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The Market System
Demand, Supply and Price
Determination
Our Market Economy


Basic economic decisions are based on the
actions of buyers and sellers
 What goods/services should be produced
Price plays an important role in our economy
 The consumer tells the market to produce
more or less of a certain product
The Market System

Market consists of:


Consumers creating a demand for a product.
Demand

the amount consumers are willing and able to buy
at various prices
Individual and Market Demand
The Law of Demand

Generally the higher the price, the less
consumers will buy of an item

Generally the lower the price, the more
consumers will buy

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
The Demand Curve
Dependent on a variety of factors the Demand
Curve moves in response to changing factors
Factors influencing Demand






Prices of Other Goods – Substitutes
and Complements
Incomes – the level and distribution of income
Tastes and fashions
The level and structure of the population
Advertising
Expectations of Consumers
The Supply Curve
The Law of Supply


Generally the lower the price, the less
producers will supply
Generally the higher the price, the more
producers will supply

Supply Curve – positive slope
The
Supply
Curve
Price
Supply
7
3
200
800
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 sales
whereas a fall in
price would lead to
the quantity
supplied to fall.
Quantity Bought and Sold
The Supply Curve
Factors Influencing Supply:




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
Profitability of other goods in production and prices of goods in
joint supply
Technology
Costs of production
Expectations of producers
Social Factors
For food items: floods, droughts, cold weather
Price
The Market
S
Equilibrium point
5
3
D1
300
450
600
D
Quantity Bought and Sold
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 increase
Price
A shift in the
demand curve to
the left will reduce
the demand to 300
from 500 at a price
of S
£5. Suppliers do
not have the
information or time
to adjust supply
immediately and
still offer 600 for
sale at £5. This
results in a market
surplus (S > D)
The Market
Surplus
5
3
D1
300
450
600
Quantity Bought and Sold
In an attempt to get
rid of surplus stock,
producers will accept
lower prices. Lower
prices in turn attract
some consumers to
buy. The process
continues until the
D
surplus disappears
and equilibrium is
once again reached.
The Market
S1
Price
£8
£5
Shortage
100
350
600
Quantity Bought and Sold
A shift in the
supply curve to
the left would
lead to less
products being
available for sale
at every price.
Suppliers would
only be able to
offer 100 units for
S sale at a price of
£5 but consumers
still desire to
purchase 600.
This creates a
market shortage.
(S < D)
The shortage in
the market would
drive up prices as
some consumers
are prepared to
pay more. The
price will
continue to rise
until the shortage
has been
competed away
andD
a new
equilibrium
position has been
reached.
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).
The Demand Curve
Price
10
D1
Demand
D2
10
100
200
Quantity Demanded
The Supply Curve
Price
S1
Supply
£4
100
400
900
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.
Quantity Bought and Sold