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The Market System
Demand, Supply and Price Determination
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Copyright 2003 – Biz/ed
The Market System
• Market consists of:– Consumers: create a demand for a product.
• Demand– the amount consumers desire to purchase
at various prices– Not what they will buy, but what they
would like to buy!
• Effective demand – must be willing AND able to pay
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Individual and Market demand
• Market demand – consists of the sum of all individual demand schedules in the market
• Represented by a demand curve• At higher prices, consumers generally
willing to purchase less than at lower prices
• Demand Curve – negative slope, downward sloping from left to right
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The Demand Curve
Price (£)
Quantity Demanded (000s)
Demand
£10
£5
100 150
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The Demand Curve 2
• The level of demand – – determines where on the graph it sits
• Low demand – – nearer the origin
• High demand – – further from the origin (assuming same
scale)• Dependent on a variety of factors• Demand Curve moves in response to
changing factors
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The Demand Curve 3• Factors influencing Demand
D = f (Pn,Pn…Pn-1, Y, T, P, A, E)• Where:• Pn = Price• Pn…Pn-1 = Prices of Other Goods – Substitutes
and Complements• Y = Incomes – the level and distribution of
income• T = Tastes and fashions• P = the level and structure of the population• A = Advertising• E = Expectations of Consumers
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The Demand Curve 4
Changes in any of the factors other than price causes the demand curve to shift either:
• Left (less demanded at each price) or• Right – (More demanded at each price)
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The Demand Curve 5
Price (£)
Quantity Demanded (000s)
Demand
£10
100
D1
D2
10 200
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The Supply Curve
• Factors Influencing Supply:• S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp)
• Where:• Pn = Price
• Pn..Pn-1 = Profitability of other goods in production and prices of goods in joint supply
• H = Technology• N = Natural shocks
• F1..Fm – Costs of production
• E = expectations of producers• Sp = Social Factors
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The Supply Curve
• Changes in any of the factors OTHER than price cause a shift in the supply curve
• A shift in supply to the left – the amount producers offer for sale at every price will be less.
• A shift in supply to the right – the amount producers wish to sell at every price increases
• HINT: Be careful to not confuse supply going ‘up’ and ‘down’ with the direction of the shift!
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The Supply CurvePrice £
Quantity Bought and Sold (000s)
Supply
£3
200
£7
800
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Copyright 2003 – Biz/ed
The Supply CurvePrice £
Quantity Bought and Sold (000s)
Supply
£4
400
S1
100
S2
900
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Copyright 2003 – Biz/ed
The MarketPrice (£)
Quantity Bought and Sold (000s)
S
D
£5
600
D1
300
Surplus
£3
450
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Copyright 2003 – Biz/ed
The MarketPrice (£)
Quantity Bought and Sold (000s)
S
D
£5
600
S1
100
Shortage
£8
350
