http www bized co uk The Market System

http: //www. bized. co. 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. co. 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. co. 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. Quantity demanded will be higher at lower prices than at higher prices. As price falls, quantity demanded rises. As price rises, quantity demanded falls. £ 10 £ 5 Demand 100 150 Quantity Demanded (000 s) Copyright 2006 – Biz/ed

http: //www. bized. co. 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. co. 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. co. 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. co. 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 D 1 Demand D 2 10 100 200 Quantity Demanded (000 s) Copyright 2006 – Biz/ed

http: //www. bized. co. uk The Supply Curve • Factors influencing supply: • S = f (Pn, Pn. . Pn-1, H, N, F 1. . 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 • F 1. . Fm = Costs of production • E = Expectations of producers • Sp = Social factors Copyright 2006 – Biz/ed

http: //www. bized. co. 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. co. 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 (000 s) Copyright 2006 – Biz/ed

http: //www. bized. co. uk The Supply Curve Price £ S 1 Supply S 2 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 (000 s) Copyright 2006 – Biz/ed

http: //www. bized. co. uk The Market S Price (£) A shift in the demand In an attemptleft get rid curve to the to will of surplus stock, reduce the demand to producers will accept 300 from 500 at a lower prices. Suppliers price of £ 5. Lower prices inhave the do not turn attract some consumers to buy. information or time to The process continues adjust supply until the surplus still immediately and disappears for sale at offer 600 and equilibrium is once a £ 5. This results in again reached. (S > market surplus D) Surplus £ 5 £ 3 D 1 300 450 600 D Quantity Bought and Sold (000 s) Copyright 2006 – Biz/ed

http: //www. bized. co. uk The Market S 1 Price (£) A shift in the supply curve to the left the The shortage in would lead to less market would drive products being up prices as some available for sale at consumers are every price. pay prepared to Suppliers would will more. The price only be ableriseoffer continue to to until 100 shortage has at the units for sale a price of £ 5 but been competed consumers still away and a new desire to purchase equilibrium position 600. been reached. has This creates a market shortage. (S < D) £ 8 £ 5 S Shortage D 100 350 600 Quantity Bought and Sold (000 s) Copyright 2006 – Biz/ed