The Market Mechanism

BTEC Business

Demand and Supply

How do we end up with a price for a good or service?

• it is set by the level of demand and supply in the market

• depends on how much of the product consumers want to and are able to buy

• and how much firms are willing or able to sell

Factors Affecting Demand

The price of the product:• usually, when a good’s price falls,

more will be bought Income:

• consumers’ incomes influence their demand for goods and services

Factors Affecting Demand

Price of other goods: • demand for one product can often

depend on the price of another Tastes and fashion:• people’s demands change over

time as fashions change

Factors Affecting Demand

Advertising:• consumers can be informed about

new or improved products• persuasive messages can boost

demand

Demand Changes With Price

Demand falls as price rises

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Amount demanded

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Factors Affecting Supply

The price of the product: • generally the higher the price that

a firm can get for its products, the more it will offer for sale

Costs of production :• if a firm’s costs fall, it can supply

more of its products

Factors Affecting Supply

Prices of other goods:• the price of alternative products

affects the quantity supplied of others

Technology:• advances in production techniques

can fuel greater supply of some products

Supply Changes With Price

Supply rises as price rises

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Amount supplied

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Putting Demand and Supply Together

The market price can be seen at the point where the demand and supply lines cross:

Price determined in a market

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Amount demanded and supplied

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Demand