Transcript 1.2.3-Marketsx

T HEME 1:
M ARKETING
AND
PEOPLE
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u
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have learnt so far can
you replace u – z with
the correct labels?
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Edexcel Business
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1.2 M ARKET
1.2.3 M ARKETS
1.2.3 M ARKETS

In this topic you will learn about

The interaction of supply and demand

The drawing and interpretation of supply and
demand diagrams to show the causes and
consequences of price changes
T HE INTERACTION OF SUPPLY AND
DEMAND

Supply and demand can be shown on one diagram

Market equilibrium is that point at which demand is
equal to supply i.e. where the supply and demand
curve cross

Any change in demand or supply will lead to a new
equilibrium price
T HE INTERACTION OF SUPPLY AND
DEMAND
The equilibrium point can be shown graphically:
S
At a price of P quantity demanded
(qd) is equal to quantity supplied
(qs). All products are sold and no
products are left over i.e. the
market has cleared.
D
At this price all products that have
been offered for sale by suppliers
have been bought by buyers and
all supply has had an equal
demand.
Price
P
Q
Quantity
T HE DRAWING AND INTERPRETATION OF
SUPPLY AND DEMAND DIAGRAMS
Recap.
What has happened
to demand as prices
rise? Why?
Excess supply:
S
Price
P1
What has happened
to supply as prices
rise? Why?
P
D
Q1
Q
Q2
Quantity
If price were to rise to P1 we
would have a position of excess
supply. Buyers would demand
less (Q1) at the higher price but
firms would wish to supply more
(Q2) at this price. This would lead
to a situation of too much supply
(Q2 – Q1) in the market.
To solve this problem firms would
need to lower price to get rid of
excess products.
T HE DRAWING AND INTERPRETATION OF
SUPPLY AND DEMAND DIAGRAMS
Recap.
What has happened to
demand as prices fall?
Why?
What has happened to
supply as prices fall?
Why?
Excess demand:
S
Price
P
P2
D
Q1
Q
Q2
Quantity
If price were to fall to P2 we would
have a position of excess demand.
Buyers would demand more (Q2) at
the lower price but firms would
wish to supply less (Q1) at this
price. This would lead to a situation
of too much demand (Q2 – Q1) in
the market.
To improve profitability firms could
raise price, thus reducing the excess
demand.
T HE
DRAWING AND INTERPRETATION OF
SUPPLY AND DEMAND DIAGRAMS
Market forces:
S
Price
P1
Market
equilibrium
P
P2
Market forces are always pushing
prices towards market equilibrium
– the price at which demand equals
supply and there are no products
left over in the market. Too much
supply leads to lower prices, too
much demand to higher prices.
D
Q1
Q
Q2
Quantity
Where demand is equal to supply
we have the market equilibrium
price.
Use your understanding of equilibrium price and supply and
demand to explain why ticket prices vary so much.
C HECK
YOUR UNDERSTANDING
Which of the following statements best defines market
equilibrium?
a)
Prices are kept low leading to consumer satisfaction
b)
Quantity demanded in the market matches supply
c)
The market is saturated by cheap supplies
d)
More suppliers can enter the market to maximise
profits

Can you explain your answer?
C HECK
As shown on the diagram
opposite price has fallen from P
to P1. Which of the following
statements is correct?
S
Price
YOUR UNDERSTANDING
P
a)
The market is in equilibrium
b)
The market has excess
demand of Q1 - Q2
c)
The market has excess
supply of Q1 – Q2
d)
The market has excess
supply and demand of Q1 –
Q2

Can you explain your answer?
P1
D
Q1
Q
Q2
Quantity
C HECK
YOUR UNDERSTANDING
A change in price, shown by the red line, has led to
excess supply within the textiles market. Which of
the following diagrams shows this?
D
a)
S
D
S
b)
D
c)
S
d)
S
D
Can you explain your answer?
T HE DRAWING AND INTERPRETATION OF
SUPPLY AND DEMAND DIAGRAMS
A change in price
will cause either:
• A movement
along the
demand curve
Or
• A movement
along the
supply curve
Disequilibrium
occurs when
there is an
imbalance in the
quantity
demanded and
quantity supplied
of a product i.e.
there is excess
demand or excess
supply?


It is important to remember that:
 a change in price will lead to a movement along the
supply or demand curve
However:
 a change in any other factor will lead to a shift in the
demand or supply curve
A shift in the demand curve will
occur due to changes in:
•
•
•
•
A shift in the supply curve will
occur due to changes in:
Consumer income
• The impact of changing costs of
Prices of other goods and services
production
Consumer tastes and fashion
• Technological progress
Other factors e.g. advertising
• Prices of other goods and services
• Government policy e.g. taxes and
subsidies
• Other factors e.g. expectations
C HECK
Market forces:
Recap.
Can you explain this diagram?
S
Price
P1
Market
equilibrium
P
P2
D
Q1
Q
Q2
YOUR UNDERSTANDING
Quantity
T HE
DRAWING AND INTERPRETATION OF
SUPPLY AND DEMAND DIAGRAMS
Shifts in the demand curve can be shown graphically:
S
Price
P1
P
Draw a
diagram to
explain
market
equilibrium
in the
housing
market.
D
Q
Q1
D1
Quantity
An increase in demand will
see the demand curve shift
upwards and towards the
right from D to D1. This will
cause price to rise to P1 and
quantity demanded to Q1.
At this point we have a new
market equilibrium (P1 Q1).
The shift in demand has led
to a movement along the
supply curve.
T HE DRAWING AND INTERPRETATION OF
SUPPLY AND DEMAND DIAGRAMS
Shifts in the supply curve can be shown graphically:
S
Price
S1
P
P1
D
Q Q1
Quantity
An increase in supply will see
the supply curve shift
downwards and towards the
right from S to S1. This will
cause price to fall to P1 and
quantity supplied to rise to
Q1.
At this point we have a new
market equilibrium (P1 Q1).
The shift in supply has led to
a movement along the
demand curve.
T HE DRAWING AND INTERPRETATION OF
SUPPLY AND DEMAND DIAGRAMS
S2
Price
S
P2
P
1) On the diagram show what
will happen when there is a
decrease in supply.
2) Explain what has
happened.
D
Q2 Q
Quantity
A decrease in supply will see the supply curve shift upwards and towards the
left from S to S2. This will cause price to rise to P2 and quantity supplied to fall
to Q2. At this point we have a new market equilibrium (P2 Q2). The shift in
supply has led to a movement along the demand curve.
C HECK YOUR
UNDERSTANDING

A City Coffee House in London opens 25 new
coffee shops in 2016

Construct a supply and demand diagram to
illustrate the impact of City Coffee House’s
decision on the London coffee shop market
C HECK YOUR
UNDERSTANDING

A change in social trends leads to more mothers
choosing to breast feed their babies rather than
using formula milk

Construct a supply and demand diagram to
illustrate the impact of this trend on the market
for formula milk
1.2.3 M ARKETS

In this topic you have learnt about

The interaction of supply and demand

The drawing and interpretation of supply and
demand diagrams to show the causes and
consequences of price changes