demand and supply

causes of change in demand

price

income

trends, fashions and preferences

advertising and branding

demographic change

external shocks

seasonal factors

basic law of demand

states that demand varies inversely with price

lower prices make products more affordable for consumers

income effect

a fall in price increases the purchasing power

this allows customers to buy more

for normal goods - demand rises with an increase in income

for inferior goods - demand increases as incomes rise

substitution effect

a fall in the price of product X makes it relatively cheaper compared to substitutes

some customers will switch to product X leading to higher demand

much depends on whether products are close to substitutes

supply

supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period

a change in market price =

= a movement along the supply curve

cause of changes in supply

costs of production

external shocks

new technology

taxation and subsidies