government to businesses to keep their operations running.

Businesses suffered significant losses due to reduced activity. Many couldn't afford to keep paying their workers and needed support to keep going. → On 20th March 2020 the Coronavirus Job Retention Scheme (CJRS) was announced to provide grants to employers during the Covid-19 pandemic in the UK.

→Read more about the CJRS’s impact here:

Has furlough prevented household financial distress during the pandemic? - Economics Observatory

The Coronavirus Job Retention Scheme may have helped to prevent a big rise in the number of UK households in financial distress. But its effects have not been equal, and those on lower incomes have been more likely to cut their spending, draw on savings and face financial hardship.

www.economicsobservatory.com

• Producers: Increased revenue and profit due to lower production costs and government support.
• Consumers: Increased consumer surplus due to lower prices.
• Market: Lower equilibrium price, increased equilibrium quantity, and higher overall welfare.

This analysis shows how the CJRS subsidy during the COVID-19 pandemic helped stabilised both supply and demand, supporting the overall economy by maintaining employment and consumer spending.

For instance, The Fraser of Allander Institute found that during crises, subsidies aimed at households can lower living costs, especially benefiting lower-income families who spend more of their income on energy.

Subsidising businesses helps maintain economic production but doesn't directly reduce living expenses. The best approach depends on policy goals: for fair distribution, demand-side subsidies targeted at consumers are effective, whereas supply-side subsidies support economic output. Often, a combination of both policies is used to achieve balanced outcomes.

What’s the impact of different forms of energy subsidies in crisis time? | FAI

Price subsidies, income subsidies, tax reductions and windfall taxes. New research by @GeoffroyPortier and @gioelef evaluates the effects of energy policies employed during the energy crisis.

fraserofallander.org