Supply and Demand
Notes on Supply and Demand
Supply: The total amount of a good or service available for purchase at any given price. Typically, as the price increases, the quantity supplied also increases, creating a positive relationship.
Demand: The desire for a good or service combined with the ability to purchase it. Generally, as the price decreases, the quantity demanded increases, resulting in a negative relationship.
Law of Demand: States that all else being equal, an increase in price results in a decrease in the quantity demanded.
Law of Supply: Indicates that all else being equal, an increase in price results in an increase in the quantity supplied.
Equilibrium: The point at which the quantity of goods supplied is equal to the quantity of goods demanded. At this point, market forces are balanced and prices tend to stabilize.
Shifts in Curves:
Demand Shift: Factors like consumer preferences, income levels, and prices of related goods can cause demand to shift left (decrease) or right (increase).
Supply Shift: Changes in production costs, technology, or the number of suppliers can lead to a leftward (decrease) or rightward (increase) shift in supply.
Elasticity: Describes how much the quantity demanded or supplied responds to changes in price.
Price Elasticity of Demand: Measures how the quantity demanded changes in response to a price change.
Elastic Demand: If the price elasticity is greater than 1, a small change in price leads to a large change in quantity demanded. Luxury goods often show elastic demand as consumers can forgo these goods when prices rise.
Inelastic Demand: If the price elasticity is less than 1, a change in price has little effect on the quantity demanded. Necessities like insulin or gasoline typically have inelastic demand since consumers will buy them regardless of price changes.
Price Elasticity of Supply: Measures how the quantity supplied changes in response to a price change.
Elastic Supply: An elasticity greater than 1 indicates that producers can easily increase production when prices rise, often seen in industries with readily available resources.
Inelastic Supply: An elasticity less than 1 suggests that producers cannot significantly change output in response to price changes, often due to long production times or limited resources.
Factors Influencing Elasticity:
Substitutes: The availability of substitutes makes demand more elastic; consumers can switch products if prices rise.
Time Frame: Demand elasticity can vary over time; it may be more elastic in the long run as consumers adjust their behavior.
Proportion of Income: Goods that take up a larger proportion of a consumer’s income tend to have more elastic demand because price changes significantly impact purchasing decisions.