Competitive Markets

Supply & Demand

 Markets

• A market exists wherever there are

buyers and sellers of a particular
good or service.

• Consumers demand goods &

services whilst firms supply goods &
services.
What is demand?
 Demand

Definition: Demand is the amount of

a good or service that consumers are
WILLING and ABLE to buy at any
given price in a given period of time.

Effective demand – demand supported

by the willingness & ability to pay for a
good or service.
What’s the relationship between price
and demand
Price

£5

£4

£3

£2

D
1 2 3 4 5 6 7 8 Quantity
 Demand

The ‘Law’ of Demand: As the price

of a good falls, more is demanded.
Therefore there is an inverse relationship
between the price of a good and the quantity
demanded and the demand curve is downward
sloping (from left to right)

…but there are some exceptions… see later

Movements along the demand
curve
Price These are NOT changes in demand

Contraction of demand/
decrease in QUANTITY demanded
P3

P1
Extension of demand/
P2 increase in QUANTITY demanded

D
Q3 Q1 Q2 Quantity
 Why an inverse relationship?
Income Effect Substitution Effect
•A fall in price increases the real purchasing power •A fall in the price of a good makes it relatively
of consumers cheaper compared to substitute products
•This allows people to buy more with the same •Some consumers will switch to the good now that
amount of income the price has fallen
•This leads to an extension of demand/ increase in
•This leads to an extension of demand/ increase in versa
vice quantity demanded (movement along the curve)
quantity demanded (movement along the curve) an
d
…

Diminishing Marginal Utility

•As individuals consume more of a good, they enjoy additional units of that
good less and less. Therefore they are only W&A to buy more if the price falls.
Total vs. marginal….
 Factors Affecting Demand
• A change in the size or structure of thePopulation
• A change in people’s buying habits due to Advertising
• A change in the price of a Substitute good
• A change in Income or wealth (including a change in interest rates
as this changes disposable income)
• A change in Fashion, tastes or trends (which might be caused by
a change in expectations or a change in social or emotional factors)
• A change in Interest rates – which affects consumers’
disposable income Add this to
• A change in the price of a Complement good your notes
A change in any of these cause the curve to shift to the left or right
 Demand and Total
Revenue

Total Revenue is the total

Price
money earned from all sales.

TR = Price X Quantity
P1

Total
It is the area of this Revenue
D
square…
Q1 Quantity
 Factors Affecting Demand

• A change in the size or structure of the

Population The Market for Ford cars
• A change in people’s buying habits due to
Price
Advertising
• A change in the price of a Substitute good
• A change in Income or wealth (including a
change in interest rates as this changes disposable
income)
• A change in Fashion, tastes or trends (which
might be caused by a change in expectations or a
change in social or emotional factors)
• A change in Interest rates – which affects
consumers’ disposable income D1
• A change in the price of a Complement good
Quantity
A change in any of these cause the curve to shift to the left or
right
 Practice Scenario

Nestle have just launched a new luxurious

brand of dark chocolate. How does this impact
the market for Green and Blacks dark

Price
chocolate?
Nestle’s luxury chocolate is a substitute good for
Green and Blacks chocolate.
Consumers may switch from Green and Blacks to
Nestle
D1
This would decrease demand for Green and Blacks D 2

chocolate, shown by the demand curve shifting Quantity

inwards from D1 to D2
 Factors Affecting Demand
Complete TASK 1
Example: Increase in Demand. The Market for Ford cars
• The diagram shows the consequences Price
of a successful advertising campaign
for Ford cars. 1. Name the factor

• This causes a change in people’s

preferences as some would switch from
buying an alternative brand such as
Audi now that they have seen the new
features offered by a Ford car.
2. Explain the factor
D1 D2
• This causes an increase in demand
which causes the demand curve to shift Quantity
to the right from D1 to D2. 3. Explain the effect on Demand
 Shifting demand

Complete Task 1

TASK 2

Complete: TASK 3
 Model Answer (1)
1. Explain what has happened to the Heroin Market

Price
demand for cocaine and the demand for
Effect on demand explained
Heroin.
Cocaine- is a substitute good for Heroin.
Consumers have switched from Heroin to Cocaine.
This would decrease demand for Heroin, shown by
the demand curve shifting inwards/left from D1 to
D 2
This would also increase demand for Cocaine, D1
D 2

shown by the demand curve shifting outwards/right

Quantity
from D1 to D2
Factors Explained
Cocaine Market

Price
This is due to a few factors. Including, change in
fashions as injecting drugs is no longer the
preferred method.
Another factor is the price of the substitute good
(cocaine). The availability of cocaine has gone up,
which would decrease the price, this increases
demand for the substitute good (cocaine), which
D2
lowers demand for Heroin. D1
Quantity
 Model Answer (2)
2. Explain how the demand for Cocaine, Heroin
and Alcohol might change because of further Factors Explained Market for Cocaine, Heroin and Alcohol
education.
Education on the harms of their use would be an effect of

Price
the advertising factor. The demand for cocaine, alcohol and
heroin will all decrease due to negative advertising.
This is shown by the demand curve shifting inwards/left from
D1 to D2 Effect on demand explained Factors Explained
A further factor for cocaine demand specifically D1
D 2
shifting to the left is because of the decrease in
demand for alcohol. As cocaine is a complement Quantity
good to alcohol, a decrease in demand for on
Effect one also explained
demand
decreases demand for the other.
Another final factor could be a change in fashions
due to people's increasing attention toward living a Factors Explained
healthier lifestyle.
This will decrease demand for harmful drugs as people are also substituting the "high"
of drugs for healthier activities which also make you feel good such as meditation,
exercise and other less harmful drugs such as coffee and marijuana.
 Topics
• Demand definition
• The shape of the demand curve
• Income and substitution effect
• Law of diminishing Marginal Utility
• Relationship between price and
quantity demanded
• Contraction and Extension of demand
• Non-price factors PASIFIC
What is supply?
 Supply

Definition: The amount of a good or service

that firms are WILLING and ABLE to sell at
any given price in a given period of time.

This is different to:

• Planned supply (the amount firms plan to
produce at each given price)
• Actual supply (the amount that firms in fact
supply)
 What relationship?
Price

S
£5

£4

£3

£2

1 2 3 4 5 6 7 8 Quantity
Why a positive relationship?
Firms are Profit Maximisers

•It is assumed that firms always aim to make the maximum

amount of profit.
•Therefore they are W&A to sell more if the price rises.
•If the price were to fall, firms would look to sell other
goods/services
•Price rises also allow for producers with higher costs to
survive within the market and make enough profit,
therefore more firms enter the market and supply increases
Movements along the supply
curve
These are NOT changes in supply
Price
Extension of supply/
S
increase in QUANTITY supplied
£5

£4
Contraction of supply/
decrease in QUANTITY supplied
£3

£2

1 2 3 4 5 6 7 8 Quantity
 Factors Affecting Supply
• A change in Productivity
Ad
• A change in the level of Indirect taxes dt
you his
• A change in the Number of firms r n to
ote
• A change in Technology s
• A change in the level of Subsidies
• A change in the Profitability of other goods (in supply)
• For agricultural goods, certain Weather conditions
change the ability to supply
• A change Costs of production
• Transport, Labour, Oil/Petrol, Raw materials, Regulation, Utilities

A change in any of these cause the curve to shift to the left or right
 Factors Affecting Supply
• A change in Productivity
• A change in the level of Indirect taxes
• A change in the Number of firms The Market for Nike shoes
Price
• A change in Technology S2 S1
• A change in the level of Subsidies
• A change in the Profitability of other
goods (in supply)
• For agricultural goods, certain Weather
conditions change the ability to supply
• A change Costs of production
• Transport, Labour, Oil/Petrol, Raw
materials, Regulation, Utilities Quantity
A change in any of these cause the curve to shift to
the left or right
 Factors Affecting Supply
Example:
Q: The price of leather has
increased for Nike by 30% in the The Market for Nike shoes
Price
last year S2 S1

‘The higher price of leather

increases Nike’s costs of
production. As this is a factor
affecting supply, higher costs
cause Nike to be less willing and
able to supply. This causes the
Quantity
supply curve to shift to the left
from S1 to S2.’
 Factors Affecting Supply
Example:
Q: The price of leather has
increased for Nike by 30% in the The Market for Nike shoes
Price
last year S2 S1

‘The higher price of leather

increases Nike’s costs of
production. As this is a factor
affecting supply, higher costs
cause Nike to be less willing and
able to supply. This causes the
Quantity
supply curve to shift to the left
from S1 to S2.’ Now complete TASK 1
 Factors Affecting Supply
https://www.bbc.co.uk/news/business-61461093

Extension - TASK 2 Super-extension - TASK 3

Watch the video, read the article Read the article and then answer the questions
and then answer the questions
Factors Affecting Supply

Here is a colour version of the graph for TASK 3

Topics