How markets work
- Market for a good or service consists of producers willing and able to supply it and consumers willing and able to demand it.
- Demand is the want and willingness of a consumer to buy a product.
- An effective demand can only occur if the consumer has enough money to buy the product.
- The relationship between demand and price is inversed and negative.
- So demand curve slopes downwards
- As price increases, quantity demanded decreases and vice versa
- A contraction is when demand falls as price increases.
- An extension is when demand rises as price decreases.
- Extension and contraction are MOVEMENT ALONG THE CURVE and only affected by price
- Determinants of demand:
- Disposable income
- Price of substitutes (substitute is a good that can satisfy the same wants / have same function)
- Price of complements (complements are goods in joint demand)
- Taste and favour
- The determinants of demand cause a SHIFT between curves.
- Supply is the ability and willingness of the producers to make a good available.
- The relationship between supply and price is positive
- As price increases, quantity supplied increases: extension
- As price decreases, quantity supplied decreases: contraction
- Supply curve slopes upwards.
- Determinants of supply:
- Cost of production
- Technical improvements/failures
- Economic turnover/downturn
- Supply of resources
- Prices of complement/substitutes
- Business optimism
- Maximise sales/profits
- A market is in equilibrium when the quantity demanded matches the quantity supplied.
- Market demand = market supply
- Market price: the quantity…