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The Market Mechanism

This resource is designed specifically for Unit 29 of the Edexcel BTEC National qualification, 'Business and Markets'.

Aim

The aim of this resource is to develop your understanding of how prices are set in markets. By the end, you should be able to:

• Understand the demand and supply factors that influence price
• Draw a simple graph showing how demand and supply move as price changes
• Apply these ideas to the retail sector of business
• Indicate how greater use of online retailers will impact on conventional markets

Resources:

• PowerPoint Presentation - The Market Mechanism [74 KB]

Activity:

Background:

Trading conditions have tightened for many retailers in the past twelve months. There have been fears that consumers have lost their appetites for spending. Competition has intensified as most other retailers struggle to keep sales levels as high as possible.

Let's examine the retail sector's performance over the festive period and analyse some of the factors responsible for determining the price of goods on the high street:

Demand

• Price of the product - consumers expect prices of goods in their weekly shopping trolley to be very competitively priced. In some cases they have become used to seeing prices fall on a regular basis.
• Price of other goods - substitute products may be lower priced. Alternative suppliers may be able to offer larger discounts. Those consumers who are comfortable with using online retailers may find better deals with these 'e-tailers'.
• Incomes - little evidence exists that incomes are falling, but worries persist over the impact of last year's five interest rate rises, mortgage costs and therefore the amount of disposable income that consumers have available.
• Advertising - promotional activity increases as Christmas approaches. The need to persuade consumers to buy certain products and the importance of informing people about pre-Christmas sales drives advertising at this time of year.

Image: Marks and Spencer reported a rise in sales over the Christmas period.

Supply

• Price of the product - theory suggests that firms will supply more goods to the market if they believe that they will receive a higher price, but during the festive period most retailers have no choice but to keep supply high in order to generate satisfactory sales. Many businesses rely on sales made during the run-up to Christmas for a large proportion of their total annual sales.
• Costs of production - for retailers this refers to the costs that the firm incurs in getting its goods into the shops. For instance, if distribution chain problems occur then the firm's production costs are likely to rise.
• Price of other products - with the retail environment become tougher, other firms are likely to be offering price discounts on certain key products.
• Technology - firms are likely to be able to supply greater quantities if they benefit from the introduction of new technology, for example in their distribution system.
• Expectations - in the run-up to Christmas most retailers expect to see their sales levels rise. This encourages them to supply greater quantities to their shops.

Image: Next also reported a weak trading period. Copyright: Les Powell, stock.xchng