# Demand, Supply and Price Determination

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Demand, Supply and Price Determination
The Market System Demand, Supply and Price Determination

The Market System Market consists of: Demand
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

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

The Demand Curve Price (£) Demand Quantity Demanded (000s) £10 £5 100
The demand curve slopes downwards from left to right (a negative slope) indicating an inverse relationship between price and the quantity demanded. Quantity demanded will be higher at lower prices than at higher prices. As price falls, quantity demanded rises. As price rises, quantity demanded falls. £10 £5 Demand 100 150 Quantity Demanded (000s)

The Demand Curve 2 The level of demand – Low demand – High 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

The Demand Curve 3 Pn = Price
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

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)

The Demand Curve 5 Price (£) D1 Demand D2 Quantity Demanded (000s) £10
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). Price (£) £10 D1 Demand D2 10 100 200 Quantity Demanded (000s)

S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp)
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

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!

The Supply Curve Price £ Supply Quantity Bought and Sold (000s) £7 £3
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 sale whereas a fall in price would lead to the quantity supplied to fall. £3 200 800 Quantity Bought and Sold (000s)

The Supply Curve Price £ S1 Supply S2 Quantity Bought and Sold (000s)
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. £4 100 400 900 Quantity Bought and Sold (000s)

The Market S Price (£) Surplus D1 D Quantity Bought and Sold (000s) £5
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. Surplus £5 £3 The slides that follow will put the demand curve and supply curve together. The emphasis is on explaining the PROCESS by which markets change.The initial starting point will be the basic equilibrium position Students can be advised that this type of analysis begins with a starting point, introduces some form of change and then analyses the process by which prices and quantity will change and the reasons for this. The first slide deals with a fall in demand. The reasons for the fall in demand could be related to an event occurring at the time but needs to be linked in to the formula given earlier. As demand falls consumers now wish to purchase less at each price. The emphasis must be on the fact that suppliers cannot control demand and therefore do not necessarily anticipate such changes, they therefore need time to be able to react. The fall in demand will mean that some suppliers will not be selling as many items, a surplus will develop (highlighted by a flashing ‘surplus’ sign) that will force prices down. A new equilibrium will be established where the new demand curve intersects with the existing supply curve at a lower price and with less items bought and sold. There is much room for confusion of this process and students need time to be able to experiment with it to reflect on it and build it into their learning. The second slide deals with a change in supply – this time creating a shortage. The same process occurs but in reverse. The next stage would be to get students to explain what would happen if the demand rose and if supply also rose. D1 D 300 450 600 Quantity Bought and Sold (000s)

The Market S1 S Price (£) Shortage D Quantity Bought and Sold (000s)
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. £8 £5 Shortage D 100 350 600 Quantity Bought and Sold (000s)