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The Market Mechanism
Demand and Supply
How do we end up with a price
for a good or service?
• it is set by the level of demand
and supply in the market
• depends on how much of the product consumers
want to and are able to buy
• and how much firms are willing or able to sell
Factors Affecting Demand
The price of the product:
• usually, when a good’s price falls, more will be
bought
Income:
• consumers’ incomes influence their demand
for goods and services
Factors Affecting Demand
Price of other goods:
• demand for one product can often depend on
the price of another
Tastes and fashion:
• people’s demands change over time as
fashions change
Factors Affecting Demand
Advertising:
• consumers can be informed about new or
improved products
• persuasive messages can boost demand
Demand Changes With Price
Demand falls as price rises
Price
150
100
50
0
Amount demanded
Factors Affecting Supply
The price of the product:
• generally the higher the price that a firm can
get for its products,
the more it will offer for sale
Costs of production :
• if a firm’s costs fall, it can supply more of its
products
Factors Affecting Supply
Prices of other goods:
• the price of alternative products affects the
quantity supplied
of others
Technology:
• advances in production techniques can fuel
greater supply of some products
Supply Changes With Price
Amount supplied
10
00
90
0
80
0
70
0
60
0
50
0
40
0
30
0
20
0
150
100
50
0
10
0
Price
Supply rises as price rises
Putting Demand and Supply
The market priceTogether
can be seen
at the point where the demand and supply
lines cross:
Price determined in a market
Price
150
100
Supply
Demand
50
0
0
300
600
900
Amount demanded and supplied