MARKETS

A market is any effective arrangement for bringing buyers and sellers together, not necessarily face to face

Eg local, national and international

Because resources are scarce they must be allocated to their best (most valued) use.

In a free market economy price changes are signals to producers - who are then able to respond to the demands of consumers -, in knowing the demand that consumers have over their product. i.e. supply and demand.

So when the price of the product rises – ceteris paribus (e o price do resource continues the same) – the producers know that consumers what more, and therefore gain more profit.

DEMANDS

Demand is:

- 'that quantity of a good or service that would be bought at each and every price over a period of time'

- demand is the amount the consumers are willing and able to buy given the price of the product

This means that demand combines: EFFECTIVE EMAND

  • The desire for a product
  • A willingness to pay for it
  • The ability to pay for it

In other words to count as demand, the demand for something has to be what is known as effective demand. This means that the demand has to be backed by a willingness AND ability to pay

The law of demand

This assumes that consumers act in a rational manner, so that, other things being equal, the lower the price of a good, the greater the quantity demanded and the higher the price, the less the quantity demanded

Thus, in the diagram below, as the price falls from OP1 to OP2, the quantity demanded increases from OQ1 to OQ2. If price were to rise from OP2 to OP1, the quantity demanded would fall from OQ2 to OQ1.

Individual demand – comes from an individual and is affected by desire, willingness and ability to pay

Market demand (whole market) – millions of individuals, :. To get market demand we need to add all the individual demand curves.

Determinants of Demand

The demand curve shows that demand depends on price. However, price is only one of the factors which influence demand, or is one of the determinants of demand. The full list of the determinants is:

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  • Price

  • Price of Other Goods - The demand for one product will be affected by changes in the prices of others. If one supermarket runs a special offer on fresh salmon then it is likely that it will sell more salmon. But other supermarkets will be affected as their sales of salmon will be hit: demand will fall even though there has been no change in the price of their product. Relative prices have changed. In this case the two products are close substitutes for each other and a fall in the price of one causes the ...

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