1.2.1, 1.2.2, 1.2.3 demand + supply

demand (or effective demand) definition

the quantity that customers are willing and able to buy at a given price in a given period of time

the basic law of demand

that demand varies inversely with price – lower prices make products more affordable for customers. 

the two types of effects of a price change

income + substitutional

income effects of a price change

• A fall in price increases the purchasing power of customers 

• This allows customers to buy more with a given budget 

• For normal goods, demand rises with an increase in incomes 

substitution effects of a price change

• A fall in the price of good X makes it relatively cheaper compared to substitutes 

• Some customers will switch to good X leading to higher demand 

• Much depends on whether products are close substitutes 

non-price factors that could increase/decrease demands for products/services

• Competitions (substitution products) 

• Prices of contemporary products (a products that is used together with another products) 

• changes to consumer income

• trends in consumer fashion - tastes and preferences changes

• advertising and branding

supply definition

the amount producers are willing and able to produce at a given price in a given time period.

market supply curve

The higher the price, the more producers are willing to supply — because profits increase

non-price factors that affect demand

• A rise in cost of production 

• New technology is introduced for production 

• Indirect taxes (e.g., VAT) are increased 

• External shocks (e.g., pandemic, a surge in oil prices) take place 

the market equilibrium definition

this is when the supply in a market is equal to the demand

summary of changes in equilibrium prices

• Demand increases

• price: Higher, quantity: Higher

• Demand decreases

• price: Lower, quantity: Lower

• Supply increases

• price: Lower, quantity: Higher

• Supply decreases

• price: Higher, quantity: Lower