The Market System

Demand, Supply and Price Determination

Introduction to Markets Market – any place

or process that brings together buyers and sellers with a view to agreeing a price

The basis of how an economy operates – through production and subsequent exchange

Introduction to Markets - Mind Map

Introduction to Markets The range of markets:

Organised markets – commodities e.g. rubber, oil, sugar, wheat, gold, copper, etc.

Financial markets – stocks, shares, currencies, financial instruments

Goods markets – the supply and demand of goods and services in general, food, clothing, leisure, houses, cars, medical care, etc.

Factor markets – the supply and demand of factors of production – land, labor, capital and entrepreneur

Introduction to Markets A market does NOT have to be

a physical place like a shop The market place consists of all those

who have items/services for sale and all those who are interested in buying those items/services

Many businesses have global markets because of the developments in technology.

Introduction to Markets Demand – the

amount consumers desire to purchase at various alternative prices

Demand – reflects the degree of value consumers place on items – price and satisfaction gained from purchase (utility)

Supply – the amount producers are willing to offer for sale at various prices

Supply – reflects the cost of the resources used in production and the returns/profits required

Introduction to Markets Factors affecting the efficiency of markets

The amount of information about the markets held by consumers and producers

The ease with which factors of production can be put to alternative uses

The extent to which price is an accurate signal of the true utility and true cost in determining the level of demand and supply (externalities)

The degree to which firms hold monopoly power The degree to which property rights are clearly

defined Whether the market can provide goods and services

(public goods)

The Market System - Mind Map

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

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

The Demand CurvePrice (Php)

Quantity Demanded

Demand

10

5

100 150

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.

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

The Demand Curve 3 Factors influencing demand

Qdx = f (Px, Y, e, Prel, T, Pop) Where: Qdx = Quantity demanded Px = Price of goods and services Y = income of consumers e = consumers’ expectations of future

prices Prel = price of related products T = consumers tastes and preferences Pop = population size

The Demand Curve 4Changes 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)

The Demand Curve 5Price (Php)

Quantity Demanded

Demand

10

100

D1

D2

10 200

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).

Exercise 1. Hypothetical Demand Schedule for Medicine X

1. Graph the demand schedule for medicine X from the given table.

2. Suppose that quantity demanded decrease by 20 units at all price level as a result of the decline in consumer income. Plot the new demand schedule together with the original demand schedule.

Price(Php)

Quantity Demanded

10 7512 6214 5316 4218 3520 30

Quiz 1. Hypothetical Demand Schedule for Vitamin Z

1. Graph the demand schedule for Vitamin Z from the given table.

2. Suppose that quantity demanded decrease by 50 units at all price level plot the new demand schedule together with the original demand schedule.

3. Identify at least 3 possible reasons for the decrease in quantity demanded.

Price(Php)

Quantity Demanded

5 39010 32015 26020 21025 13030 60

Quiz 2. Hypothetical Demand Schedule for Carrots

1. Graph the demand schedule for carrots from the given table.

2. Suppose that quantity demanded increase by 50 units at all price level plot the new demand schedule together with the original demand schedule.

3. Identify at least 3 possible reasons for the decrease in quantity demanded.

Price(Php)

Quantity Demanded

10 27012 20514 15016 10518 6520 30

The Supply Curve Factors influencing supply:

Qsx = f (Px, T, C, Exp, Grt, Gs, M) Where: QSx = Quantity Supplied Px = Price of good x T = Technology C= Cost of Inputs used Exp = Expectations of future price Grt = Government regulations and taxes Gs = Government subsidies M= number of Firms in the market

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!

The Supply CurvePrice Php

Quantity Bought and Sold

Supply

3

200

7

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 sale whereas a fall in price would lead to the quantity supplied to fall.

The Supply CurvePrice Php

Quantity Bought and Sold

Supply

4

400

S1

100

S2

900

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.

The MarketPrice (Php)

Quantity Bought and Sold

S

D

5

600

D1300

Surplus

3

450

A shift in the demand curve to the left will reduce the demand to 300 from 500 at a price of Php 5. Suppliers do not have the information or time to adjust supply immediately and still offer 600 for sale at Php 5. This results in a market surplus (S > D)

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 surplus disappears and equilibrium is once again reached.

The MarketPrice (Php)

Quantity Bought and Sold

S

D

5

600

S1

100

Shortage

8

350

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 sale at a price of Php 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 and a new equilibrium position has been reached.

Exercise 2. Hypothetical Supply Schedule for Medicine X

1. Graph the supply schedule for medicine X from the given table.

2. Suppose that quantity supplied increase by 10 units at all price level as a result of the increase in consumer income. Plot the new supply schedule together with the original supply schedule.

Price(Php)

Quantity Supplied

12 2110 188 166 134 72 2

Quiz. Hypothetical Supply Schedule for Vitamin Z

1. Graph the supply schedule for Vitamin Z from the given table.

2. Suppose that quantity supplied decrease by 100 units at all price level plot the new supply schedule together with the original schedule.

3. Identify at least 3 possible reasons for the decrease in quantity supplied.

Price(Php)

Quantity Supplied

40 44035 37030 31025 26020 18015 110

Quiz. Hypothetical Supply Schedule for Notebook

1. Graph the supply schedule for notebook from the given table.

2. Suppose that quantity supplied increase by 100 units at all price level plot the new supply schedule together with the original schedule.

3. Identify at least 3 possible reasons for the increase in quantity supplied.

Price(Php)

Quantity Supplied

12 8110 688 566 434 372 20

Exercise 1. Suppose that quantity

demanded decrease by 90 units at all price level as a result of the decline in consumer income. Construct the new demand schedule in the table provided. Using this new demand schedule, plot this together with the original supply schedule and determine the equilibrium price and quantity.

Price (Php)

Quantity Demanded

Quantity Supplied

5 480 16010 410 20015 350 26020 300 30025 220 34030 150 430

EXERCISE. Hypothetical Demand and Supply Schedule for Medical Care

Graph together the given demand and supply schedule. Suppose that

quantity demandeddecrease by 70 units atall price level and quantity supplied decrease by 30 units, construct the new schedule and determine the equilibrium price and quantity. Note itscondition.

Price (Php)

Quantity Demanded

Quantity Supplied

Condition

100 750 330

120 620 410

140 510 510

160 420 630

180 350 780

QUIZ. Hypothetical Demand and Supply Schedule for denims

Graph together the givendemand and supplyschedule. Suppose that

quantity demandeddecrease by 30 units atall price level and quantitysupplied decrease by 40units, construct the new

schedule and determine the equilibrium price and quantity. Note its condition.

Price (Php)

Quantity Demanded

Quantity Supplied

Condition

1000 350 930

820 420 710

740 610 610

660 720 430

580 950 380

QUIZ. Hypothetical Demand and Supply Schedule for Commodity XYZ

Graph together the givendemand and supplyschedule. Suppose that

quantity demandedincrease by 20 units atall price level and quantitysupplied increase by 30units, construct the new

schedule and determine the equilibrium price and quantity. Note its condition.

Price (Php)

Quantity Demanded

Quantity Supplied

Condition

120 90 180

100 100 160

80 130 130

60 150 70

40 200 20