The market system : where buyers and sellers communicate and negotiate to exchange goods for a price and to allocate resources.
When Price rises, demand falls
When Price rises, supply rises
When Demand rises, price rises
When Supply rises, price falls
Market Equilibrium : when supply is equal to demand, the market is said to be in equilibrium. The equilibrium or market clearing price is the price when there is market equilibrium.
Excess Demand is when demand is higher than supply as price is lower than equilibrium price,
Excess Supply is when supply is higher than demand as price is higher than equilibrium price.
In a market system, both demand and supply can shift/change.
The reasons for a shift in demand are:
- Income- when income rises, demand normally rises as people are more able to buy products.
- Population- when population rises, demand will rise as more people are there to buy the goods.
- Fashion- changes in consumer taste and fashion can change demand.
- Price- a low price raises demand.
- Price of other products- if the price of substitutes (products that are in competition with the certain product) falls then demand falls as more people will buy the substitute product. If the price of complements (products that are bought along with the certain product) falls then demand rises.
The shift in demand can be shown using a demand curve:
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| An increase in demand is shown by a shift to the right |
The reasons for a shift in supply are:
- Cost of production- if production cost rises, the supply will fall as profits will be reduced.
- Indirect taxes- VAT and duties imposed on products will decrease supply.
- Subsidies- subsidies and grants increase supply.
- Changes in technology- these lower costs which in turn increase supply.
- Natural factors- the weather, natural disaster and seasons can all affect supply. Eg. agriculture
The shift in supply can be shown using a supply curve:
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| An increase in supply is shown by a shift to the right |
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