Presentation on theme: "Demand, Supply and Price Determination"— Presentation transcript:
1 Demand, Supply and Price Determination The Market SystemDemand, Supply and Price Determination
2 The Market System Market consists of: Demand Consumers - create a demand for a productDemandthe amount consumers desire to purchase at various pricesNot what they will buy, but what they would like to buy!Effective demand – must be willing AND able to pay
3 Individual and Market Demand Market demand – consists of the sum of all individual demand schedules in the marketRepresented by a demand curveAt higher prices, consumers generally willing to purchase less than at lower pricesDemand curve – negative slope, downward sloping from left to right
4 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£5Demand100150Quantity Demanded (000s)
5 The Demand Curve 2 The level of demand – Low demand – High demand – determines where on the graph it sitsLow demand –nearer the originHigh demand –further from the origin (assuming same scale)Dependent on a variety of factorsDemand curve moves in response to changing factors
6 The Demand Curve 3 Pn = Price Factors influencing demandD = f (Pn,Pn…Pn-1, Y, T, P, A, E)Where:Pn = PricePn…Pn-1 = Prices of other goods – substitutesand complementsY = Incomes – the level and distribution of incomeT = Tastes and fashionsP = The level and structure of the populationA = AdvertisingE = Expectations of consumers
7 The Demand Curve 4Changes in any of the factors other than price causes the demand curve to shift either:Left (Less demanded at each price) orRight (More demanded at each price)
8 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 (£)£10D1DemandD210100200Quantity Demanded (000s)
9 S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp) The Supply CurveFactors influencing supply:S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp)Where:Pn = PricePn..Pn-1 = Profitability of other goods in production and prices of goods in joint supplyH = TechnologyN = Natural shocksF1..Fm = Costs of productionE = Expectations of producersSp = Social factors
10 The Supply CurveChanges in any of the factors OTHER than price cause a shift in the supply curveA shift in supply to the left – the amount producers offer for sale at every price will be lessA shift in supply to the right – the amount producers wish to sell at every price increasesHINT: Be careful to not confuse supply going ‘up’ and ‘down’ with the direction of the shift!
11 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.£3200800Quantity Bought and Sold (000s)
12 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.£4100400900Quantity Bought and Sold (000s)
13 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£3The 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.D1D300450600Quantity Bought and Sold (000s)
14 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£5ShortageD100350600Quantity Bought and Sold (000s)
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