Summary Revision Notes for 1.2 how markets work
How markets work 1.2
Demand-the quantity of a good or service that consumers are willing and able to buy at a given
price, at a particular time
Marketsare where Goods and Services are Bought and Sold- opportunity for buyers and sellers to
interact in order to establish a price
▪ Buyers and sellers can exchange goods and services
▪ The price charged for and quantity sold is determined by demand and supply in a market
▪ The level of demand and supply are shown using diagrams- demonstrate the price level and
quantity demanded/ supplied of goods or services
A demand curve shows the relationship between price and quantity demanded. At any given point
along the curve it shows the quantity that would be bought at a particular price
The law of demand shows the inverse relationship between price and quantity, assuming all other
variables remain constant
,Movements and shifts of the demand curve:
A movement along the demand curve- from A to B, is caused by a change in the
price of the good. A shift of the demand curve, for example D1 to D2, is caused by a
change in any of the factors which affect demand, the conditions of demand.
A movement from A to B is a contraction in demand, the quantity demanded falls
because of an increase in price. A movement from A to C is an extension in demand,
the quantity demanded rises due to a decrease in price. Movements along the curve
are not called increases or decreases- this only occurs when the curve shifts.
A shift from D1 to D2 is a decrease in demand, because fewer goods are demanded
at each and every price. For example, at price P only Q2 goods are demanded rather
than Q1 goods. A shift from D1 to D3 is an increase in demand, as more goods are
demanded at each and every price. Now, Q3 goods are demanded at price P
, Factors that cause a shift in
Demand Pirates:
▪ P- Population. The larger the population, the higher the demand. Changing the structure of the population
also affects demand, such as the distribution of different age groups.
▪ I-Income. If consumers have more disposable income, they are able to afford more goods, so demand increases.
▪ R- Related goods.-substitutes or complements. A substitute can replace another good, such as two different brands
of TV. If the price of the substitute falls, the quantity demanded of the original good will fall because consumers
will switch to the cheaper option. A complement goes with another good, such as strawberries and cream. If the
price of strawberries increases, the demand for cream will fall because fewer people will be buying strawberries,
and hence fewer people will be buying cream.
▪ Advertising. This will increase consumer loyalty to the good and increase demand.
▪ T- Tastes and fashions. The demand curve will also shift if consumer tastes change. E.g. demand for physical
books might fall, if consumers start preferring to read e-books.
▪ E- Expectations. This is of future price changes. If speculators expect the price of shares in a company to increase
in the future, demand is likely to increase in the present.
▪ S- Seasons. Demand changes according to the season. Summer, the demand for ice cream, sun lotions increases.
Income effect- prices fall= consumers afford a greater quantity of
goods and services (assuming income is fixed). Demand for
goods and services increases
Substitute goods- an increase in price of one
good will increase the quantity demand of Substitution effect- price of one good falls, consumers buy more of
the other. E.g. Persil and Ariel washing pods the cheaper good and less of the more costly good. Demand for
cheaper good increases & demand for costlier good decreases
Complement goods- an increase in the price of
one good will cause a decrease in the quantity Derived demand: demand for one good is linked to the
Ddeemmaannddecduorvf Deman curve to shifts
demand for a right:
related good. Demand for bricks is derived
ethteo osthhifter.leEft.g:. flights to Dubai d from the demand for the building of new houses. The
ncrease in population
and ▪sun Decrease
cream. Buyin one, naturally buy another
population demand for labour is derived from the goods the labour
▪ Increased
produces.income= decreased demand- inferior
▪ sed income= decreased demand- ▪ Igoods Decrease price of complement goods
Normal Goods-income increases people demand more of goods shift left, demand curve for other items shift right. As
inferior goods ▪ Decrease price in substitutes
a good. Demand curve shifts right there’s fewer rich people who can afford luxury items, more
▪ Changes in tech ▪ Hot weather= Increase demand for ice creams
people can afford everyday items
▪
Inferior good- spe porpilce doefmcoamndp lemsseonftigf ncrease advertising (trends)
othoedisr income
▪
incre▪aseIsn. cRriesaesien pinricoemine sduebmstiatnudtecs
urve shifts left- switch ▪ to ex▪penCsoivled
gwoeoadtsher= decrease demand for ice
creams
Equal
▪ Decrease of income-demand curve for luxury
distribution
How markets work 1.2
Demand-the quantity of a good or service that consumers are willing and able to buy at a given
price, at a particular time
Marketsare where Goods and Services are Bought and Sold- opportunity for buyers and sellers to
interact in order to establish a price
▪ Buyers and sellers can exchange goods and services
▪ The price charged for and quantity sold is determined by demand and supply in a market
▪ The level of demand and supply are shown using diagrams- demonstrate the price level and
quantity demanded/ supplied of goods or services
A demand curve shows the relationship between price and quantity demanded. At any given point
along the curve it shows the quantity that would be bought at a particular price
The law of demand shows the inverse relationship between price and quantity, assuming all other
variables remain constant
,Movements and shifts of the demand curve:
A movement along the demand curve- from A to B, is caused by a change in the
price of the good. A shift of the demand curve, for example D1 to D2, is caused by a
change in any of the factors which affect demand, the conditions of demand.
A movement from A to B is a contraction in demand, the quantity demanded falls
because of an increase in price. A movement from A to C is an extension in demand,
the quantity demanded rises due to a decrease in price. Movements along the curve
are not called increases or decreases- this only occurs when the curve shifts.
A shift from D1 to D2 is a decrease in demand, because fewer goods are demanded
at each and every price. For example, at price P only Q2 goods are demanded rather
than Q1 goods. A shift from D1 to D3 is an increase in demand, as more goods are
demanded at each and every price. Now, Q3 goods are demanded at price P
, Factors that cause a shift in
Demand Pirates:
▪ P- Population. The larger the population, the higher the demand. Changing the structure of the population
also affects demand, such as the distribution of different age groups.
▪ I-Income. If consumers have more disposable income, they are able to afford more goods, so demand increases.
▪ R- Related goods.-substitutes or complements. A substitute can replace another good, such as two different brands
of TV. If the price of the substitute falls, the quantity demanded of the original good will fall because consumers
will switch to the cheaper option. A complement goes with another good, such as strawberries and cream. If the
price of strawberries increases, the demand for cream will fall because fewer people will be buying strawberries,
and hence fewer people will be buying cream.
▪ Advertising. This will increase consumer loyalty to the good and increase demand.
▪ T- Tastes and fashions. The demand curve will also shift if consumer tastes change. E.g. demand for physical
books might fall, if consumers start preferring to read e-books.
▪ E- Expectations. This is of future price changes. If speculators expect the price of shares in a company to increase
in the future, demand is likely to increase in the present.
▪ S- Seasons. Demand changes according to the season. Summer, the demand for ice cream, sun lotions increases.
Income effect- prices fall= consumers afford a greater quantity of
goods and services (assuming income is fixed). Demand for
goods and services increases
Substitute goods- an increase in price of one
good will increase the quantity demand of Substitution effect- price of one good falls, consumers buy more of
the other. E.g. Persil and Ariel washing pods the cheaper good and less of the more costly good. Demand for
cheaper good increases & demand for costlier good decreases
Complement goods- an increase in the price of
one good will cause a decrease in the quantity Derived demand: demand for one good is linked to the
Ddeemmaannddecduorvf Deman curve to shifts
demand for a right:
related good. Demand for bricks is derived
ethteo osthhifter.leEft.g:. flights to Dubai d from the demand for the building of new houses. The
ncrease in population
and ▪sun Decrease
cream. Buyin one, naturally buy another
population demand for labour is derived from the goods the labour
▪ Increased
produces.income= decreased demand- inferior
▪ sed income= decreased demand- ▪ Igoods Decrease price of complement goods
Normal Goods-income increases people demand more of goods shift left, demand curve for other items shift right. As
inferior goods ▪ Decrease price in substitutes
a good. Demand curve shifts right there’s fewer rich people who can afford luxury items, more
▪ Changes in tech ▪ Hot weather= Increase demand for ice creams
people can afford everyday items
▪
Inferior good- spe porpilce doefmcoamndp lemsseonftigf ncrease advertising (trends)
othoedisr income
▪
incre▪aseIsn. cRriesaesien pinricoemine sduebmstiatnudtecs
urve shifts left- switch ▪ to ex▪penCsoivled
gwoeoadtsher= decrease demand for ice
creams
Equal
▪ Decrease of income-demand curve for luxury
distribution
