Copyright 2003 – Biz/ed The Market System Demand, Supply and Price Determination
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
Copyright 2003 – Biz/ed 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
Copyright 2003 – Biz/ed The Demand Curve Price (£) Quantity Demanded (000s) Demand £10 £
Copyright 2003 – Biz/ed 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
Copyright 2003 – Biz/ed The Demand Curve 3 Factors influencing Demand D = f (P n, P n …P n-1, Y, T, P, A, E) Where: P n = Price P n …P n-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
Copyright 2003 – Biz/ed 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)
Copyright 2003 – Biz/ed The Demand Curve 5 Price (£) Quantity Demanded (000s) Demand £ D1 D
Copyright 2003 – Biz/ed The Supply Curve Factors Influencing Supply: S = f (P n, P n..P n-1,H, N,F 1..F m,E,Sp) Where: Pn = Price P n..P n-1 = Profitability of other goods in production and prices of goods in joint supply H = Technology N = Natural shocks F 1..F m – Costs of production E = expectations of producers Sp = Social Factors
Copyright 2003 – Biz/ed 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!
Copyright 2003 – Biz/ed The Supply Curve Price £ Quantity Bought and Sold (000s) Supply £3 200 £7 800
Copyright 2003 – Biz/ed The Supply Curve Price £ Quantity Bought and Sold (000s) Supply £4 400 S1 100 S2 900
Copyright 2003 – Biz/ed The Market Price (£) Quantity Bought and Sold (000s) S D £5 600 D1 300 Surplus £3 450
Copyright 2003 – Biz/ed The Market Price (£) Quantity Bought and Sold (000s) S D £5 600 S1 100 Shortage £8 350