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!
• Effective demand – must be willing AND
able to pay
 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
 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
£10 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.

£5

Demand

100 150

Quantity Demanded (000s)

 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
 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
 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)
 The Demand Curve 5
Changes in any of the
factors affecting
Price (£) demand other than
price cause the entire
demand curve to shift
to the left (less
demanded at each
price) or to the right
£10 (more demanded at
each price).

D1

D2 Demand

10 100 200

Quantity Demanded (000s)

 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
 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!
 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
£3 to offer more for sale
whereas a fall in price
would lead to the
quantity supplied to
fall.

200 800

Quantity Bought and Sold (000s)

 The Supply Curve
Price £ S1 Supply
S2

Changes in any of the

£4 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.

100 400 900

Quantity Bought and Sold (000s)

 The Market
Price (£) S

A shift in the demand

In an attempt
curve to get
to the left will rid
ofreduce
surplus
thestock,
demand to
producers
300 from will
500accept
at a
lower prices. Lower
price of £5. Suppliers
Surplus prices
do notinhave
turn the
attract
some consumers
information or time to to
£5 buy. Thesupply
process
adjust
continues
immediatelyuntiland
thestill
surplus disappears
offer 600 for sale at and
£3 equilibrium is once
£5. This results in a
again reached.
market surplus (S >
D)

D1 D
300 450 600 Quantity Bought and Sold (000s)
 The Market
S1 S
Price (£)
A shift in the supply
curve to the left
The shortage in the
£8 would
market would less
lead to drive
products
up prices being
as some
available
consumers forare
sale at
every price.
prepared to pay
Suppliers
more. Thewould
price will
£5 only be able
continue to offer
to rise
100 units for sale at
until the shortage
Shortage a price
has beenof competed
£5 but
consumers
away and astillnew
desire to purchase
equilibrium position
600.been
has This reached.
creates a
market shortage. (S
< D)

D
100 350 600 Quantity Bought and Sold (000s)