TOPIC 4

MARKET MECHANISM
(PART 1)
AEDF 0633
 CONTENTS
• Market
• Definition
• Early Market during Prophet Time
• Price
• Demand
• Law of Demand
• Demand Terminology
• Determinants of Demand
• Changes in Demand

• Market Supply
• Law of Supply
• Supply Terminology
• Determinants of Supply
• Changes in Supply
 MARKET
• Market  Actual place where buyers and sellers could
engage in face-to-face or online bargaining.
• A market  An instrument for coordinating people, activities,
and business through a system or platform.

• Market mechanism  A system

where forces of demand and supply
determine the price and quantity
traded. Synonym as “price
mechanism” by which buyer and
sellers can determine prices and
exchange goods and services.
 DEFINITION

“MARKET is the process of buyers

and sellers exchanging goods and
services”
(Sexton, 2017)
 DEFINITION

“MARKET is the organized exchange

of a commodity between buyers and
sellers within a specific geographic
area and in a given period of time”
(Amos, 1987)
 Early Market During Prophet
Time

• Market preceded Islam and the religion recognized them as

social institutions of value and significance but with the
insistence on subjecting the conduct of participants—buyer
and seller—involved in the process of exchange to the moral
code of Islam.
• The Prophet (pbuh) established a market in Medina for
Muslims run on Islamic principles of fair play and social
commitment because a Jewish market already operating in
the locality was found to be involved in malpractices.
 Early Market During Prophet
Time (Cont’d)
• The first established or founded by Prophet (pbuh) that was Al Batha
(‫ البطح=اء‬and other name is Al Munakhata (‫ المناخ=ة‬located in the West of
Majid Nabawi. Afterwhile this market has given different names like;
Old Madina ‫ )المدينة‬market, Baqi ‫ )البقيع‬market and Almusala‫)المصلى‬.
 Early Market During Prophet
Time (Cont’d)
• Like others there were also some markets in Madinah such as Market of
Bani Qenaka market that was founded and run by the Jews. The
transaction and trade in the market was found to be involved in
malpractices such as Riba and with other unlawful manners which are
prohibited in Islam.
• The Prophet (pbuh) guides all of business activity in the market to be
based on sharīʿah pillars (al-Qurān and al-Sunnah). The market trading
was operated with moral code of simplicity, honesty, justice, freedom,
responsibility, transparency, prohibiting Riba and others.
• These Islamic principles are a key to solve many problems of
contemporary business
 PRICE
In a market system, everything has a PRICE (which
is the value of the good in terms of money). Price
manages the market

• Price payment expected on

which people and firms
voluntarily exchange different
commodities.
• Payment transaction or
trading by buyer and seller in
return for goods or services.
 PRICE (Cont’d)

• PRICE act as a balance wheel in the market

mechanism
• Higher price  Reduce consumer purchase BUT
encourage production
Production
PRICE
Consumption

• Lower price  Encourage consumption BUT

decrease production
Consumption
PRICE
Production
 • HOW MARKET SOLVE THE 3 ECONOMIC PROBLEMS??

• Determined by the consumers’

purchasing decision
• Firm reduce the production or
WHAT to areas where they are losing
produce? money
• Example :Typewriter production
to computers production.
• Film Camera to Digital Camera

For
ECONOMICS WHOM • Depends on the supply and
PROBLEM to demand in market

produce?

•Determined by the competition

among different producers
•Meet price competition & Maximize
HOW to the profit by adopting the most
produce efficient methods of production
 DEMAND

MAJOR
COMPONENTS

SUPPL
Y
 DEMAND
~ Household As A Consumer~
 DEMAND HOUSEHOLD AS A CONSUMER

The desire of buyers to purchase

certain quantity of goods due to
the ability and willingness to
purchase at a particular price in a
given period time.
DEMAND = ability to buy + willingness to buy
(Consumer must have money to buy the product)
 DEMAND HOUSEHOLD AS A CONSUMER
LAW OF DEMAND
• Quantity Demanded is related to a price
• Inverse relationship: the higher the price of the product,
the lower quantities will be demanded OR the lower the
price of the product, the higher quantities will be
demanded. *WHY???
 PRICE is an
obstacle to
PRICE QUANTITY DEMANDED human

 Human
Nature
when price
decrease ,
people will
buy more
DEMAND TERMINOLOGY
Types of demand
Individual demand  Single consumer participating in the market
Market demand  Multiple consumer participating in the market

Demand Schedule
A list of amounts of a product that a consumer would purchase
at different price when all non-price factor are held constant

Quantity Demanded
The quantity of goods & services that is purchased at certain
price in a given period
 DEMAND INDIVIDUAL DEMAND

Price Demand
(D)
Demand
relationship
P3

P2

P1

Q1 Q2 Q3 Quantity demanded

Demand Curve
 DEMAND INDIVIDUAL DEMAND

Demand for laptop

Price(RM) Quantity
2000 50 5000

5000 5 2000

Table 1: Individual demand schedule for computer

5 50

Buyer A
 DEMAND MARKET DEMAND
Supply for laptop

5000 5000 5000

2000 2000 2000

10 100 15 150
5 50

Buyer A + Buyer B = C (Market = Buyer A +

Buyer B)
DEMAND HOUSEHOLD AS A CONSUMER

Price
Factor

Determinant of
Demand.

Non-
Price
Factor
 DEMAND PRICE FACTOR

PRICE OF GOOD  by assuming all other non-price factors are equal or

“CETERIS PARIBUS”, changes in price of a good will affect the quantity demand of
the good.
• Only have 1 demand curve
• The increasing or decreasing of the quantity demanded  along demand curve.
• Quantity demanded is increasing if price of good is decreasing ( A B)
Quantity demanded is decreasing if price of good is increasing (B A)
DETERMINANTS OF DEMAND NON-PRICE FACTOR
Number of consumers
Price of other goods 
substitutes good,
complements good and
unrelated good
Consumers’ expectation
on future price, income
and supply
Change in consumer's’
taste & preference
*A Change in any of
these NON-PRICE
FACTORS will cause
Consumers’ income a change in demand
 shifting of
Demand curve
 CHANGES IN DEMAND
•Shifting in Demand  new Demand curve will be produced.
Price
Demand
(D0)

Demand
(D1)
+ve
Higher
demand

Quantity

• Increasing, positive and higher demand

 Demand curve Shifted to the right.(D1)
 CHANGES IN DEMAND
•Shifting in Demand  new Demand curve will be produced.
Price
Demand
(D0)

Demand
(D2)
-ve
Lower
demand

Quantity

• Decreasing, negative and lower demand

 Demand curve Shifted to the left.(D2)
 DEMAND EXERCISE
Table 1 shows a demand schedule of an i-pad. Based on a given demand schedule:

a) Ceteris Paribus, Sketch the individual demand curve for buyer A

b) Ceteris Paribus, Sketch the market demand curve for an i-pad
c) Government announced that there will be a salary increment starting by next month.
By assuming that the price for an i-pad is remain constant ,determine what will happen to
the demand curve

Quantity (nos)-Buyer A Price (RM/nos) Quantity (nos)-Buyer B

10 2000 13

5 2500 10

1 4000 5

Table 1 : A Demand Schedule of an i-pad

 SUPPLY
~ Firm As A Producer~
 SUPPLY FIRM AS A PRODUCER

The quantity of goods that a

producer is able and willing to sell
at a particular price in a given
period of time
SUPPLY = ability to produce + willingness to sell
(Producer must have capital to produce the product)
 SUPPLY FIRM AS A PRODUCER

LAW OF SUPPLY
• Quantity Supplied is related to a price
• Directly proportional to price: the higher the price
of the product, the higher quantities will be
supplied OR the lower the price of product, the
lower the quantities will be supplied *WHY???
 PRICE represent
the revenue

 When price
increase, producer
PRICE QUANTITY SUPPLIED will produce more
to gain more
revenue (incentive
to sell)
SUPPLY TERMINOLOGY
Types of supply
Individual Supply  Single producer participating in the market
Market Supply Multiple producer participating in the market

Supply Schedule
A List of amount of a product that a seller would offer for sale
at different price when all non-price factors are held constant

Quantity Supplied
The quantity of good & service that is sold at certain price in
a given period
 SUPPLY INDIVIDUAL SUPPLY

Price Supply (S)

Supply
relationship
P3

P2

P1

Q1 Q2 Q3 Quantity supplied

Supply Curve
 SUPPLY INDIVIDUAL SUPPLY -FIRM

Supply for smartphone

Price(RM) Quantity
2000 50 5000

5000 5 2000

Table 2: Individual supply schedule for smartphone

5 50

Firm A
 SUPPLY MARKET SUPPLY –INDUSTRY
Supply for smartphone

2000 2000 2000

1000 1000 1000

50 100 100 250 150 350

Firm A + Firm B = C (Market Supply = Firm A +

Firm B)
 SUPPLY FIRM AS A PRODUCER

Price
Factor

Determinant of
Supply.

Non-
Price
Factor
 SUPPLY PRICE FACTOR

PRICE OF GOOD  Changes in price of a good will affect the quantity

supplied of the good.
• Only have 1 supply curve
• The increasing or decreasing of the quantity supplied  along demand curve.
• Quantity supplied is increasing if price of good is increasing ( A B)
• Quantity supplied is decreasing if price of good is decreasing (B A)
DETERMINANTS OF SUPPLY NON-PRICE FACTO
Level of technology

Resources price 
Numbers of producers effect the production
cost

Price of other goods 

substitutes good, Price expectations
complements good

*A Change in any of
Government policies  these NON-PRICE
taxes and subsidies FACTORS will cause
a change in supply
 shifting of Supply
curve
 CHANGES IN SUPPLY
•Shifting in Supply  new Supply curve will be produced.
Price

Supply
(S0)

Supply
(S1)
Increase in
supply -
surplus

Quantity

• Increasing supply, surplus

 Supply curve Shifted to the right.(S1)
 CHANGES IN SUPPLY
•Shifting in Supply  new Supply curve will be produced.
Price

Supply Supply
(S2) (S0)
Decrease in
supply -
shortage

Quantity

• Decreasing supply, shortage

 Supply curve Shifted to the left.(S2)
 SUPPLY NON-PRICE FACTOR
S1

S2

•Changes in Supplied  new curve will be produced.

•If Increasing  Shifted to the right. S2
•If decreasing  Shifted to the left. S1
 SUPPLY EXERCISE
Table 2 shows a supply schedule for laptop. Based on a given demand schedule:

a) Ceteris Paribus, Sketch the individual supply curve for producer B

b) Ceteris Paribus, Sketch the market supply curve for laptop
c) Producer B found that the owner of the land want to increase the rental price,
determine what will happen to the supply curve for producer B

Quantity (nos)- Price (RM/nos) Quantity (nos)-

Producer A Producer B

1 1800 5
5 3000 10
10 5000 13

Table 2 : Supply schedule for laptop

 CONCLUSION
Market mechanism is a system where the forces of demand
and supply determine the price and quantity of goods and
services traded.
Market system has a price which is the value of the good in
terms of money or similar acceptable medium.
Market mechanism which the use the medium of exchanging
monetary with an open and understood system of value and
time trade-offs in a market which tends to optimize
distribution of goods and services.
 ~REFERENCES~

Choo, T. H; Ahmad, N; Nisa, Z; Ramli, M. I; Ghani, R. A. (2017). Fundamentals of

Economics. Oxford

Hasan, Z. (2015). Economics with Islamic Orientation. Oxford