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The Market System
Demand, Supply and Price Determination
Our Market Economy Basic economic decisions are based on the
actions of buyers and sellers What goods/services should be produced
Price plays an important role in our economy The consumer tells the market to produce
more or less of a certain product
The Market System Market consists of:
Consumers creating a demand for a product.
Demand the amount consumers are willing and able to buy
at various prices
Individual and Market DemandThe Law of Demand Generally the higher the price, the less
consumers will buy of an item
Generally the lower the price, the more consumers will buy Demand Curve – negative slope, downward
sloping from left to right
The Demand CurvePrice
Quantity Demanded
Demand
10
5
100 150
The demand curve slopes downwards from left to right (a negative slope) indicating an inverse relationship between price and the quantity demanded. Demand will be higher at lower prices than at higher prices. As price falls, demand rises. As price rises, demand falls.
The Demand Curve Dependent on a variety of factors the Demand
Curve moves in response to changing factors
Factors influencing Demand Prices of Other Goods – Substitutes
and Complements Incomes – the level and distribution of income Tastes and fashions The level and structure of the population Advertising Expectations of Consumers
The Supply Curve
The Law of Supply Generally the lower the price, the less
producers will supply Generally the higher the price, the more
producers will supply Supply Curve – positive slope
The Supply CurvePrice
Quantity Bought and Sold
Supply
3
200
7
800
The supply curve slopes upwards from left to right indicating a positive relationship between supply and price. As price rises, it encourages producers to offer more for sales whereas a fall in price would lead to the quantity supplied to fall.
The Supply CurveFactors Influencing Supply:
Profitability of other goods in production and prices of goods in joint supply
Technology Costs of production Expectations of producers Social Factors For food items: floods, droughts, cold weather
The MarketPrice
Quantity Bought and Sold
S
D
5
600
D1
300
3
450
Equilibrium point
The Supply CurveChanges 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 increase
The MarketPrice
Quantity Bought and Sold
S
D
5
600
D1
300
Surplus
3
450
A shift in the demand curve to the left will reduce the demand to 300 from 500 at a price of £5. Suppliers do not have the information or time to adjust supply immediately and still offer 600 for sale at £5. This results in a market surplus (S > D)
In an attempt to get rid of surplus stock, producers will accept lower prices. Lower prices in turn attract some consumers to buy. The process continues until the surplus disappears and equilibrium is once again reached.
The Market
Price
Quantity Bought and Sold
S
D
£5
600
S1
100
Shortage
£8
350
A shift in the supply curve to the left would lead to less products being available for sale at every price. Suppliers would only be able to offer 100 units for sale at a price of £5 but consumers still desire to purchase 600. This creates a market shortage. (S < D)
The shortage in the market would drive up prices as some consumers are prepared to pay more. The price will continue to rise until the shortage has been competed away and a new equilibrium position has been reached.
The Demand Curve Price
Quantity Demanded
Demand
10
100
D1
D2
10 200
Changes in any of the factors affecting demand other than price cause the entire demand curve to shift to the left (less demanded at each price) or to the right (more demanded at each price).
The Supply Curve
Price
Quantity Bought and Sold
Supply
£4
400
S1
100
S2
900
Changes in any of the factors affecting supply other than price will cause the entire supply curve to shift. A shift to the left results in a lower supply at each price; a shift to the right indicates a greater supply at each price.
