How markets work
Buyers and sellers trade goods, services and work; supply, demand and competition can change prices and wages; profit-seeking firms, charities and unions have different purposes
What a learner can do afterwards
- Explain a price change using supply and demand (e.g., 'umbrella prices rise in a sudden storm because demand jumps')
- Describe the labour market as a market (employers buy work, workers sell it, and the wage is the price)
- Distinguish institutional purposes: a profit-seeking firm aims to earn profit for owners, a union bargains for workers, and a charity serves a mission
1 · Read
A market connects buyers and sellers of goods, services or work. Sellers offer prices; buyers decide whether to buy. Agreement does not prove a price is fair to everyone. Demand describes what buyers are willing and able to buy at different prices. Supply describes what sellers are willing and able to offer. When buyers want more or less at each price, that is a change in demand.
You have learned about supply and demand. Higher demand with unchanged supply tends to raise prices. Lower demand tends to lower them. Less supply with unchanged demand can also raise prices. These are pressures, not promises that every posted price changes. A seller may keep its price fixed even when it sells out.
Find a price increase by subtracting the old price from the new price: $9 - $4 = $5. A stated sales pattern can predict an amount too. Suppose each $1 price cut adds 6 sales. A $2 cut has two $1 steps, so it adds 6 + 6 = 12 sales. Use that calculation only when the question gives the pattern.
Each row stands for six extra sales from one $1 price cut.
In the labour market, workers offer work and employers pay wages for it. Maria offers babysitting; families pay her hourly wage. Employers competing for a limited number of available workers may offer higher wages. If more qualified workers seek the same number of jobs, wages may face downward pressure. Contracts and wage rules can limit changes.
In this example, six qualified applicants want two jobs at the offered wage.
A profit-seeking firm aims to earn profit for its owners. A union represents workers and bargains with employers over pay and working conditions. Bargaining does not guarantee the outcome members want. A charity serves a mission, such as providing meals. It may collect donations or charge fees. Money left after costs supports its mission rather than being paid to owners as profit.
With other things unchanged, a lower price usually increases the quantity buyers want and can buy. This is the law of demand, not a change in tastes. Here, buyers want three bottles at $4 but seven at $2.
The bars compare quantities wanted at two different prices.
At a stated price, a shortage means buyers want and can buy more than sellers offer. A surplus means sellers offer more than buyers want. Matching amounts are equilibrium in a market model. A shortage can persist if the price stays fixed or more stock cannot arrive quickly.
This example has a shortage at its stated price.
Supply, demand and competition put pressure on prices and wages. Actual changes can take time. Firms, unions and charities have different purposes.
Lesson, questions and flashcards written for this dataset. Economic references informed factual study; no source prose was copied.
Readings and extra questions written for this dataset.
More to read
A model is not a promise
A market model compares quantities offered and wanted at different prices. Equilibrium is where those amounts match. At a price with more wanted than offered, there is a shortage. With more offered than wanted, there is a surplus.
These comparisons explain pressure on prices. They do not promise that a shop immediately changes its price or receives more stock. A fixed price and a delayed delivery can leave a shortage in place.
An agreed price also does not prove that everyone considers the trade fair. Explaining a market outcome is different from judging it.
Who is competing?
Three families want to hire the same available babysitter. They are competing as buyers of work. A family may offer a higher wage to attract the sitter.
Now consider several qualified sitters seeking one babysitting job that has not changed. The competition is among people offering work. That can put downward pressure on the wage offered.
Identify the buyers, the sellers and what changed before predicting a direction. A contract or wage rule can still limit the result. Competition creates pressure; it does not give the exact wage by itself.
Compare the whole offer
When shops sell the same item on the same terms, a lower price may attract customers away from another shop. Comparing offers gives buyers information and gives sellers a reason to reconsider their prices.
Online shops can also use information about customers' purchases to aim different offers at different people. This is often called one-to-one marketing.
Competition does not guarantee that every price falls or every product improves. A buyer still needs to check what each offer includes. A lower listed price may come with different delivery charges or other terms.
2 · Watch
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Where it sits
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Where this leads
13 questions wait behind this lesson, each with its answer explained. Every answer feeds the sky: stars light as they are learned, and dim when it is time to come back.