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The Market System - Part 2

Demand and Supply

Shifts in the Demand Curve

Information on how to use this resource can be found in Part 1.

The level of demand (the amount consumers desire to purchase at each and every price) depends on a variety of factors all of which could be working together at the same time. This can get a bit confusing. A model allows us to be able to isolate these factors and to observe what happens to the level of demand. The diagram below illustrates this.

Diagram 4:

Get Interactive:

Look at the drop down box - this contains the factors that can influence the level of demand. Click on any one factor, for example incomes:
What do you think would happen to demand if incomes, in general, increased?
Use the slider to check your answer.
Now look at all the other factors. In the boxes below identify the direction of change of the factor and what happens to the level of demand and then draw a conclusion between the extent of the relationship between the factor and the level of demand. The first one is done for you as an example. You will need to think carefully about the nature of the relationship between the factors - for example, what will have to happen to the prices of complements and substitutes to make the demand curve move to the left or the right?

Now let's look at the other half of the market mechanism - the supply curve.

The Supply Curve

You now have to start thinking, not as a consumer, but as a producer. Producers combine various factors of production - land, labour and capital - to make output that they wish to sell. In producing goods and services costs are going to be incurred and the price received by sellers will reflect those costs plus an element of profit. The price they receive therefore can be split up into these four elements - wages, rent, interest and profit, so called factor incomes. If you pay 35p for a Mars bar, that 35p represents a contribution to all these elements; 10p may be the cost of the ingredients; 5p the administration and promotion costs; 7p the cost of the labour that goes into making it and in running the company; 9p may be the contribution to the cost of all the machinery and buildings used by the company leaving 4p as the element of profit. (These figures are only for illustration purposes).

It follows therefore that if producers are going to increase output they are going to incur some additional costs - raw materials and so on and so may want to receive a higher price in order to persuade them to offer more. In general we would expect a supplier to be willing to offer more items for sale at higher prices than lower prices. We say there is a positive relationship between price and supply and the supply curve slopes upwards from left to right.

Diagram 5:

Get Interactive:

Look at the diagram.

• At a price of 5 how many products would suppliers be willing to offer for sale on the market?
• If the price were to change to 2.5, what would happen to the amount offered for sale?
• If the price were to change to 8.5 what would the level of supply being offered for sale now be?
• How would you explain the changes to the level of supply as a result of different prices?

As with demand, the actual level of supply (the amount offered for sale at each and every price) will depend on a variety of factors. The shape of the supply curve will also vary. It will be influenced by the ease with which suppliers can react to changing circumstances and increase or decrease the amount they can offer for sale. Each year at the Wimbledon Tennis Championships, there is a limited amount of tickets available for the Centre Court, it is very difficult for the All England Club (who administer the Championships) to increase the amount of seats available. Over a longer term they may be able to build new stands and so on, but in the short term it is almost impossible to expand 'output'. With other products it may be easier, for example, during the summer of 2003 the hot weather prompted ice cream manufacturers to increase output. It was relatively easy to do this as they may be in a position to be able to employ workers on overtime, increase production through using existing machinery or adopting shift patterns of working.

Diagram 6:

Diagram 7:

Get Interactive:

• Compare the quantity offered for sale in the two diagrams at a price of 5.
• If the price were to change to 7 what would happen to the quantity supplied in each case?
• Calculate the change in the price and the quantity supplied as a percentage. (Hint, take the difference in the price/quantity, divide it by the original price/quantity and multiply by 100)
• What do you notice about the difference between the changes in supply in the two cases? How would you explain this?
• What type of products might these two diagrams represent? Explain your answer.

Factors influencing the level of supply.

Look at the drop down box. Consider what the effects on supply would be as these factors change. Complete the table below and again think carefully about the direction of the change of the factor and the impact on supply as a result. It is important to try to consider how significant the impact would be likely to be in terms of how far the supply curve would shift! Remember to think in terms of supply moving to the 'left' or to the 'right' rather than going 'up' or 'down' as this can lead to confusion over the direction of the change. Again, one has been done for you.

Get Interactive!

Now lets just test our understanding of what we have learned. Consider each of the following 'news headlines' below and state what type of market is being discussed and state what would happen to either the demand curve or the supply curve in each case and what factor is causing the change. There may be an effect on more than one market! Remember the difference between movements along and shifts in the curves!

Example:

Postal workers agree 4.5% pay rise with employers:

• California's strawberry crops hit by late frost
• Price of train travel to rise again
• Music industry to slash price of CDs by half!
• Over 65s to become biggest proportion of the population
• Unknown chemical in apples linked to rise in cancer numbers
• Microsoft angry at rise in hardware prices
• Lager prices jump following rise in duty
• Construction industry looks forward to mortgage rate cut
• Rise in numbers of sheep raised as health report praises lamb
• More of us like our vegetables organic!
• OPEC agrees to further cuts in supply
• 'No more building on greenbelt land' promises government
• Taxes on waste products angers industry leaders
• Growth in DVD sales supports profits for music retailers
• Sales campaign flops as consumers register anger at offensive material
• Average incomes to rise above rate of inflation
• Is this the end of the line for permed hair?

Go to Part 3.

Part 1 | Part 2 | Part 3