TOPIC 3: MARKETS
1.Demand
Demand = quantity of g or s that consumers are willing and able to purchase at various price
levels at a given point in time. There can be individual demand or market demand
Factors affecting market demand:
1. Price of the good or service itself
2. Pric eof other goods and services
3. Expected future prices
4. Change in consumer tastes and preferences
5. Level of income
6. Size of population and age distribution
How does demand for a good respond to price changes?
The quantity demanded by consumers falls as price rises.
More people are willing to buy the good at a lower price
- Any change in the price of a good will lead to a
change in the qty demanded in the opposite
direction to the price change
- Expansions and contractions in demand
- It’s downward slope as the price of a product
increase, ceteris paribus, consumers will demand
less
A change in any of the other 5 factors can influence demand, not price changes.
- Shifts of the demand curve ie. increases and decreases
An increase in demand shifts the demand curve to the right. Consumers are willing and
able to buy more of the product at each possible price than before ie. consumers
demand more of the product at the same price. Also they are willing to buy a given
quantity at a higher price than before
A decrease in demand means consumers are willing and able to buy less of the product
at each possible prie than before ie. consumers demand less of the product at the same
price and are prepared to pay a lower price to purchase the same quantity
Price Elasticity of demand
→ measures the responsiveness of qty demanded to a change in price. Calculated as %
change in qty demanded divided by % change in price
Eg. a fall in price in goods will cause an increase in qty demanded. If that increase in qty
demanded is greater than the fall in price, then the demand is very responsive to price change
→ demand is relatively elastic.
Total Outlay Method = price x qty demanded
is the total outlay/revenue. If price and
revenue move in the same direction,
demand in inelastic. If price and revenue
move in opposite direction, demand is
elastic. If it remains unchanged, demand is unit elastic. You compare the
two total outlays.
Perfectly elastic demand = consumers will demand in infinite qty at a certain price, but nothing
at all at a price above this eg. apples, rice. The demand curve is a horizontal straight line
Perfectly inelastic demand = consumers are willing to pay any price to obtain a given qty of a
good or service eg. drug for a life-threatening disease. Demand curve is a vertical straight line
5 Factors affecting elasticity of demand
1. Whether the good is a luxury or a necessity
2. Whether the good has any close substitutes
3. The expenditure on the product as a proportion of income
4. Length of time subsequent to a price change
5. Whether a good is habit-forming (addictive) or not
2.Supply
Demand = quantity of g or s that all firms are willing and able to offer for sale at different price
levels, at a given point in time
Factors affecting market demand:
1. Price of the good or service itself. Also the expectations of suppliers about the future
price
2. Price of other goods or services
3. State of technology
4. Changes in the cost of factors of production
5. Quantity of the good available
6. Climatic and seasonal influence
Supply curve shows the quantity of a good that will be supplied over a range of prices. It is
upward slope as producing the good becomes more profitable. It slopes upwards
Shifts to the supply curve are called increases and decreases.
An increase (shift to right) means firms are willing and able to supply more at each price
level than before. Firms are also willing to supply a given qty at a lower price than before
- Fall in price of other goods which makes production of other goods less profitable,
improvement in technology, fall in cost of factors of production
A decrease (shift to left) means firms are willing and able to supply less of a good at each
price level than before. Firms are also able to supply a given qty at a higher price than
before
- Rise in price of other goods, climate conditions that are less favourable to the
production of a particular good
Price elasticity of supply measures responsiveness of qty supplied to a change in price
Perfectly elastic supply = where producers are willing to supply an infinite qty of a good at a
particular price but nothing at a price below this. Depicted with a horizontal straight line
Perfectly inelastic supply = where producers are willing to supply a given qty of a good or
service regardless of the price. Depicted with a vertical supply curve
3 Factors affecting elasticity of supply
1. Time lags after a price change
2. Ability to hold and store stock
3. Excess capacity
3.Market Equilibrium
Explains how a market economy determines how much of a g or s is produced and at what price
it is sold. Assumes there is pure competition in the marketplace and there is no govt intervention
Market equiliubium = where at a certain price level, the qty
supplied and demanded are equal ie. the consumer willing to
pay the market price is satisfied and the producer who offers at
the market price is able to sell their product. The market clears
(there is no excess supply or demand) and there is no tendency
for change. This is determined by the price mechanism which
is the process of supply and demand interacting to determine the market price.
Changes in equilibrium
Caused by changes in the conditions behind supply and demand -
not a change in the price of the good itself
The role of the market
The price mechanism attempts to solve the economic problem in product markets for goods and
services. Producers will only produce g + s for which there is consumer demand
The price mechanism does the same in the factor markets eg. individuals who possess skills in
high demand will command higher incomes and a greater proportion of total output.
→ ensures allocative efficiency - ability allocate resources to satisfy consumer wants
Government intervention in the marketplace
Market failure = when markets do not produce the desire
outcomes because price mechanism takes account of the
private costs and benefits of production (to producers and
consumers) but not the social costs and benefits borne by the
whole of society
Types of intervention
Price ceiling (max price; horizontal straight line below
equilibrium) = impose the maximum price that can be charged for a particular
commodity
- Redistributes money from sellers to buyers. Helps buyers!
- Eg. for bread. If the market equilibrium is too high, they might set a price
ceiling. But this may cause an under-production of bread → causes market
disequilibrium
Price floor (min price; horizontal straight line above equilibrium) = the minimum price that can be
charged for a particular commodity
- Redistributes money from buyers to sellers. Helps sellers!
- Eg. farms are struggling with wheat prices being too low. This may cause an
over-production of wheat
Quantity intervention
Negative externalities → social costs such as pollution, health risks, environmental damage
Positive externalities → social benefits such as museums, public parls
Merit goods → goods not produced in sufficient qty by private sector. Involves positive
externalities. Includes education and health care
Public goods → goods that private firms are unwilling to supply, as they are not able to restruct
usage and benefits to those willing to pay for the good eg. national defence, public roads
Competition and market power
No firm has the market power to be able to raise prices above the competitive equilibrium. The
degree of competition is determined by the market structure