1. 1.2 Market 1.2.3 Markets Theme 1: Marketing and peopleu 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 Markets
Edexcel Business

2. 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

3. 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

4. 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.

5. 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

6. 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

7. 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 Q1 Q Q2
Quantity
Use your understanding of equilibrium price and supply and demand to explain why ticket prices vary so much.

8. 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

9. 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

10. 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?

11. 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?

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

13. 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

14. 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.

15. 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.

16. 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

17. 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

18. 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