Transcript demand curve - Business-TES

The Market System
Demand & Supply
The Market System
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Market consists of:
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Demand
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Consumers - create a demand for a product
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
Individual and Market Demand
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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
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)
The Demand Curve 2
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The level of demand –
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Low demand –
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nearer the origin
High demand –
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determines where on the graph it sits
further from the origin (assuming same scale)
Dependent on a variety of factors
Demand curve moves in response
to changing factors
The Demand Curve 3
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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
The Demand Curve 4
Changes in any of the factors other than price
causes the demand curve to shift either:
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Left (Less demanded at each price) or
Right (More demanded at each price)
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)
The Supply Curve
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Factors influencing supply:
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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
The Supply Curve
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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!
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)
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)
The interaction of S & D
Equilibrium
Equilibrium is…
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A state of equality between Supply and
Demand
This price is known as the market
clearing price
There is no reason for anything to
change
The market for OIL
Excess and Equilibrium
Diagrammatic equilibrium
Price
supply
A demand diagram
Equilibrium
price
Demand
Equilibrium
quantity
Quantity
Excess Demand
Excess supply
Suddenly people want more oil
e.g. because India is developing
supply
Price
A shift in demand diagram
New price
Equilibrium
price
New
demand
Demand
Equilibrium
quantity
Quantity
New equ
quantity
Suddenly OPEC start pumping more oil
Price
supply
A shift in supply diagram
New
Supply
Equilibrium
price
New price
Demand
New equ
quantity
Equilibrium
quantity
Quantity
Both?
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It is, of course possible for both supply
and demand to shift at the same time!
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Key word “exogenous”
The Market
S
Price (£)
A shift in the demand
In
an attempt
to get
curve
to the left
will rid
ofreduce
surplus
stock,
the
demand to
producers
300 from will
500accept
at a
lower
prices.
Lower
price of £5. Suppliers
prices
turn the
attract
do notinhave
some
consumers
to to
information or time
buy.
Thesupply
process
adjust
continues
untiland
thestill
immediately
surplus
disappears
and
offer 600 for sale at
equilibrium
is once
£5. This results
in a
again
reached.
market surplus (S >
D)
Surplus
£5
£3
D1
300
450
600
D
Quantity Bought and Sold (000s)
The Market
S1
Price (£)
A shift in the supply
curve
to the left
The shortage
in the
would lead
to less
market
would
drive
products
being
up prices as some
available
forare
sale at
consumers
every
price.
prepared to pay
Suppliers
more. Thewould
price will
only be able
to offer
continue
to rise
100
units
for
sale at
until the shortage
a
price
of competed
£5 but
has
been
consumers
away and astill
new
desire
to
purchase
equilibrium position
600.been
This reached.
creates a
has
market shortage. (S
< D)
£8
£5
S
Shortage
D
100
350
600
Quantity Bought and Sold (000s)