A market is where buyers and sellers come into contact for the purpose of exchange. A price is agreed for exchange to take place. By price, we mean the exchange value of a good or service. There are many types of market, and the Edexcel specification focuses on product, commodity and labour markets:
- A product market refers to foods or services which the consumer derives utility from – they are wanted for their own sake. Examples are chocolate, wine and fast food.
- A commodity market refers to raw materials or minerals used in the production of goods and services. Examples are wheat, sugar, oil and gold.
- A labour market refers to the buying and selling of labour time for the production of goods and services. Examples include the markets for plumbers, teachers and accountants.
The buyers or consumers in a market are said to demand goods or services. Demand refers to the quantity of a good or services purchased at a given price over a given time period. Demand is different from just wanting a good or service. It is a want backed up by the ability to pay, which is known as effective demand.
Downward-sloping demand curve
A demand curve is the quantity of a good or service that would be bought over a range of different price levels in a given period of time.
The demand curve slopes downwards for two different reasons:
- The substitution effect. When the price of a good falls, it becomes cheaper relative to substitutes and some customers switch their purchases from more expensive substitutes to the good in question.
- The income effect. When the price of a good falls, the real income of a consumer may rise. In effect, the purchasing power of the consumer’s nominal income has increase and so more of the good can be bought.
The market demand curve is the horizontal summation of each individual demand curve for a particular good or service.
Movement along a demand curve
There is movement along a demand curve for a good only when there is a change in price. A fall in price causes an extension in demand, and a rise in price causes a contraction in demand, as shown in the diagram below.
[diagram on page 18]
Shifts in the demand curve
An increase in demand refers to the whole demand curve shifting outwards at every price level. A decrease in demand refers to the whole demand curve shifting inwards to the left at every price level.
There are various factors which can shift the demand curve for a good. For example, the demand for Sony PlayStation games consoles might increase due to:
- a fall in the price of complimentary goods, such as games
- a rise in the price of substitute goods, such as the 360 or Wii
- a change in fashion and tastes which makes games console more or less popular as a leisure activity for young people
- increased advertising for PlayStation console, or complimentary goods
- an increase in real incomes (for normal goods) meaning that the PlayStation becomes more affordable to buy
- a decrease in income tax, leading to more disposable income
- an increase in population, or a change in the age structure of a population so that there are more of the demographics that the PlayStation appeals to
- an increase in credit facilities which makes it easier to obtain the required funds
[diagram page 19]
The diagram shows a decrease in demand by the shift of the demand curve leftwards to D1, and an increase in demand is demonstrated by a rightward shift to D2.