Demand and supply in product markets

The determinants of demand​

Income
Substitute prices
Complementary prices
Population changes
Social changes
Technological changes
Seasonal demand
Tastes, fashions, trends
Cost and availability of credit
Government legislation
The effectiveness of advertising
Expectations

The determinants of supply

Cost of inputs
Price of other goods
Technology
Taxes/Subsidies
Expectations
Weather
Seasons
Natural resources
Government policy
World affairs

A market is

any situation where buyers and sellers come into contact in order to exchange goods and services. ​

Types of market​

Product
Factor
Labour
Housing
Stock
Foreign exchange

Product market

Where buyers and sellers interact to trade goods and services.

Factor market

Where buyers and sellers interact to trade factors of production eg land, labour.

Labour market

Where buyers and sellers interact to trade labour.​

Housing market

Where buyers and sellers interact to trade houses.​

Stock market

Where buyers and sellers interact to trade shares.​

Foreign exchange market

Where buyers and sellers interact to trade currency.

Objectives of buyers in a market​

Maximise economic welfare/utility from consuming:​
Low prices​
Quality

Objectives of sellers in a market​

Maximise profit​:
Maximise revenues (satisfy customer needs)​
Minimise costs (sell at lowest price to win over competition)

Demand

The willingness of consumers to buy a product/service at a a given price

The 'Law' of Demand states that as price falls quantity demanded rises and if price rises quantity demanded will fall, ceteris paribus. There are two reasons for this:

Substitution Effect​
Real Income Effect

The demand curve for an individual shows

the quantity of a good or service an individual would be willing and able to buy at various prices, over a particular time period.

​The market demand curve shows

the quantity of a good or service that would be demanded by all consumers, at various prices over a particular time period. It is the sum of all the individual demand curves.

A demand schedule is

a table that shows the quantity demanded for a good or service for a specific time period over a range of prices.

Supply

The amount of goods and services producers can and are willing to provide at a given price level, over a specific time period.

The supply curve for an individual firm shows

the quantity of a good or service that firm is willing to supply over a range of prices, within a given time period.

The supply curve for the market shows

the total amount of a good or service that will be supplied by all firms in the market over a range of prices, within a given time period.

A supply schedule is

a table that shows the quantity supplied of a good or service for a specific time period over a range of prices.

Equilibrium in the free market is where

Qs = Qd

SUPPLY AND DEMAND ANALYSIS

Changes to equilibrium/market price and quantity.​

Increase in D
Increase in S =

P is indeterminate
Increase in Q

Decrease in D
Decrease in S =

P is indeterminate
Decrease in Q

​Marginal utility -

the change in satisfaction/benefit from consuming an extra unit of a good or service.

The law of diminishing marginal utility

As we consume additional units of a good or service the satisfaction/benefit that we derive from each additional unit declines or diminishes.​

CONSUMER SURPLUS

The difference between what consumers are willing pay for a good or service and the price they actually pay.

PRODUCER SURPLUS

The difference between the market price which firms receive and the price at which they are willing to supply.

Increase in D =

Increase in P
Increase in Q

Decrease in D =

Decrease in P
Decrease in Q

Increase in S =

Decrease in P
Increase in Q

Decrease in S =

Increase in P
Decrease in Q

Increase in D
Decrease in S =

Increase in P
Q is indeterminate

Decrease in D
Increase in S =

Decrease in P
Q is indeterminate