Demand and Supply

What is demand?

The amount of a product that consumers are willing and able to purchase at any given price.

What does the law of demand state?

The law of demand states: the higher the price, the lower the quantity demanded, and the lower the price, the higher the quantity demanded.

Hence the demand curve slopes downwards from left to right.

What are the factors that cause the demand curve to shift?

• Population

• Advertising

• Substitutes (price of)

• Income

• Fashion and taste

• Interest rates

• Complements (price of)

How does a change in the price of substitute goods affect demand?

• Substitutes goods are replacement goods e.g. different brands of car

• If the price of VW cars increases then the demand for Ford cars might rise.

• Shifts the demand curve for Ford cars to the right.

How does a change in the price of complementary goods affect demand?

• Complementary goods are goods that are consumed together.

• Cars and petrol: if the price of petrol rises the demand for cars may fall.

• Shifts the demand curve for cars to the left.

How does a change in tastes/ fashions affect demand?

• If goods/services become more fashionable then demand them increases.

Demand curve shifts to the right.

How does advertising affect demand?

• If more money is spent on advertising or branding, then this increases consumer awareness and brand loyalty.

Shifts the demand curve to the right.

A change in a non-price factor which leads to less demand will shift the demand curve to the…

Left.

A change in a non-price factor which leads to more demand will shift the demand curve to the…

Right.

What is supply?

The amount of a product that suppliers will offer to the market at a given price in a specific time period.

What does the law of supply state?

The law of supply states: all else equal, an increase in price results in an increase in quantity supplied.

What are the factors that cause the supply curve to shift?

• Productivity

• Indirect Taxes

• Number of Firms

• Technology

• Subsidies

• Weather

• Cost of Production

How does the cost of production affect supply?

An increase in costs of production makes it more expensive to produce each unit and a business will be able to produce less at a given price.

Supply curve moves to the left.

How does new technology affect supply?

Advances in technology will lead to lower costs of production and businesses will be able to produce more at a given price.

Shifts the supply curve to the right.

How does indirect taxes affect supply?

The government increases indirect taxes on businesses which causes an increase in the costs of production as firms have to pay extra costs.

Shifts the supply curve to the left.

How do government subsidies affect supply?

A subsidy given by the government to businesses will reduce the costs of production.

Shifts the supply curve to the right.

A change in any factor which leads to less supply will shift the supply curve to the…

Left.

A change in any factor which leads to more supply will shift the supply curve to the…

Right.

What is the equilibrium price?

In a free market, demand and supply equal the equilibrium price.

This is the price where quantity demanded is equal to quantity supplied.