Microeconomics - Determinants of Demand, Supply and Elasticities

Determinants of Demand

P I R A T E S

P (Pirates)

Population change effect - if more consumers enter a market then there will be more demand for a product.

I (pIrates)

Income effect - as consumer incomes rise, consumers can afford to buy more products at each and every price.

R (piRates)

Related goods (substitutes and complements) - as the price of a substitute rises, demand for the related good increases, and vice versa. When the price of a complement good decreases, the demand for the related good increases, and vice versa.

A (pirAtes)

Advertising effect - effective advertising can increase consumer awareness and desire for a product, shifting demand to the right.

T (piraTes)

Taste and preferences - consumers' preferences can change, influencing demand for products based on trends and other factors.

E (piratEs)

Expectations (of future prices) - if consumers expect prices to rise in the future, demand may increase now, while expectations of falling prices can decrease current demand.

S (pirateS)

Seasonality - some products and services are highly seasonal (christmas trees) so the demand curve shifts back and forth throughout the seasons due to variations in consumer needs at different times of the year.

Determinants of Supply

STINC FJC

S (Stincfjc)

Subsidies - reduces the CoP and encourages more to be produced

T (sTincfjc)

Technology - some firms can exploit improvements in technology to increase production efficiency and reduce costs, leading to a rightward shift in the supply curve.

I (stIncfjc)

Indirect taxes - Borne by the producer (who then tries to pass the increased cost onto the consumer). this increases unit costs and therefore lowers supply.

N (stiNcfjc)

Numbers of producers (in the market) - As producers enter or leave a market, supply shifts in or out.

C (stinCfjc)

Costs of production - the unit costs incurred by firms can affect the qty supplied (since a firm may be unwilling or unable to produce at the same price if their input costs are higher).

F (stincFjc)

Favourable weather conditions - notoriously volatile and can significantly affect output (especially agricultural products)

J (stincfJc)

Joint supply - a product or process that can yield two or more outputs so a change in the demand or price of one product can directly affect the supply of another.

C (stincfjC)

Competitive Supply - when more than one product can be produced from the same FoPs. Therefore increase in price for one product will reduce the supply of another good as the producer is incentivised to capture profits elsewhere.

determinants of PED

BANDITS

B Bandits

Brand - more brand loyalty = less elastic PED

A bAndits

Addictive - more addictive = less elastic PED

N baNdits

Necessity - more necessity = less elastic PED

D banDits

Definition (of the market - nuts vs cashew nuts) - larger definition of market = less elastic PED

I bandIts

Income (proportion of) - higher proportion of income = more elastic PED

T bandiTs

Time - in the short term, price changes have little effects on behaviours and QD, however in the longer term, behaviour patterns may change due to a sustained price change. short term inelasticity and long term elasticity.

S banditS

Substitutes - the more available substitutes there are, the more elastic PED since consumers can easily change to the alternative if there is an increase in price.

Determinants of PES

CREST

C - crest

Capacity - when an industry has lots of spare capacity, it can increase production in line with changes in supply without incurring significant new costs.

R - crest

Resources - abundant resources lead to more elastic supply (firms can easily increase production), while scarce resources result in inelastic supply (firms struggle to respond to price changes).

E - crest

Ease to entry - Ease of entry into a market generally leads to a more elastic (higher) price elasticity of supply (PES), meaning suppliers can more readily adjust their output in response to price changes. Conversely, higher barriers to entry result in a more inelastic PES. 

S - crest

Stock - Higher stock levels enable firms to quickly respond to price increases, thus raising PES.

T - crest

Time (length of production and time to respond to price change) Immediately following a price change producers are unable to change output so supply is perfectly inelastic. In the short run firms may be able to raise output by adding some of its variable inputs e.g. labour. In the long run all inputs can be increased, including capital and more firms can enter the industry thereby making supply more elastic.