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Markets (Not including causes of movement in equilibrium ) - Coggle Diagram
Markets (Not including causes of movement in equilibrium )
A market occurs when buyers and sellers come into contact in some way in order to agree a price and exchange a good or service. Markets can be worldwide or very local
Markets exist for:
Goods
Services
Resources
Currencies
All markets have things in common:
Buyers (consumers/demand)
Sellers (producers/supply)
The buyers and sellers must be in contact with each other
Something to be exchanged
Market Equilibrium
In a free market, the price that will eventually be established will be where the demand for the good equals the supply of that good. This price is known as the equilibrium price
The Price Mechanism
The price mechanism uses the forces of demand and supply to determine the price of a product
The equilibrium price (EP) is also known as the market clearing price
This is because, at that price, there will be no unsatisfied demand (everyone who wants the good, and is willing to pay the market price, will get the good) and no unsold supplies (all goods put on the market will be sold)
When demand increases:
This will cause a shortage
This will cause the price to rise
The producer is motivated by profit and aims to maximise profits
This will encourage existing and new suppliers to increase their supply
Resources are reallocated to the production of the more profitable product and away from other, less profitable products
When demand decreases the opposite of the aforementioned will be true
Why use the price mechanism?
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Supply and Demand relationships
When the demand for different goods or the supply of different goods are linked in some way, changes in the market for one of the goods can bring about changes in the market for the other good
Demand
Joint or complementary demand
When two goods tend to be demanded together e.g. strawberries and cream
An increase in demand for one will tend to lead to an increase in demand for the other and vice-versa for a decrease in demand
Competitive demand
When the goods are close substitutes
An increase in the price of one will lead to an increase in demand for the other as consumers switch from buying the more expensive product to the cheaper product
Derived demand
When the demand for one good is the direct result of the demand for the other. The demand for any factor of production is a derived demand e.g. the demand for workers in a car factory is derived from the demand for cars
Composite demand
When a commodity can be used for two or more purposes. This applies to most raw materials
Example: Wool can be used to produce carpets or clothes or fabric for furniture. An increase in demand for one will tend to lead to a decrease in supply of the other as resources are switched to producing the more popular product
Supply
Joint supply
When two or more goods are produced together - when one is produced, the other is produced automatically - beef and leather
Example: If there is an increase in the supply of mutton there will be an increase in supply of wool
Competitive supply
When an increase in the supply of one good results in a decrease in the supply of the other
Example: If there is an increase in the price of jeans a clothing manufacturer will decrease their supply of denim jackets in order to reallocate their resources to supply more jeans - the jeans are now more profitable at the higher price so the manufacturer wants to supply more of them