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The Market System
Demand, Supply and Price Determination

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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
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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
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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 (000s)
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The Demand Curve 2
• The level of demand – • Low demand –
– nearer the origin – further from the origin (assuming same scale) – determines where on the graph it sits

• High demand –

• Dependent on a variety of factors • Demand curve moves in response to changing factors

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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
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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)

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The Demand Curve 5
Price (£)
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).

£10

D1 D2
10 100 200

Demand

Quantity Demanded (000s)
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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
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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!

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The Supply Curve
Price £
£7

Supply
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 (000s)

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The Supply Curve
Price £ S1 Supply S2

£4

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.

100

400

900

Quantity Bought and Sold (000s)

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The Market
Price (£) S
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 to information or time buy. The process adjust supply continues until thestill immediately and surplus disappears at offer 600 for sale and equilibrium is once a £5. This results in again reached. (S > market surplus D)

Surplus
£5

£3

D1
300 450 600

D

Quantity Bought and Sold (000s)
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The Market
Price (£) S1 S
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 100 units for sale at until the shortage a price of competed has been £5 but consumers still away and a new desire to purchase equilibrium position 600.been reached. has This creates a market shortage. (S < D)

£8

£5

Shortage

D
100 350 600

Quantity Bought and Sold (000s)
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