1.1.3 Demand, Supply and the market equilibrium

Theory of Demand

Theory of Demand

At higher prices, a lower quantity will be demanded than at lower prices, and vice versa.

Determinants of Demand

• Income

• Prices of complements and substitutes

• Tastes and fashions

• Advertising

• Population

Cause of movements along a Demand Curve

Price determinants

Cause of shifts along a Demand Curve

Non-price determinants - will cause the quantity demand to change

Supply Curve

How much of a product sellers are willing to supply at different prices

(between price and quantity supplied)

Factors affecting Supply

• Prices of factors of production

• Technology

• Taxes

• Subsidies

• Labor productivity

• Number of firms in an industry

• Natural factors (e.g. weather)

Cause of movements along a Supply Curve

Price variations

Cause of shifts of a Supply Curve

Alterations in non-price determinants (like technology, costs and labor productivity)

Equilibrium Price

The price where supply equals demand, leading to a state of ‘rest’ in the market, determined by the intersection of the demand and supply curves.

Excess supply on supply and demand diagram - how to fix this

There is a higher supply of the products than there is demand; a surplus

To fix, lower price temporarily (sale) until excess stock is sold

Excess demand on supply and demand diagram - how to fix this

Demand is higher than the amount that can be supplied, to combat:

Raise the price until demand evens out it is justified due to the popularity of the good- people will begin to buy less, and extra revenue is made

Shifts in Supply and Demand

Changes in equilibrium price due to shifts in demand or supply curves, leading to adjustments in price levels to match supply and demand.