Transcript The Market System - PowerPoint Presentation

http://www.bized.ac.uk
The Market System
Demand, Supply and Price
Determination
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
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 2006 – Biz/ed
http://www.bized.ac.uk
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 2006 – Biz/ed
http://www.bized.ac.uk
The Demand Curve
Price (£)
The demand curve slopes
downwards from left to
right (a negative slope)
indicating an inverse
relationship between price
and the quantity
demanded. Demand will
be higher at lower prices
than at higher prices. As
price falls, demand rises.
As price rises, demand
falls.
£10
£5
Demand
100
150
Quantity Demanded (000s)
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
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 2006 – Biz/ed
http://www.bized.ac.uk
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
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
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 2006 – Biz/ed
http://www.bized.ac.uk
The Demand Curve 5
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)
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
The Supply Curve
• Supply refers to the amount of a certain good
producers are willing to supply when receiving
a certain price
• The relationship between price and how much
of a good or service is supplied to the market
is known as the supply relationship
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
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 (Examples of supply shocks include unusually bad (good)
weather which reduces (increases) the supply of a commodity such as wheat)
• F1..Fm = Costs of production
• E = Expectations of producers
• Sp = Social factors
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
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 2006 – Biz/ed
http://www.bized.ac.uk
The Supply Curve
Price £
Supply
£7
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)
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
The Supply Curve
Price £
S1
Supply
S2
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)
Copyright 2006 – Biz/ed
The Market
Price (£)
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)
Surplus
£5
£3
D1
300
450
In an attempt to get rid
of surplus stock,
producers will accept
http://www.bized.ac.uk
lower prices. Lower
prices in turn attract
some consumers to
buy. The process
continues until the
surplus disappears and
S
equilibrium
is once
again reached.
600
D
Quantity Bought and Sold (000s)
Copyright 2006 – Biz/ed
The Market
S1
Price (£)
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)
£8
£5
The shortage in the
market would drive
up prices as some
consumers are
http://www.bized.ac.uk
prepared to pay
more. The price will
continue to rise
until the shortage
has been competed
away and a new
S
equilibrium position
has been reached.
Shortage
D
100
350
600
Quantity Bought and Sold (000s)
Copyright 2006 – Biz/ed