If you want cheap cheap touristy stuff, go to one of the two Saturday and Sunday morning markets in Juliaca (about 5 hours away by bus), Puno (about 6 hours away by bus). They are about 1/3 the price of Cuzco.
If you don't want to go so far away, but still want touristy stuff, go to the Artisan Market at the intersection of la Avenida del Sol and Tullumayo. It's the big red building near the fountain.
The further away you get from the main square, the cheaper things become. There is a mini-mart next to the big church in the main square. It is the San-Pedro market where bread costs around s/0.10 and a glass of combination juices around s/1.50 and they give you 2-4 refills. Don´t go too far from the main square at night though, it can be dangerous.
There is another market called Centro Comercial El Molino, Urbanizacion Ttio, you have to take a taxi and it costs s/2 to get there. In this market you can buy heaps of illegal merchandise, DVDs, CDs etc. A good quality copy DVD is s/4, or you can by 5 VCDs for s/10.
The indigenous women at El Centro Bartolome de Las Casas have a store in which they sell homemade handicrafts and weavings. You can often watch them work, though they often don't speak Spanish, and rarely speak a word of English. It's located a few blocks from the plaza on Avenida Tullumayu.
Also Pisac, a town outside Cuzco, has a very big market. It is about 30 minutes from Cuzco by bus. The bus station is on Tullumayo street a couple blocks from Limacpampas. The fare is very cheap, and you can see the Incan ruins at Pisac.
In Aguas Calientes and Machu Picchu prices can be the double of what they are in Cuzco.
If you travel to the "Sacred Valley" (Valle Sagrado, including the towns/ruins of Chinchero, Ollantaytambo and Pisac), there is lots of touristy stuff to buy, you can barter, but the prices won´t go down much.
Alpaca sweaters are not like they used to be. The only good ones are in upmarket shops.