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Part 1 Marketing Basics
Chapter 4
Market Forces
Learning Goals
 describe the three types of economic
systems
 describe the three main features of a market
economy
 identify the three main market forces
 explain the effect that price has on supply
and demand, and that supply and demand
have on price
(Continued)
Learning Goals
 identify three factors that cause changes in
demand
 describe three ways a business can increase
profits
 explain the role of the consumer in
determining which products get produced
Marketing Terms
 scarcity
 traditional
economy
 command
economy
 market economy
 mixed economy
 demand
 supply
 market demand
 market supply
 law of demand
 law of supply
 profit motive
 productivity
 competition
Scarcity
Scarcity
 a condition in which there are not enough
resources to meet needs
Scarcity leads to three questions.
 What should we produce?
 How should we produce it?
 Who should get the products?
Types of Economic
Systems
Three basic types of economies
 traditional economy
 command economy
 market economy
Traditional Economy
In a traditional economy, elders answer the
economic questions based on traditions.
 In Canada, some Inuit still maintain a
traditional economy.
Command Economy
In a command economy, the national
government makes all the economic
decisions.
 Everyone in the country shares limited
resources.
Features
 government ownership of land and capital
 government control of labour
 government control of all economic activity
Market Economy
In a market economy, individuals make
economic decisions.
Individuals decide
 what to produce
 how to produce it
 who gets the products
Market Economy Features
Three main features of a market economy
 private property
 economic freedom
 market forces
Mixed Economies
There are no pure command or pure market
economies.
Most modern economies are mixed
economies.
Market Forces
How do the right products get to the right
places, in the right quantities, and at the right
prices?
Market Forces at Work
Three main market forces
 supply and demand
 profit
 competition
A market economy is also called a free market
economy because market forces are free to
influence economic decisions.
Supply and Demand
Demand
 quantity of a product a consumer is willing
and able to buy at a certain price
Supply
 quantity of a product a supplier is willing to
provide at a certain price
(Continued)
Supply and Demand
Individual demand
 quantity of a product demanded by an
individual consumer
Market demand
 sum of all individual demands for a specific
product
(Continued)
Supply and Demand
Individual supply
quantity of a product supplied by one
supplier
Market supply
sum of all individual suppliers’ supply of a
specific product
Effect of Price on Demand
Law of demand
 when prices fall, demand will rise
 when prices rise, demand will fall
The law of demand is based on market
demand.
Law of Demand
Demand
will rise
When
prices
fall
(Continued)
Law of Demand
Consumers buy more (demand rises) when
price is low.
Consumers buy less (demand falls) when
price is high.
Effect of Price on Supply
Law of supply
 when prices are high, supply will rise
 when prices fall, supply will fall
The law of supply is based on market supply.
Law of Supply
When
prices
are
high
Supply
will
rise
(Continued)
Law of Supply
Manufacturers will supply more of a product
when its price is high because they will make
more profit.
Manufacturers will supply less of a product
when the price falls because they will make
less profit.
Constant Environment
The laws of supply and demand describe
what happens to supply and demand as
prices change in a constant environment.
A constant environment is one in which other
factors do not change.
Changes in Demand
Changes in demand can be caused by
changes in
 marketing campaigns
 the economic situation
 social trends
These changes can interfere with the laws of
supply and demand.
Effect of Supply and
Demand on Price
Price affects supply and demand and gives us
the laws of supply and demand.
However, the level of supply and the level of
demand interact to affect price.
Effect of Demand on
Supply and Price
Demand
Rises
Consumers
start buying
lots of
basketballs.
Supply
Falls
Suppliers
can’t
keep up with
the rapid
sale of
basketballs.
Price
Rises
Suppliers
raise the
price of
basketballs.
Consumers
pay the
higher price.
Effect of Rising Demand on
Supply and Price
When demand is rising and supply falls,
marketers raise prices.
If demand is still high even though the price is
high, suppliers will start making more
basketballs and supply will rise.
Effect of Demand on
Supply and Price
Demand
Falls
Consumers
are not
buying
soccer
balls.
Supply
Rises
Soccer balls
pile up in the
suppliers’
warehouses.
Price
Falls
Suppliers
lower
the price
to sell the
soccer
balls.
Effect of Falling Demand on
Supply and Price
When demand is falling and supply rises,
marketers lower prices.
If demand is still low even though the price is
low, suppliers will stop making soccer balls
and the supply will fall further.
Effect of Supply on Price
and Demand
Supply
Rises
Strawberries
are in season.
The berries
are spoiling
before
consumers
purchase
them.
Price Falls
The suppliers
want to sell
their product
before it
spoils.
They lower the
price of
strawberries.
Demand
Rises
The reduction
in price
increases
consumers’
demand for
strawberries.
Effect of Rising Supply on
Price and Demand
For some items, like seasonal fruits, the
supply rises rapidly, so
 marketers lower the price to sell the fruit
faster
In this situation, consumer demand rises with
the lowered prices until the fruits are out of
season, so
 the price then rises
Profit
Profit motive is the drive to earn more profit.
Sales
Costs and
Expenses
Profit
(Continued)
Profit
What is your profit if your store sells $100
worth of merchandise and your costs are
$75?
Sales
–
Costs=
Profit
$100
–
$75 =
$25
 Your profit is $25.
(Continued)
Profit
Three main ways to increase profit
 decrease costs or expenses
 increase productivity (the amount of product
a worker produces per hour)
 increase sales
(Continued)
Profit
To increase profit, decrease costs and/or
expenses.
Think of your store with the $100 in sales.
 Reduce your costs to $25.
• What would your profit be?
 Sales –
 $100 –
Costs=
$25 =
Profit
$75
• Your profit would be $75.
(Continued)
Profit
To increase profit, increase productivity.
 If workers produce more product per hour,
you will have more products to sell.
 More products to sell means that you will
have higher sales.
 Higher sales, with the same costs and
expenses, mean higher profit.
(Continued)
Profit
To increase profit, increase sales.
Think back to the “store” example.
 Suppose you sold $200 worth of goods,
and your costs stayed at $25.
• What would your profit be?
 Sales –
 $200 –
Costs=
$25 =
• Your profit would be $175.
Profit
$175
Competition
Competition
 businesses competing with each other to get
customers
Competition results in
 better products
 better quality
 more services
 lower prices
Role of the Consumer
Consumers (as a
group) have a large
impact on a market
economy through the
forces of supply and
demand.
(Continued)
Role of the Consumer
If many consumers
buy a product, it will
probably succeed.
If few consumers buy
a product, it will
probably fail.
Review
 Who controls a market economy?
 List the three main market forces.
 Describe the laws of supply and demand.
 What is a constant environment?
 What three factors can change demand?
 How is profit calculated?
 How do consumers influence a market
economy?
Glossary
Back
 command economy. Economy in which the
national government makes all the economic
decisions.
 competition. Contest between two or more
businesses to get customers.
 demand. Quantity of a specific product that a
buyer is able and willing to buy at a certain
price, usually at a particular time and place.
(Continued)
Glossary
Back
 law of demand. When prices fall, demand
will rise (in a constant environment).
 law of supply. When prices are high, supply
will rise (in a constant environment).
 market demand. Sum of all the individual
demands for a specific product, for a specific
time period.
(Continued)
Glossary
Back
 market economy. Economy in which
individuals answer the economic questions
and market forces are allowed to operate.
 market supply. Sum of all the individual
suppliers’ supply of a specific product, for a
specific time period.
(Continued)
Glossary
Back
 mixed economy. Economy in which both the
government and individuals are involved in
making economic decisions.
 productivity. Amount of product a worker
produces per hour (product/hour).
 profit motive. Drive to earn more profit.
(Continued)
Glossary
Back
 scarcity. Condition in which there are not
enough resources to meet needs.
 supply. Quantity of a specific product that a
supplier is willing to supply at a certain price.
 traditional economy. Economy in which the
economic questions are answered by the
elders based on the society’s traditions.