The Nature of Markets - Factors Influencing Demand and Supply

The Nature of Markets - Factors Influencing Demand and Supply
There is a whole range of factors that influence both demand and supply. The drag and drop exercise
below lists some of these factors. You have to decide whether you think the factor concerned affects
demand or supply and then drag the factor to the appropriate box.
Note that if you make a mistake you will only be able to tell by the amount you have got right out of the
total. You will have to decide which ones are right and which are wrong!
Please note: to make full use of the activity, your system must have Macromedia Flash Player 6 (or
higher) installed - this can be obtained from the Macromedia Web site. Interactive Macromedia Flash
resources developed by Biz/ed are designed to work both with and without the use of a mouse and be
compatible with as many assistive technologies as possible (further information on our accessibility
features is available). If you cannot view the interactive resources for whatever reason a static
annotated image will appear instead, if you cannot view the static image it will be replaced by
descriptive text.
A substitute is a product that is similar to another product and can be used instead. For example,
butter and margarine, a bus or a taxi, coffee and tea, gas and electricity and so on.
A complement is a good that tends to be used together with another related good. For example, a DVD
player and a DVD, toast and marmalade, coffee and milk, pen and paper and so on
The Nature of Markets - How Factors Affect Demand and Supply
Once you have correctly separated the factors out in the previous activity, print out the table below to
explain what effect you think it will have on the demand or the supply of a good. We have done one for
you as an example.
Factor Effect
This will affect demand. If people are paid more, then they are likely to increase
Income demand for a good or service. If their income falls, then they will be likely to reduce
their demand for goods and services.
Climate
Age
Technology
Price of
substitutes
Expectations of
producers
Advertising
Taste
Cost of production
Fashion
Nature
Quality
Size of the
population
Price of
complements
Image: Natural disasters like floods and hurricanes can have a major effect on
the supply of many different types of goods - farmers can have their crops badly
damaged, frost can kill off young fruit, and Hurricane Katrina recently had a
major effect on the world supply of oil.
Page 2
The Nature of Markets - Demand Curves
When looking at markets we use various techniques to help us understand what is going on in the real
world. We call these things 'models'.
A model is an attempt to represent, in a simplified way, a very complex process. Markets are very
complex things but they do have certain characteristics that we can look at and the model is based on
these characteristics.
This next section looks in more detail at how we 'model' markets and how we can use them to make
some simple predictions. We will start with demand. We are going to look at demand through a game.
The Demand for Chocolate Bars
Purpose:
A game to show how to draw demand curves and to show how market demand curves can be derived
from individuals' demand curves.
Learning Objectives:
At the end of the game, you should understand:
• How individuals' demands combine to create market demand

• How to plot a market demand curve
• How to plot a shift in the demand curve
Requirements:
• Table
• Can of coke
• King-size Snickers bar
• Pint of milk
• King-size Mars bar
• 4 '50p' price labels and '£1' price label (available to print out)
Method:
Stage 1
1. Set up the table as a shop with the four products on top. Place a 50p price label in front
of each product.
2. Explain to the students that they have a maximum of £2.50 to spend and can buy any
of the products in the shop, in any combination.
3. You can buy any number of one product and do not have to buy all the products. You
must spend all of your income.
4. When you have made your decisions, print out and fill in the table below.
Product Quantities
Can of coke (50p)
Snickers bar (50p)
Pint of milk (50p)
Mars bar (50p)

Stage 2
1. Now assume that it is a new day and you have consumed all the food you bought
yesterday.
2. A global shortage of peanuts has pushed the price of a Snickers bar up to £1. Replace
the 50p label in front of the Snickers bar with a £1 label.
3. You still have £2.50 to spend. Make your decisions again. Print out and complete the
table below with your new preferences following the price rise.
Product Quantities
Can of coke (50p)
Snickers bar (£1)
Pint of milk (50p)
Mars bar (50p)
Stage 3 - Calculating Market Demand
1. Organise yourseleves into groups of 5-6.

2. Work out the market quantities for your group for stages 1 and 2. Do this by adding
together the quantities for each product at each price level demanded by each person in your
group. An example of how to do this is shown below.
Quantities - Stage 1 Quantities - Stage 2

Product
(Snickers cost 50p) (Snickers cost £1)
Can of coke ||||| ||||| |||| ||||| ||||
Snickers bar ||||| ||||| ||| ||||
Pint of milk ||||| ||||| || |||
Mars bar ||||| ||||| ||||| |||| ||||| ||||| ||||
What this represents is the demand for each product - the amount each person would like to purchase at
the price stated. By adding together each individual's demand we get the market demand.
3. Print out the blank table below and complete it to show market demand for your group.

Product
(Snickers cost 50p) (Snickers cost £1)
Can of coke
Snickers bar
Pint of milk
Mars bar
We can represent this information in the form of a graph. Price goes on the vertical axis and quantity
demanded on the horizontal axis. A guide has been provided for you below.
Plot the quantity demanded of Snickers bars for your group against the price - you will get two points on
the graph, one for the quantity demanded when price was 50p and another for the quantity demanded
when price rose to £1. Draw a straight line through the two points as shown in the example below.
4. Print out the blank graph below and plot the market demand for Snickers bars for your
group.
Task
Having drawn your demand curve, compare it to the ones drawn by those in other groups. Are they the
same shape? (By this we mean does the line slope downwards from left to right?)
Assuming that they are the same shape, what can you conclude about the relationship between price
and the amount demanded?
Use your graph to estimate the following for your group:
• What is the demand likely to be if the price were 75p?

Page 3
The Nature of Markets - Changes in Demand
Let's now take the game one step further.
Stage 4
1. It is now day three and the peanut crisis has eased. Snickers now cost 50p
once more. Replace the £1 label in front of the Snickers bar with the 50p
label.
2. The government has decided to provide all students with a grant (or
Education Maintenance Allowance). As a result your income has increased
and you now have £4 to spend.
3. Again, in your groups work out market demand by adding together each
person's demand for each product. Print out and fill in the table below,
following the example given.

Product
(Income is £2.50) (Income is £4)
Can of coke ||||| |||| ||||| ||||| ||||| ||||| |||||
Snickers bar |||| ||||| ||||| ||||| |
Pint of milk ||| ||||| ||||| ||||| ||
Mars bar ||||| ||||| |||| ||||| ||||| ||||| ||||| |||

Product
(Income is £2.50) (Income is £4)
Can of coke
Snickers bar
Pint of milk
Mars bar
What has happened to the level of demand for all the goods after incomes have risen? The chances are
that demand for all the goods is greater than before. This helps us to make another important point.
Demand does not stay 'static' - it changes as a result of changes in the factors that affect demand.
These are the changes that we identified earlier in the resource.
When factors affecting demand (other than price) change, the demand curve will shift - either to the left
or to the right.
The animation below will help you to understand what is happening here.
annotated image will appear instead, if you cannot view the static image it will be replaced by some
descriptive text.
If you move the slider to the right, the demand curve moves to the right. What happens to the amount
demanded when you do this?
If you move the slider to the left, the demand curve moves to the left. What happens to the amount
demanded now?
Notice that in each case the price is not changing. What is changing are the factors that affect demand
and it affects how much we choose to buy of different goods.
In the case of our game, if we have a higher income it means we can afford to buy more Mars bars,
more Snickers, more milk and more Coke. It could be that you really like Mars bars and spend all your
extra money just on those as opposed to other goods! It is likely, however, that the market as a whole
will react in a similar way so we can say that:
If incomes rise, then the demand for a product will also rise and if incomes fall then we would expect the
demand for a product to also fall.
See if you can work out whether changes in the following factors cause a movement to the left (fall) in
demand or a movement to the right (rise) in demand.
descriptive text.
Page 4
The Nature of Markets - Supply
The principles behind what we have looked at with demand equally apply to supply. Each individual
seller of a good or service will have their own schedules - the amount they are willing to supply at
different prices.
The market supply therefore is the combined total of all the individual supply schedules in that market.
The total supply of tomato soup, for example, is the sum of all the different producers of tomato soup in
the market - Heinz, Campbell's, Cross and Blackwell as well as all the other own brand labels.
The market supply can be drawn as a graph in the same way that we did with demand but the curve
goes upwards from left to right. This shows that at higher prices, suppliers are willing to sell more than
at lower prices - fairly obvious when you think about it!
The graph will look like this:
descriptive text.
Shifts in Supply
As with demand, the supply curve also shifts when factors affecting supply change. See if you can work
out which way the curve will shift as you did with demand.
Experiment with the diagram and the slider to help your thinking.
descriptive text.
Now see if you can work out whether changes in the following factors cause a movement to the left (fall)
in supply or a movement to the right (rise) in supply.
descriptive text.
Page 5
The Nature of Markets - The Market
Let's now put the two things together - both demand and supply. We can now use this as a means of
making some predictions about what we might expect to happen to prices and to the amount that would
be both bought and sold in a market where changes are occurring all the time.
There are two very important things we need to know about here. When demand and/or supply in a
market changes, we will get either shortages occurring (where demand is greater than supply) or
surpluses (where supply is greater than demand).
A shortage will generally cause the price of a good or service to rise.
A surplus will generally cause the price of a good or service to fall.
We know that demand and supply curves both move when changes that affect either demand or supply
change. In reality demand and supply are almost constantly changing. However, to make things easier
to understand we tend to analyse markets by assuming that just one factor changes and then look at
what we expect to happen as a result.
Look at the diagram below which has both demand and supply on it.
descriptive text.
Let's take an example of a topical issue. In recent weeks there have been widespread reports of the
possibilities regarding bird flu. When these types of reports hit the headlines, there tend to be effects on
different markets.
Imagine the diagram represents the demand for turkeys. What do you think might happen to the
demand for turkeys after the news about bird flu? Will it rise or will it fall and what do you think will
happen to the price and the amount bought and sold as a result?
Let's use the diagram to make a prediction. Move the slider to the right if you think demand will rise and
to the left if you think it will fall. Then watch what happens
Page 6
The Nature of Markets - Effect on Supply
Now look at the effect on supply. The bird flu issue might mean that millions of birds might have to be
killed if the disease was to reach the UK. What do you think would happen to the market for turkeys
now?
Again, use the slider to move the supply curve to the right if you think supply will rise and to the left if
you think supply will fall and then watch what happens to price and the amount bought and sold.
descriptive text.

The Nature of Markets - Factors Influencing Demand and Supply

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The Nature of Markets - Factors Influencing Demand and Supply

The Nature of Markets - How Factors Affect Demand and Supply

The Nature of Markets - Demand Curves

• How individuals' demands combine to create market demand

Can of coke (50p)

Snickers bar (50p)

Pint of milk (50p)

Mars bar (50p)

Can of coke (50p)

Snickers bar (£1)

Pint of milk (50p)

Mars bar (50p)

Stage 3 - Calculating Market Demand

1. Organise yourseleves into groups of 5-6.

Quantities - Stage 1 Quantities - Stage 2

Can of coke ||||| ||||| |||| ||||| ||||

Snickers bar ||||| ||||| ||| ||||

Pint of milk ||||| ||||| || |||

Mars bar ||||| ||||| ||||| |||| ||||| ||||| ||||

Quantities - Stage 1 Quantities - Stage 2

Use your graph to estimate the following for your group:

• What is the demand likely to be if the price were 75p?

The Nature of Markets - Changes in Demand

Let's now take the game one step further.

Quantities - Stage 1 Quantities - Stage 4

Can of coke ||||| |||| ||||| ||||| ||||| ||||| |||||

Snickers bar |||| ||||| ||||| ||||| |

Pint of milk ||| ||||| ||||| ||||| ||

Quantities - Stage 1 Quantities - Stage 4

The graph will look like this:

A shortage will generally cause the price of a good or service to rise.

A surplus will generally cause the price of a good or service to fall.

The Nature of Markets - Effect on Supply

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