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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
£10 demanded. Demand will
be higher at lower prices
than at higher prices. As
price falls, demand rises.
As price rises, demand
falls.

£5

Demand

100 150

Quantity Demanded (000s)

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The Demand Curve 2

• The level of demand –
– determines where on the graph it sits
• Low demand –
– nearer the origin
• High demand –
– further from the origin (assuming same
scale)
• 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

Changes in any of the
factors affecting
Price (£) demand other than
price cause the entire
demand curve to shift
to the left (less
demanded at each
price) or to the right
£10 (more demanded at
each price).

D1

D2 Demand

10 100 200

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 £
Supply

£7
The supply curve
slopes upwards from
left to right indicating
a positive relationship
between supply and
price. As price rises, it
encourages producers
£3 to offer more for sales
whereas a fall in price
would lead to the
quantity supplied to
fall.

200 800

Quantity Bought and Sold (000s)

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The Supply Curve

Price £ S1 Supply
S2

Changes in any of the

£4 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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 In an attemp
of surplus st
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producers wi
lower prices.

The Market prices in turn

some consum
buy. The pro
continues un
Price (£) S surplus disap
equilibrium i
again reache
A shift in the demand
curve to the left will
reduce the demand to
300 from 500 at a
price of £5. Suppliers
Surplus do not have the
information or time to
£5
adjust supply
immediately and still
offer 600 for sale at
£3 £5. This results in a
market surplus (S >
D)

D1 D
300 450 600 Quantity Bought and Sold (000s)

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The Market
S1 S
Price (£)
A shift in the supply
curve to the left
£8 would lead to less
products being
available for sale at
every price.
Suppliers would
£5 only be able to offer
100 units for sale at
Shortage a price of £5 but
consumers still
desire to purchase
600. This creates a
market shortage. (S
< D)

D
100 350 600 Quantity Bought and Sold (000s)

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