Demand and supply 1.2

Demand

Consumer's desire to purchase goods/services and willingness to pay a price for a specific good or service

Supply

A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers

Demand curve

A line drawn on a graph that shows how much of a good will be bought at different prices

Supply curve

A line which is drawn on a graph that shows how much of a good which sellers are willing to supply at different prices

market equilibrium

Rise in demand

Fall in demand

Rise in price

Fall in supply

Equilibrium price

The price where supply and demand are equal

Excess demand

The position where demand is greater than supply at a given price and there are shortages in the market

Excess supply

The position where supply is greater than demand at a given price and there are unsold goods in the market

Factors leading to a change in demand

price of substitutes, price of compliments, consumer incomes, fashion, advertising, demographic changes, external shocks, seasonality.

Factors leading to a change in supply

costs of production, new technology, taxes, government subsidies, external shocks.

Complimentary goods

Goods that are purchased together because they are consumed together

Subsidies

A grant which is given to producers, usually to encourage production of a certain good

Substitute goods

Goods that can be bought as an alternative to others, but perform the same function

Price elasticity of demand

This measures the demand for a product changes when there is a change in price

price elasticity of demand formula

PED=%change in demand/%change in price

When a product is price elastic

A change in price results in a greater change in demand. PED co-efficient of more than 1.

When a product is price inelastic

A change in price results in a proportionately smaller change in demand. PED co-efficient of less than 1.

Income elasticity of demand

The responsiveness of demand to a change in income. Referred to as YED.

Income Elasticity

Change in demand is smaller than the change in income

Income Inelasticity

Change in demand is bigger than the change in income

Inferior goods

Not poor quality, negative YED, Eg. Aldi

Necessity

Positive YED, between 0-1, normally buy the same quantity of necessary goods

Luxury goods

Positive YED, usually bigger than 1-2, business focus on areas with higher income