The Market Mechanism

Supply and Demand

The market mechanism is a model to show how prices interact with
quantity demanded or supplied. This model is used to determine the
price and quantity traded for everything that is bought and sold in our
society.
Black Friday chaos
Black Friday chaos
Demand Curve

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Demand
comes from consumers.
The demand curve shows us the total quantity that is demanded at
each price level.
It is negatively sloped because as the price decreases the quantity
demanded will increase.
There is an inverse relationship between price and quantity.
Demand
The law of demand states: An increase in price will result in a
decrease in the quantity demanded. A change in price will result in a
movement ALONG the curve.

An increase in price will lead to a decrease in the quantity demanded

and this is called a CONTRACTION. Vice Versa is called an
EXPANSION.
Contraction and Expansion
Contraction

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Expansion
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Quiz

C
 MOVING THE DEMAND CURVE
A change in anything but price will result in a movement OF the
curve. An increase will shift the curve to the RIGHT and a decrease
will shift the curve to the LEFT

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Pete, James ,Sally Pete, James, Sally,

Steven, Mike, Kimmy,
Sandra
FACTORS OF DEMAND What will shift the
curve?
Out/In of fashion
Income
Quality / Technology
Weather / Climate
Advertising
Price of substitutes (direct relationship)
Price of compliments (indirect relationship)
Population
Supply Curve
SUPPLY
comes from producers.
The supply curve shows us the total quantity that is supplied at each
price level.
It is positively sloped because as the price increases the quantity
supplied will also increase. There is a direct relationship between
price and quantity.
The law of supply states: An increase in price will result in an increase
in the quantity supplied. A change in price will result in a movement
ALONG the curve
Supply Curve
MOVING THE SUPPLY CURVE
A change in anything but price will result in a movement OF the
curve. An increase will shift the curve to the RIGHT and a decrease
will shift the curve to the LEFT.
FACTORS OF SUPPLY What will shift the
curve?
Any change in the cost of production will shift the supply curve. An increase in
costs will shift the curve to the left and a decrease in costs will shift the curve to
the right. Eg:
Cost of Raw Materials
Wages
Technology
Government Charges / taxes
Overheads water, electricity
Profit levels
Seasons
A change in methods
 Draw (shifting curves: left and right)
EQUILIBRIUM
The equilibrium point is where the demand and supply curves meet.
This is a level that BOTH the consumers and producers are happy with
BOTH the price and quantity traded.
SHORTAGES
A shortage will occur when the demand for a product is higher than
the supply of it. This will push the price up. The may be caused by
either an increase in demand OR a decrease in supply.
SURPLUSES
A surplus will occur when the demand for a product is less than the
supply of it. This will push the price down.
This may be caused by either a decrease in demand OR an increase in
supply.
MOVING THE DEMAND AND SUPPLY CURVES
An AUTONOMOUS shift to the left or the right (increase/decrease).
This movement is from outside the model. It is the shift of either the
demand or supply curves
This autonomous shift will cause a change in price and this increase
or decrease will INDUCE another movement ALONG the curve
(expansion/contraction).
Example Banana 2011