Component One Handout Two

• Market


  A place where buyers and sellers trade goods and services with each other
• Demand


  The amount of a good or service which customers are willing and able to purchase at a given price and within a given time period
• Supply


  The amount of goods or services sellers are able and willing to provide at a time at a given price
• Equilibrium


  Price equilibrium is found when the quantity demanded is equal to the quantity supplied
• The forces of demand and supply


  Dictate the price of a good or service
• If demand for a product exceeds supply

  The price would increase as businesses would take advantage of high demand
• If supply was to exceed demand

  This would lead to prices decreasing, as businesses would want to avoid a surplus so would lower the price to encourage demand and clear excess stock
• Factors that affect demand


  • Price
  • Income
  • Interest rates
  • Change in the price of substitutes
  • Change in the price of complements
  • Change in tastes and fashions
  • Change in legislation
  • Advertising campaign
• The law of demand states that the higher the price, the lower the quantity demanded; and the lower the price, the higher the quantity demanded

  
• A price increase


  Causes a movement up the demand curve
• A price decrease


  Causes a movement down the demand curve

  
• If anything other than price changes


  It will cause the demand curve to shift

  
• If the change causes demand to increase

  The curve must shift to the right
• If the change causes demand to decrease

  The curve must shift to the left
• If advertising of the DVDs increases

  It will cause demand to increase due to more consumers being aware of the product and more willing to purchase
• If income decreases


  It means that consumers will have less money to spend on luxuries such as foreign holidays
• If the price of lamb increases


  The demand for chicken would increase as it becomes a substitute
• If the price of petrol goes up

  The demand for cars would decrease as petrol is a complement
• If there is a change in tastes away from your product

  The demand curve would shift left
• If there is a decrease in interest rates

  The demand for cars would increase as it becomes cheaper to borrow money to purchase them
• Factors that affect supply


  • Price
  • Costs of production
  • VAT/Corporation tax
  • Subsidies
  • The weather
  • Improvements in technology
• As price increases


  Supply will increase (expansion of supply) as the supplier will be more willing to supply at that price as they will make a higher revenue and profit
• As price decreases


  Supply will decrease (contraction of supply) as the supplier will be less willing to supply at that price as they will make a lower revenue and profit
• As cost of production increase

  Supply will decrease as firms will be less willing to supply at the given price as they would make a lower amount of profit once costs have increased
• As cost of production decrease

  Supply will increase as firms will be more willing to supply at the given price as they would make a higher amount of profit once costs have decreased
• Increases in tax


  Will mean the firm's ability to supply at a given price would fall as their profits at that price would decrease
• Decreases in tax


  Will mean the firm's ability to supply at a given price would rise as their profits at that price would increase
• Increases in subsidies


  Would increase supply as firms would be more willing to supply at a given price as they would benefit from the subsidy
• Removal or decreases in subsidies

  Would decrease supply as firms would be less willing to supply at a given price as they would no longer benefit from the subsidy
• Adverse weather


  Often reduces a firm's ability to supply a product as there may have been damage to products or it is not possible to provide the produce in certain weather conditions
• Improvements in technology


  Usually means the firm can produce on a larger scale and reduce unit costs, this should increase a firm's ability and willingness to supply a product
• A price increase


  Causes a movement up the supply curve (expansion of supply)

  
• A price decrease


  Causes a movement down the supply curve (contraction of supply)

  
• If anything other than price changes


  It will cause the supply curve to shift

  
• If the change causes supply to increase

  The curve must shift to the right
• If the change causes supply to decrease

  The curve will shift to the left
• Favourable weather conditions


  Mean that more strawberries can be supplied to the market, causing the supply curve to shift right
• An increase in the price of cocoa

  Means an increase in the cost of production, therefore less chocolate can be supplied for the same cost, causing the supply curve to shift left
• The point where the quantity that consumers are willing to purchases matches the quantity that suppliers are willing to supply at a given price


  Is known as market equilibrium
• The price at which the demand and supply curves cross

  Is known as the equilibrium price