1.2 Market 1.2.3 Markets Theme 1: Marketing and people u x y v w z Based on what you have learnt so far can you replace u – z with the correct labels? 1.2 Market 1.2.3 Markets Edexcel Business

1.2.3 Markets In this topic you will learn about The interaction of supply and demand The drawing and interpretation of supply and demand diagrams to show the causes and consequences of price changes

The interaction of supply and demand Supply and demand can be shown on one diagram Market equilibrium is that point at which demand is equal to supply i.e. where the supply and demand curve cross Any change in demand or supply will lead to a new equilibrium price

The interaction of supply and demand The equilibrium point can be shown graphically: Price Quantity D P Q S At a price of P quantity demanded (qd) is equal to quantity supplied (qs). All products are sold and no products are left over i.e. the market has cleared. At this price all products that have been offered for sale by suppliers have been bought by buyers and all supply has had an equal demand.

The drawing and interpretation of supply and demand diagrams Recap. What has happened to demand as prices rise? Why? What has happened to supply as prices rise? Why? Excess supply: If price were to rise to P1 we would have a position of excess supply. Buyers would demand less (Q1) at the higher price but firms would wish to supply more (Q2) at this price. This would lead to a situation of too much supply (Q2 – Q1) in the market. To solve this problem firms would need to lower price to get rid of excess products. Price Quantity D P Q S P1 Q2 Q1

The drawing and interpretation of supply and demand diagrams Recap. What has happened to demand as prices fall? Why? What has happened to supply as prices fall? Why? Excess demand: If price were to fall to P2 we would have a position of excess demand. Buyers would demand more (Q2) at the lower price but firms would wish to supply less (Q1) at this price. This would lead to a situation of too much demand (Q2 – Q1) in the market. To improve profitability firms could raise price, thus reducing the excess demand. Price Quantity D P Q S P2 Q2 Q1

The drawing and interpretation of supply and demand diagrams Market forces: Market forces are always pushing prices towards market equilibrium – the price at which demand equals supply and there are no products left over in the market. Too much supply leads to lower prices, too much demand to higher prices. Where demand is equal to supply we have the market equilibrium price. S Price P1 Market equilibrium P P2 D http://www.dailymail.co.uk/sport/football/article-2794415/premier-league-supporters-flock-europe-enjoy-affordable-football-incredible-atmosphere-ticket-price-hikes-forcing-english-fans-away.html Q1 Q Q2 Quantity Use your understanding of equilibrium price and supply and demand to explain why ticket prices vary so much.

Check your understanding Which of the following statements best defines market equilibrium? Prices are kept low leading to consumer satisfaction Quantity demanded in the market matches supply The market is saturated by cheap supplies More suppliers can enter the market to maximise profits Can you explain your answer? B

Check your understanding As shown on the diagram opposite price has fallen from P to P1. Which of the following statements is correct? The market is in equilibrium The market has excess demand of Q1 - Q2 The market has excess supply of Q1 – Q2 The market has excess supply and demand of Q1 – Q2 Can you explain your answer? Price Quantity D P Q S P1 Q2 Q1 B

Check your understanding A change in price, shown by the red line, has led to excess supply within the textiles market. Which of the following diagrams shows this? D S a) b) D S D D c) S d) S D Can you explain your answer?

The drawing and interpretation of supply and demand diagrams It is important to remember that: a change in price will lead to a movement along the supply or demand curve However: a change in any other factor will lead to a shift in the demand or supply curve A change in price will cause either: A movement along the demand curve Or A movement along the supply curve A shift in the demand curve will occur due to changes in: A shift in the supply curve will occur due to changes in: Consumer income Prices of other goods and services Consumer tastes and fashion Other factors e.g. advertising The impact of changing costs of production Technological progress Government policy e.g. taxes and subsidies Other factors e.g. expectations Disequilibrium occurs when there is an imbalance in the quantity demanded and quantity supplied of a product i.e. there is excess demand or excess supply?

Check your understanding Market forces: Recap. Can you explain this diagram? S Price P1 Market equilibrium P P2 D Q1 Q Q2 Quantity

The drawing and interpretation of supply and demand diagrams Shifts in the demand curve can be shown graphically: Price Quantity D P Q S P1 Q1 An increase in demand will see the demand curve shift upwards and towards the right from D to D1. This will cause price to rise to P1 and quantity demanded to Q1. At this point we have a new market equilibrium (P1 Q1). The shift in demand has led to a movement along the supply curve. Draw a diagram to explain market equilibrium in the housing market. D1 http://www.bbc.co.uk/news/10620450

The drawing and interpretation of supply and demand diagrams Shifts in the supply curve can be shown graphically: Price Quantity D P Q S P1 Q1 S1 An increase in supply will see the supply curve shift downwards and towards the right from S to S1. This will cause price to fall to P1 and quantity supplied to rise to Q1. At this point we have a new market equilibrium (P1 Q1). The shift in supply has led to a movement along the demand curve.

The drawing and interpretation of supply and demand diagrams Price 1) On the diagram show what will happen when there is a decrease in supply. P2 P 2) Explain what has happened. D Q2 Q Quantity A decrease in supply will see the supply curve shift upwards and towards the left from S to S2. This will cause price to rise to P2 and quantity supplied to fall to Q2. At this point we have a new market equilibrium (P2 Q2). The shift in supply has led to a movement along the demand curve.

Check your understanding A City Coffee House in London opens 25 new coffee shops in 2016 Construct a supply and demand diagram to illustrate the impact of City Coffee House’s decision on the London coffee shop market

Check your understanding A change in social trends leads to more mothers choosing to breast feed their babies rather than using formula milk Construct a supply and demand diagram to illustrate the impact of this trend on the market for formula milk

1.2.3 Markets In this topic you have learnt about The interaction of supply and demand The drawing and interpretation of supply and demand diagrams to show the causes and consequences of price changes