2.7 - demand and supply curves

Price mechanism

the means of allocating resources in a market economy

• It sends out a signal from consumers to producers

  • e.g. if there is an excess supply, this is a signal from consumers to producers to allocate fewer resources to this product

• It is self-regulating - it does not require any involvement from the government when it is working efficiently

Consumers

individuals or households who buy goods and services for their own use or for others

Market

where buyers and sellers get together to trade.

• Housing market - where people buy, sell and rent property

• Labour market - where individuals’ services are bought and sol

• Global market - e.g. market for oil

• Stock market - where people buy and sell shares

• Foreign exchange market - where currencies are bought and sold

Demand

the quantity of a product that consumers are willing and able to buy at different prices per period of time other things equal, ceteris paribus.

• Notional demand - where buyers may want to buy a product but which is not always backed up by the ability to pay

• Effective demand - demand that is supported by the ability to pay

 

Notional demand

where buyers may want to buy a product but which is not always backed up by the ability to pay

Effective demand

demand that is supported by the ability to pay

Demand curve (D)

a line plotted on a graph that represents the relationship between the quantity demanded and the price of a product.

Market demand

the total amount demanded by consumers

• Market demand represents the aggregation of individual demand

Demand schedule

the data from which a demand curve is drawn on a graph

Determinants of demand

• Income

  • For most products there is a positive relationship between income and demand

    • Normal goods - where the quantity demanded increases as income increases

      • e.g. If income tax falls, it may lead to more money available to spend and an increase in demand for goods, such as cars

  • For some products there is a negative relationship between income and demand

    • Inferior goods - where the quantity demanded decreases as income increases

      • e.g. If income increases, there may be a decrease in demand for bus travel as people switch to the use of cars

• The price and availability of related products

  • Substitutes - an alternative good

    • The better the substitute, the greater the effect on demand

      • e.g. two soft drinks - if the price of Coca-Cola increases then the demand for Pepsi is likely to increase

  • Complement - a good consumed with another good.

  • Joint demand - when two goods are consumed together.

    • A complement adds to the satisfaction a consumer gets from another product

      • e.g. cars and petrol - if the price of petrol goes up, the demand for cars will decrease 

• Fashion, tastes and attitudes

  • Fashion, taste and attitudes are largely a matter of individual choice

  • Consumers are unique and have their own personal likes and dislikes

  • The popularity of goods and services is often influenced by changes in society's preferences

    • e.g a rise in the popularity of eating out has increased the demand for restaurants

• Others:

  • Advertising - a successful advertising campaign might bring to the notice of some new consumers and may encourage some existing consumers to purchase more of the product.

  • Population changes in terms of :

    • Size - increase in size - demand for most products will rise

    • Age  - ageing population - people live longer, fall in birth rate - demand for wheelchairs is likely to increase while demand for toys might fall

    • Composition 

  • Interest rates

  • Quality of the good / service

  • Climate 

    • Hot weather - increase in demand for ice cream

Normal goods

where the quantity demanded increases as income increases

• e.g. If income tax falls, it may lead to more money available to spend and an increase in demand for goods, such as cars

Inferior goods

where the quantity demanded decreases as income increases

• e.g. If income increases, there may be a decrease in demand for bus travel as people switch to the use of cars

Complement

a good consumed with another good.

Joint demand

when two goods are consumed together.

Supply

the quantity of a product that producers are willing and able to sell at different prices within a period of time, other things equal, ceteris paribus.

Supply curve (S)

a line plotted on a graph that represents the relationship between the quantity supplied and the price of a product

Market supply

the total amount supplied by producers

• Market supply represents the aggregation of individual supply

Supply schedule

the data from which a supply curve is drawn on a graph

Determinants of supply

  

• Costs - an increase in costs of production will result in a fall in supply

  • e.g. an increase in wages will cause a decrease in supply

  • e.g. an increase in worker productivity will result in an increase in supply

• The size and nature of the industry - a growing industry will result in an increase in supply of products. 

  • This growth may attract new entrants into the industry - this increased competition may cause prices to fall and result in some firms leaving the industry (decrease in supply)

• Changes in the price of other products - an increase in the price of a competitor may result in an increase in supply for a firm if it can keep costs low

• Government policy

  • e.g. indirect taxes may result in a decrease in supply

  • e.g. subsidies may result in an increase in supply

• Other factors

  • Weather conditions 

    • e.g. a flood may result in a fall in supply of agricultural products

  • Improvements in technology 

  • Wars

Movement along a demand or supply curve

shows how quantity demanded or quantity supplied responds to a change in price of the product

Extension

an increase in quantity demanded or supplied

Contraction

a decrease in the quantity demanded or supplied

Shift of a demand or supply curve

occurs when there is a change in the non-price factors of demand or supply