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The Market System

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

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The Market System

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  1. The Market System Demand, Supply and Price Determination

  2. 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

  3. 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

  4. The Demand Curve Price (£) £10 £5 Demand 100 150 Quantity Demanded (000s)

  5. 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

  6. The Demand Curve 3 • 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

  7. 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)

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

  9. 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

  10. 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!

  11. The Supply Curve Price £ Supply £7 £3 800 200 Quantity Bought and Sold (000s)

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

  13. The Market S Price (£) Surplus £5 £3 D1 D 300 600 450 Quantity Bought and Sold (000s)

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

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