1. Dr. Michelle Commosioung
THE OPERATIONS
OF MARKETS:
DEMAND AND SUPPLY
Dr. Michelle Commosioung

2. The Market
The market refers to the exchange of a particular good or service by a group of buyers and sellers at an agreed price.
SELLERS BUYERS

3. The Market Players
Buyers determine Demand
Sellers determine Supply

4. The range of markets:
Organised markets – commodities e.g. rubber, oil, sugar, wheat, gold, copper, etc.
Financial markets – stocks, shares, currencies, financial instruments
Goods markets – the supply and demand of goods and services in general, food, clothing, leisure, houses, cars, etc.
Factor markets – the supply and demand of factors of production – land, labour and capital

5. A market does NOT have to be a physical place like a shop
The market place consists of all those who have items/services for sale and all those who are interested in buying those items/services
Many businesses have global markets because of the developments in technology – e.g.

6. Generally we define a market as follows:
the area over which buyers and sellers interact to determine how much of a product is bought and sold and at what price
There are two sides to any market:
- demand side showing the behaviour
of consumers
- supply side representing the behaviour of producers

7. Today… We shall examine each of these sides
separately and then once we understand
each side of the market, we shall bring the
two sides together

8. Assumptions re: market structure
In this discussion of the Market we will focus on Perfectly Competitive Markets.
A Perfectly Competitive Market has:
Many Buyers
Many Sellers
As a result the Firm is a Price Taker

9. Assumptions re: behaviour of players in the market
Players in the market are rational
Buyers want to maximise utility
Sellers want to maximise profit

10. DEMAND SIDE
Demand – the amount consumers (households) are willing & able to buy in a given period of time, at a given price.
Demand – reflects the degree of value consumers place on items – price and satisfaction gained from purchase (utility)

11. The main determinant of demand is the
DEMAND SIDE
The main determinant of demand is the
price of the good itself
The law of demand states that “when
the price of a good rises, the quantity
demanded will fall” (and vice versa)
The demand curve is a graphical
representation of the relationship
between quantity demanded and price

12. DEMAND CURVE 12

13. Two main reasons why the law of demand holds are reasons:
DEMAND CURVE
Two main reasons why the law of demand holds are reasons:
- The substitution effect
- The income effect
If the price changes then we move along the demand curve and there is a change in the quantity demanded 13

14. • Market demand is obtained by adding
FROM INDIVIDUAL TO
MARKET DEMAND CURVES
• Market demand is obtained by adding
the quantity demanded by each consumer
at each price, i.e. by horizontally adding
individual demand curves
Consider two consumers A and B with
demand curves denoted DA and DB

17. The demand curve: The demand for potatoes (monthly)17

18. Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of the product.

19. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20
Market demand
(tonnes 000s)
700 A
Price (pence per kg) A
Demand
Quantity (tonnes: 000s) 19

20. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40
Market demand
(tonnes 000s)
700
500 A B
Price (pence per kg) B A
Demand
Quantity (tonnes: 000s) 20

21. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40 60
Market demand
(tonnes 000s)
700
500
350 A B C
Price (pence per kg) C B A
Demand
Quantity (tonnes: 000s) 21

22. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40 60 80
Market demand
(tonnes 000s)
700
500
350
200 A B C D D
Price (pence per kg) C B A
Demand
Quantity (tonnes: 000s) 22

23. Market demand for potatoes (monthly)
Point
Price
(pence per kg) 20 40 60 80
100
Market demand
(tonnes 000s)
700
500
350
200
100 A B C D E D
Price (pence per kg) C B A
Demand
Quantity (tonnes: 000s) 23

24. Other determinants of Demand
Tastes/preferences of consumers
number and price of substitute goods
number and price of complementary goods
Income (normal or inferior good)
distribution of income
expectations 3 24

25. Demand Movements along and shifts in the demand curve change in price
 movement along D curve
change in any other determinant of demand
 shift in D curve
increase in demand  rightward shift
decrease in demand  leftward shift 3 25

26. Shift in the Demand Curve
Consumer Income
As income increases the demand for a normal good will increase.
As income increases the demand for an inferior good will decrease.

27. Shift in the Demand Curve
Related Good – Complement
As price increases the demand will decrease
As price decrease the demand will increase.
Related Good – Substitute
As price increases the demand will increase
As price decrease the demand will decrease.

28. EXAMPLE: DEMAND FOR BEER?
price of substitutes (lager?) and
complements (crisps)
is beer a “normal good” so as income
rises demand rises or an “inferior good”
so as income rises demand falls?
environmental factors: population/weather
• tastes: advertising/health warning 28

29. SHIFTS IN THE DEMAND CURVE The whole demand curve can shift:
- to the right if there is an increase in
demand at a given price
- to the left if these is a decrease in 29

30. An increase in demand D1 P
Price D0 O Q0 Q1
Quantity 30

31. SUPPLY SIDE We have considered the demand side
of the market, now to consider
the supply side….
On the supply side the quantity
supplied of a product is the amount
that firms are willing & able to sell in a
given period of time, at a particular
price.

32. SUPPLY SIDE The main determinant of supply is the
price of the good itself.
The law of supply states that “when the
price of a good rises, the quantity
supplied will rise/firms are willing to
supply more” (and vice versa)
Why does the law of supply hold?
firms are profit maximisers

33. SUPPLY SIDE The supply curve is a graphical
representation of the relationship
between quantity supplied and price.
If the price changes then we move
along the supply curve and there is a
change in the quantity supplied

35. Supply Relationship between supply and price The supply curve
as price rises, firms supply more
it is worth incurring the extra unit costs
firms switch from less profitable goods
in the long run, new firms will be encouraged to enter the market
The supply curve
constructing the supply curve
individual and market supply curves
assumptions
generally upward sloping 4 35

36. The supply curve: The supply of potatoes (monthly)36

37. Market supply of potatoes (monthly)20 Q
100 a
Price (pence per kg) a
Quantity (tonnes: 000s) 37

38. Market supply of potatoes (monthly)20 40 Q
100
200 a b
Price (pence per kg) b a
Quantity (tonnes: 000s) 38

39. Market supply of potatoes (monthly)20 40 60 Q
100
200
350 a b c
Price (pence per kg) c b a
Quantity (tonnes: 000s) 39

40. Market supply of potatoes (monthly)d P 20 40 60 80 Q
100
200
350
530 a b c d
Price (pence per kg) c b a
Quantity (tonnes: 000s) 40

41. Market supply of potatoes (monthly)d P 20 40 60 80
100 Q
100
200
350
530
700 a b c d e
Price (pence per kg) c b a
Quantity (tonnes: 000s) 41

42. Supply Other determinants of supply
Costs of production i.e. input prices (e.g. wages)
Technology
Price of other products, substitutes or compliments in production
Number of sellers
Nature and other random shocks (e.g. weather)
Expectations of producers
Aims of producers
Government actions e.g. taxes or subsidies 5 42

43. EXAMPLE: SUPPLY OF POTATOES?
An increase in the price of wheat
(a substitute in production) will decrease
the supply of potatoes.
A rise in the wage of farm labourers will
decrease the supply of potatoes.
Bad weather may decrease the supply of
potatoes.
An increase in the number of farmers
will increase the supply of potatoes.

44. EXAMPLE: SUPPLY OF BEER?
An increase in the price of lager
(a substitute in production) will decrease
the supply of beer.
A rise in the wage of workers will
decrease the supply of beer.
A poor harvest of hops will decrease the
supply of beer.
An increase in the number of breweries
will increase the supply of beer.

45. EXAMPLE: SUPPLY OF BEER?
An improvement in technology (so more
output can be produced with the same
inputs) will increase the supply of beer.

46. SUPPLY CURVE The supply curve is drawn only
changing the price of the good itself.
The other determinants are held
constant (the ceteris paribus assumption)
If the other determinants of supply
change, then there is a shift in the
supply curve.

47. SHIFTS IN THE SUPPLY CURVE
The whole supply curve can shift:
- to the right if there is an increase in
supply at a given price
- to the left if these is a decrease in

48. Supply Movements along and shifts in the supply curve change in price
 movement along S curve
change in any other determinant of supply
 shift in S curve
increase in supply  rightward shift
decrease in supply  leftward shift 5 48

49. Shifts in the supply curveO Q 49

50. Shifts in the supply curve
Increase O Q 50

51. Shifts in the supply curve
Decrease
Increase O Q 51

52. BRINGING DEMAND AND SUPPLY TOGETHER
So far we have considered the demand
and the supply sides of the market
in isolation.
Next, we ask what happens if we bring
consumers and producers together?

53. MARKET EQUILBRIUM If firms cannot sell their products
(excess supply) they will reduce their
price to encourage buyers into the
market

54. MARKET EQUILBRIUM Conversely, if consumers are chasing
goods (i.e. there is an excess demand,
so at the current price the quantity
demanded exceeds the quantity supplied),
the competition amongst consumers
will bid the price of the good upwards
A rise in price will reduce any
excess demand

55. MARKET EQUILBRIUM A change in price will reduce any excess
demand or supply.
This process will continue until the
quantity demanded equals the quantity
supplied
At that point the market is in equilibrium.
There is no pressure for further changes
in price.

57. Price and Output Determination
Equilibrium price and output
response to shortages and surpluses
shortage (D > S)
 price rises
surplus (S > D)
 price falls
significance of ‘equilibrium’ 7 57

58. Equilibrium price and output: The Market Demand and Supply of Potatoes (Monthly)58

59. The determination of market equilibrium (potatoes: monthly)
Supply D
SURPLUS
( ) d
Price (pence per kg) C c b B a A
Demand
Quantity (tonnes: 000s) 59

60. The determination of market equilibrium (potatoes: monthly)
Supply D d
Price (pence per kg) C c b
SHORTAGE
( ) B a A
Demand
Quantity (tonnes: 000s) 60

61. The determination of market equilibrium (potatoes: monthly)
Supply D d
Price (pence per kg) b B a A
Demand Qe
Quantity (tonnes: 000s) 61

62. Price and Output Determination
Let us examine the effects of shifts in the demand curve on the equilibrium 7 62

63. Effect of a shift in the demand curveP S g
Pe1 D1 O
Qe1 Q 63

64. Effect of a shift in the demand curveP S g
Pe1 D1 O
Qe1 Q 64

65. Effect of a shift in the demand curveP S g
Pe1 D2 D1 O
Qe1 Q 65

66. Effect of a shift in the demand curveP S i
Pe2 g h
Pe1 D2 D1 O
Qe1
Qe2 Q 66

67. Price and Output Determination
Effects of shifts in the demand curve
movement along S curve and new D curve
rise in demand (rightward shift)  P rises
fall in demand (leftward shift)  P falls 7 67

68. Shift in Demand

69. Shift in Demand

70. Shift in Demand

71. Shift in Demand

72. Price and Output Determination
Let us examine the effects of shifts in the supply curve on the equilibrium

73. Effect of a shift in the supply curveg
Pe1 D O
Qe1 Q 73

74. Effect of a shift in the supply curveg
Pe1 D O
Qe1 Q 74

75. Effect of a shift in the supply curveg
Pe1 D O
Qe1 Q 75

76. Effect of a shift in the supply curvek
Pe3 j g
Pe1 D O
Qe3
Qe1 Q 76

77. Price and Output Determination
Effects of shifts in the supply curve
movement along D curve and new S curve
rise in supply (rightward shift)  P falls
fall in supply (leftward shift)  P rises 7 77

78. Shift in Supply

79. CHANGES IN EQUILIBRIUM
The equilibrium can change if the
conditions of demand or supply change
There are five possibilities
First, an increase in demand will raise
the equilibrium price and quantity
(perhaps due to a rise in income for a
normal good or a shift in tastes towards
the product)

82. CHANGES IN EQUILIBRIUM
Second, the equilibrium may also change
because of a decrease in demand. For
example a fall in the price of good A
will reduce the demand for substitute
good B as people switch to good A
as it is now relatively cheaper
A decrease in demand reduces the
equilibrium price and quantity

85. CHANGES IN EQUILIBRIUM
Third, an increase in supply will also change the equilibrium. For example, a reduction in the labour costs will encourage production (the supply curve will shift to the right). In order to sell the extra goods that are produced, firms will
lower their price. At the new equilibrium
the market price will be lower and
the quantity higher.

87. CHANGES IN EQUILIBRIUM
A fourth possibility is that there may be
a decrease in supply. e.g. poor weather
may reduce the supply of an agricultural
product. The resulting shortages will
push the market price upwards.
Comparing the initial and final
equilibriums (comparative statics) price
will have risen but production will be
lower.

89. CHANGES IN EQUILIBRIUM
Finally, demand and supply conditions
may change simultaneously. Both
curves may shift at the same time,
possibly with conflicting influences on
price and quantity. The actual effect will
depend upon the direction in which the
curves shift and the relative magnitude
of the shifts in demand and supply

91. EXAMPLE: MARKET FOR BEER

92. EXAMPLE: MARKET FOR BEER

93. Introduction to Markets – Mind Map

94. The Market System – Mind Map