Competitive markets & how they work OCR Economics AS Level F581 Microeconomics

Lesson 1 Objectives To be able to explain what exactly we mean by a market To be able to explain the difference between notional and effective demand To be able to explain the relationship between price and quantity demanded, using a graph to display a demand curve

To begin You have 5 minutes to come up with as many uses of the word ‘market’ as you can (in relation to the world of Business, Commerce & Economics)

Definition of ‘Market’ Market: where or when buyers and sellers meet to trade or exchange products & services Examples include the stock market, housing market, local high streets, e-bay, the labour (jobs) market Within markets the level of demand and supply fluctuate and as a result so do prices

Who would like one of these?

Who can afford to buy one of these?

Definitions of Notional & Effective Demand Notional Demand : the desire for a product Effective Demand : desire for a product backed up by a willingness and ability to pay Demand : the quantity of a product that consumers are able & willing to purchase at various prices over a period of time

An example of a lack of effective demand

Relationship between price & quantity demanded We assume ceterus paribus (that all other factors remain equal) We focus on a period of time (e.g. a day, a week, a month, a year) We assume that consumers are rational, seeking the cheapest purchase There is an inverse relationship between price and quantity demanded – as prices rise, demand falls

Task: Look at table 2.1 and Fig 2.1 on Page 25 Turn over to Page 26 and complete the Benidorm holiday activity

Definitions of Demand Curve & Demand Schedule Demand curve : this shows the relationship between the quantity demanded and the price of a product Demand schedule : the data that is used to draw up a demand curve Movements along the demand curve : a change in quantity demanded in response to a change in price

Pass the Buck What can you recall from Lesson 1?

Lesson 2 Objectives To be able to define and explain what we mean by consumer surplus To recognise how price and quantity demanded can be used to calculate total revenue/total expenditure To be able to describe the range of factors other than price that influence demand

How much would you pay to use Facebook or Twitter?

Globally, it’s estimated that we get €100 billion more in value from use of the internet than we pay for (click on the image below to read live on line)

Definition of Consumer Surplus Consumer Surplus : the extra amount a consumer would be willing to pay for a product and service over and above the amount that actually is paid Consumer Surplus Price Quantity P Q

How have the following affected consumer surplus? The introduction of a congestion charge in London The arrival of Amazon and others in to the market for books Price discrimination by low-cost airlines who charge different prices depending upon how far in advance customers book We’ll return to this concept later to see how consumer surplus is affected by market developments

Calculating Total Revenue/Total Expenditure A demand curve is plotted against two axis –Price –Quantity By multiplying price per unit by the number of units sold, we can determine the total revenue earned by firms which is also the total expenditure by consumers, at a given price E.g. 200 units x £1.50 per unit = £300

Why is this important? We will discover in future lessons how different products/services have demand that is more or less sensitive to price changes Total revenue/expenditure can vary quite dramatically if demand and or prices fall There may be an increase in revenue even if prices are cut, or a decrease in revenue even if prices are increased

Other factors that influence demand

Key income definitions Disposable income : Income after taxes on income have been deducted and state benefits have been added Real disposable income : As per disposable income but further adjusted to take account of changes in price level (inflation) Normal goods : goods for which an increase in income leads to an increase in demand e.g. Plasma TV Inferior goods : goods for which an increase in income leads to a fall in demand e.g. ‘Basics’/’Value’ branded foods Substitutes : competing goods e.g. i-tunes vs CDs Complements : goods for which there is joint demand e.g. houses and mortgages

The effect on the demand curve Change in demand due to Effect on the demand curve An increase in consumer income Demand at the same price is HIGHER than before, and the curve shifts to the RIGHT A rise in the price of substitutes A fall in the price of complements A positive change in tastes & fashion A fall in consumer income Demand at the same price is LOWER than before, and the courve shifts to the LEFT A fall in price of substitutes A rise in price of complements A negative change in tastes & fashion D D1 D2

Real Life Examples What examples of these factors in action do you recall from the commodity presentations you did last term?