1.2.3 Markets (supply and demand curves)

Supply curve

Represented by a straight positive line

Demand curve

Represented by a negative straight line

Market clearing price

• the interaction of buyers andsellers provide an equilibrium price in a market where demand and supply is equal. This is called the market clearing price

• the point where the supply curve meets the demand curve is the equilibrium point

Surplus definition

• where supply exceeds demand then there is a surplus

• a surplus is an excess of production or supply

• this may be due to the price being too high which has decreased the demand

Shortage definition

• where demand exceeds supply there will be a shortage

• this may be because the price being charged is too low which caused an increase in demand

• it could also be due to other factors such as panic buying

Price increase affecting supply curve

Price decrease affecting supply curve

Non-price factors that affect & shift supply

1. cost of production

2. introduction of new technology

3. indirect taxes (e.g. VAT)

4. government subsidies

5. external shock

Non-price shift in supply curve (image is surplus)

(image is shortage)

Price increase affecting demand curve

price decrease affecting demand curve

Non-price factors that shift demand

1. price of substitutes

2. alternative brands

3. price of compliments

4. changes in consumer income

5. trends in fashion and tastes

6. advertising and branding

7. population structure / demographics

8. time of year

9. weather and climate

10. external shocks

Non-price shift in demand curve (increase of demand)

(decrease in demand)