Chapter 8: Prices and Markets
8.1 The Meaning of Price and Value
Price: The amount of money required to purchase a good or service.
Value: The worth of a good or service, which may differ from its price due to factors like
scarcity, demand, and individual preferences.
8.2 Types of Market
Old and New Markets: Traditional physical marketplaces vs. modern online and digital
markets.
Local, National, and International Markets:
o Local: Limited to a specific geographic area (e.g., local grocery stores).
o National: Operates within a country’s borders (e.g., stock market of a country).
o International: Trade between countries (e.g., oil and commodity markets).
8.3 Demand
How Changes in Price Affect Demand:
o Higher prices lead to lower demand (law of demand).
o Lower prices lead to higher demand.
The Shape of the Demand Curve:
o Downward sloping from left to right.
o Represents the inverse relationship between price and quantity demanded.
(Graph: Downward sloping demand curve)
8.4 Supply
The Shape of the Supply Curve:
o Upward sloping from left to right.
o Shows that as price increases, supply increases.
(Graph: Upward sloping supply curve)
8.5 The Market Price
The equilibrium price where quantity demanded equals quantity supplied.
Determined by the interaction of demand and supply.
(Graph: Equilibrium price where demand and supply intersect)
8.6 Changes in Demand
Movement Along the Demand Curve:
o Caused by a change in price.
Movement of the Demand Curve:
o Caused by factors other than price.
Causes of Movement of the Demand Curve:
1. Changes in Income: Higher income increases demand.
2. Changes in Prices of Other Goods:
Substitutes: A price increase in one good increases demand for its
substitute.
Complementary Goods: A price increase in one good decreases demand for
its complement.
3. Changes in Taste and Fashion: Trends influence demand.
4. Advertising: Can boost or reduce demand.
5. Hire Purchase: Easy credit options can increase demand.
Effects of Changes in Demand:
o Increase in Demand: Demand curve shifts right → Higher price & quantity.
o Decrease in Demand: Demand curve shifts left → Lower price & quantity.
8.7 Changes in Supply
Movement Along the Supply Curve:
o Caused by a change in price.
Movement of the Supply Curve:
o Caused by factors other than price.
Causes of Movement of the Supply Curve:
1. Changes in the Prices of the Factors of Production: Higher costs reduce supply.
2. Technical Progress and Productivity: Increases supply.
3. Weather Conditions: Affects agricultural output.
4. Taxes and Subsidies: (Important)
Taxes: Increase costs, reducing supply.
Subsidies: Reduce costs, increasing supply.
Effects of a Change in Supply:
o Increase in Supply: Supply curve shifts right → Lower price & higher quantity.
o Reduction in Supply: Supply curve shifts left → Higher price & lower quantity.
8.8 Demand and Supply - Some Important Relationships
1. Competitive Demand: Two goods competing for consumer spending (e.g., Coca-Cola vs.
Pepsi).
2. Joint Demand: Goods used together (e.g., cars and petrol).
3. Joint Supply: A good that produces multiple outputs (e.g., cows provide both beef and
leather).
8.9 Demand and Supply - Some Real Examples
1. Non-Market Prices:
o Holding Down Food Prices During an Emergency: Price ceilings prevent excessive
inflation.
o Offering Farmers a Guaranteed Price Higher Than the Free Market Price: Price
floors ensure stability.
2. A Fixed Supply – Cup Final Tickets:
o Limited supply leads to high prices.
3. Taxes and Subsidies:
o Effect of Placing a Tax on a Commodity: Increases price, reducing demand.
o Effect of a Subsidy: Lowers price, increasing demand.
(Graph: Impact of Taxes and Subsidies on Supply and Demand)