1.2.1-1.2.3 Demand, Supply & Markets

What is demand?

The quantity consumers are willing and able to buy at a given price.

What is supply?

The quantity producers are willing and able to sell at a given price over a period of time.

What do demand and supply curves show?

The relationship between price and quantity demanded or supplied, ceteris paribus.

Why do demand and supply curves slope in opposite directions?

Demand slopes downwards; supply slopes upwards as higher prices usually encourage greater output.

What are extension and contraction of demand?

Extension: price falls and quantity demanded rises. Contraction: price rises and quantity demanded falls.

What are extension and contraction of supply?

Extension: price rises and quantity supplied rises. Contraction: price falls and quantity supplied falls.

What is the difference between a movement and a shift?

A price change causes movement along a curve; a non-price factor shifts the whole curve.

What non-price factors affect demand?

• consumer income

• alternative brands

• price of substitutes,

• complementary goods

• trends in fashion + tastes

• advertising, marketing + branding

• population,

• time of year/seasons + weather

• external shocks.

How does income affect normal and inferior goods?

Higher income increases demand for normal goods but usually reduces demand for inferior goods.

How do substitutes and complements affect demand?

How do tastes, marketing and population affect demand?

Favourable trends, effective advertising and growth in the target population can increase demand.

How do seasons, weather and external shocks affect demand?

They shift demand; e.g. ice-cream demand may fall in winter, while COVID-19 reduced demand for some products.

What factors affect supply?

• cost of production

• technology

• indirect taxes

• subsidies

• external shocks

How do production costs and technology affect supply?

Lower costs or improved technology increase supply; higher costs reduce it.

How do indirect taxes and subsidies affect supply?

Taxes raise costs and reduce supply; subsidies lower effective costs and increase supply.

What is a market and how is its price determined?

A market brings buyers and sellers together; demand and supply interact to determine price and quantity.

What is market equilibrium?

The price where quantity demanded equals quantity supplied, at the intersection of demand and supply.

What are shortages and surpluses?

A shortage occurs when demand exceeds supply; a surplus occurs when supply exceeds demand.

How does the price mechanism respond to shortages and surpluses?

Shortages create upward pressure on price; surpluses create downward pressure.

What happens when demand increases or decreases?

If supply is unchanged, rising demand increases equilibrium price and quantity; falling demand reduces both.

What happens when supply increases or decreases?

If demand is unchanged, rising supply lowers equilibrium price and raises quantity; falling supply does the opposite.

What if demand and supply both increase or both decrease?

Quantity rises if both increase and falls if both decrease; the price effect is uncertain.

What if demand and supply shift in opposite directions?

Demand rises and supply falls: price rises. Demand falls and supply rises: price falls. Quantity is uncertain.

How can cheaper smartphones affect network providers?

Smartphones and network services are complements; cheaper phones may increase demand for network services.

How can online food shopping affect traditional food stores?

Online shopping can act as a substitute, reducing demand for traditional stores.