1. The document discusses the functions of the price mechanism in allocating scarce resources, rationing supply and demand, signaling where resources are needed, and providing incentives. 2. It provides guidance on how to properly construct supply and demand diagrams, including labeling, showing equilibrium shifts, and explaining elasticities. 3. The effects of commodity price volatility are explored, including increased risk and uncertainty, poverty and unemployment, and macroeconomic impacts like trade balance fluctuations.

1. AS Micro
The Price Mechanism
in Action

2. Functions of the Price Mechanism
1. Allocate – the market mechanism allocates
scarce resources
2. Ration – prices serve to ration scarce resources
when demand outstrips supply
3. Signal – market prices adjust to demonstrate
where resources are required, and where they
are not.
4. Incentive – when the price of a product rises,
the quantity supplied increased, this is due to
the incentive function

3. Diagrams matter!
Diagram must haves
Fully labeled
Original and new equilibrium
Demand and supply the correct way round
Well explained – you must explain why the
curve has shifted, in detail
Think about the elasticity – e.g. oil has
inelastic demand and supply

4. Shift Equilibrium Price
Demand increases Higher
Demand decreases Lower
Supply increases Lower
Supply decreases Higher

5. Shift Equilibrium Price Equilibrium Quantity
Demand increases Higher Higher
Demand decreases Lower Lower
Supply increases Lower Higher
Supply decreases Higher Lower

6. Which direction?
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Crude Oil?
A deep recession in many of
the world’s advanced
economies
OPEC decides to introduce
lower output quotas for each
of their members

7. Which direction?
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Crude Oil?
A deep recession in many of
the world’s advanced DEMAND
economies
OPEC decides to introduce
lower output quotas for each
of their members

8. Using an analysis diagram
Price
S1
P1
D1
Q1
Quantity of crude oil

9. Using an analysis diagram
Price
S1
P1
D1
D2
Q1
Quantity of crude oil

10. Using an analysis diagram
Price
S1
P1
P2
D1
D2
Q2 Q1
Quantity of crude oil

11. Which direction?
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Crude Oil?
A deep recession in many of
the world’s advanced DEMAND
economies
OPEC decides to introduce
lower output quotas for each SUPPLY
of their members

12. Using an analysis diagram
Price
S1
P1
D1
Q1
Quantity of crude oil

13. Using an analysis diagram
S2
Price
S1
P1
D1
Q1
Quantity of crude oil

14. Using an analysis diagram
S2
Price
S1
P2
P1
D1
Q2 Q1
Quantity of crude oil

15. The effects of high oil prices
• Exploration
Oil
Industry
& Drilling
• Investment
• Cost of living
Consum
ers • Real
incomes
• Oil
substitutes
Related
sectors • Oil supply
chain
industries
P6

16. Stakeholders
Groups who benefit from high Groups who lose out from high
oil prices oil prices
Oil companies themselves
Industries supplying petroleum
businesses
Oil exporting nations
Government – oil taxes
Renewable energy industry

18. Stakeholders
Groups who benefit from high Groups who lose out from high
oil prices oil prices
Consumers of products that
Oil companies themselves
uses oil as essential input
Industries supplying petroleum Transport businesses e.g.
businesses airlines, road haulage
Consumer goods businesses
Oil exporting nations
(less real income to spend)
Government – oil taxes
Renewable energy industry

19. The Global Market for Aluminium

20. Shifts in supply & demand
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Aluminium?
A fall in demand for new long-haul
aircraft
Tighter fuel-efficiency standards for new
vehicles in the USA
A persistent fall in the world price of
steel
A rise in the price of bauxite (used in
manufacturing aluminium)

21. Shifts in supply & demand
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Aluminium?
A fall in demand for new long-haul DEMAND FALL
aircraft
Tighter fuel-efficiency standards for new
vehicles in the USA
A persistent fall in the world price of
steel
A rise in the price of bauxite (used in
manufacturing aluminium)

22. Shifts in supply & demand
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Aluminium?
A fall in demand for new long-haul DEMAND FALL
aircraft
Tighter fuel-efficiency standards for new DEMAND RISE
vehicles in the USA
A persistent fall in the world price of
steel
A rise in the price of bauxite (used in
manufacturing aluminium)

23. Shifts in supply & demand
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Aluminium?
A fall in demand for new long-haul DEMAND FALL
aircraft
Tighter fuel-efficiency standards for new DEMAND RISE
vehicles in the USA
A persistent fall in the world price of DEMAND FALL
steel
A rise in the price of bauxite (used in
manufacturing aluminium)

24. Shifts in supply & demand
Market Change Shift in Supply Rise or Fall in
or Demand? Market Price for
Aluminium?
A fall in demand for new long-haul DEMAND FALL
aircraft
Tighter fuel-efficiency standards for new DEMAND RISE
vehicles in the USA
A persistent fall in the world price of DEMAND FALL
steel
A rise in the price of bauxite (used in SUPPLY RISE
manufacturing aluminium)

25. Shifts in supply & demand
A fall in demand for new long-haul DEMAND FALL
aircraft
Price of
Aluminium
Supply
P1
Demand
Q1 Quantity of
Aluminium

26. Shifts in supply & demand
A fall in demand for new long-haul DEMAND FALL
aircraft
Price of
Aluminium
Supply
P1
Demand
D2
Q1 Quantity of
Aluminium

27. Shifts in supply & demand
A fall in demand for new long-haul DEMAND FALL
aircraft
Price of
Aluminium
Supply
P1
P2
Demand
D2
Q2 Q1 Quantity of
Aluminium

28. Shifts in supply & demand
A rise in the price of bauxite (used in SUPPLY RISE
manufacturing aluminium)
Price of S2
Aluminium
Supply
P1
P2
Demand
D2
Q2 Q1 Quantity of
Aluminium

29. Shifts in supply & demand
A rise in the price of bauxite (used in SUPPLY RISE
manufacturing aluminium)
Price of S2
Aluminium
Supply
P3
P1
P2
Demand
D2
Q3 Q2 Q1 Quantity of
Aluminium

30. Inter-related markets
Price of Price of
Aluminium Pepsi Max
S1
P1 Si
Pi
D1 Di
Quantity of Q1 Quantity of Qi
Aluminium Pepsi Max

31. Inter-related markets
Price of Price of
Aluminium Pepsi Max
S1
P2
P1 Si
Pi
D2
D1 Di
Quantity of Q1 Q2 Quantity of Qi
Aluminium Pepsi Max

32. Inter-related markets
Price of Price of
Aluminium Pepsi Max
S1 Sii
P2
P1 Si
Pii
Pi
D2
D1 Di
Quantity of Q1 Q2 Qii Qi Quantity of
Aluminium Pepsi Max

33. Application
Analysis
Evaluation
Good application opens the door to
good analysis and good evaluation

34. Why are prices volatile in the markets
for many commodities?
Low Low Volatile Specula
Ped Pes Supply tors

35. Using analysis diagrams
Price S1 Price
P2
P1
D1 D2
Quantity Quantity

36. Using analysis diagrams
Price S1 Price S1
P2
P1
D1 D2 D1
Quantity Quantity

37. Using analysis diagrams
Price S1 Price S1 S2
P2
P1 P1
P2
D1 D2 D1
Quantity Quantity

38. Problems arising from price volatility
Risk and Uncertainty
• Uncertain incomes and profits
• May limit investment by poorer farmers
Risk of poverty and unemployment
• Millions of smaller farmers suffer
• Many do not gain when world prices rise
Macroeconomic effects
• Volatile export revenues affects the trade balance
• High prices can cause inflation and food poverty