Demand & Supply

Learning Objectives:

  • Explain the concept of demand and define the law of demand

  • Describe and apply a range of factors that may cause changes in demand

  • Explain the difference between a change in quantity demanded and a change in demand

Interaction BET. Households & firms: Circular flow

Demand (DD), Law of Demand & DD curve

Demand: the willingness and ability of a buyer to purchase a product

Law of Demand: there is an inverse r/ship bet, price & quantity demanded (Qd) that consumers are willing & able to buy (assuming ceteris paribus) - P⬆ → Qd⬇

Demand curve:

  • shows the relationship between the price of a product & quantity demanded

  • the dd curve slopes downwards from left to right & has a negative slope

Demand Curves: What They Are, Types, and Example

Factors that influence buyers

Non-P factor Δdd

  • Taste & preference

  • Level of Y

  • P of substitute products

    • Products considered as alternatives for each other

    • DD for a product ⬆ when P of its substitute increase & vice versa

  • P of complementary products

    • product that is consumed with another product

    • DD for a product ⬆ when P of its complimentary decreases % vice versa

  • Expectations about the future

    • expected future changes (P,Y, confidence, etc) will change dd in the current time

P-factor

  • changes quantity demanded

  • increase in P - Qd falls/ dd contracts

  • decrease in P - Qd increases/ dd expands

Change in P of the product itself vs change in non-P factors

Change in P of the product itself - changes Qd

Decrease in P:

  • Qd⬆ OR expansion in DD

  • movement down the same DD curve

Increase in P:

  • Qd⬇ OR contraction in DD

  • movement up the same DD curve

Changes in Non-P determinants of dd - changes DD

Factors that encourages DD:

  • ⬆dd - increase in Qd at every P level

  • rightward SHIFT of the entire dd curve

Factors that discourages DD:

  • ⬇dd - decrease in Qd at every P level

  • leftward SHIFT of the entire dd curve

e.g. P of Ausmat has increased how will this affect consumers purchase of MUFY? NPF (DD shift)

  • The e Qd of MUFY will increase whilst the Qd of Ausmat decreases.

  • The dd curve for MUFY will shift from left to right

*QD for P, DD for NPF

the e dd of petrol will increase as the price of cars decrease. this will cause a rightward shift of the entire dd curve

Distinguish between an ‘expansion’ in demand and an ‘increase’ in demand by explaining in words. Support your explanation by illustrating on diagrams.                                 

Supply

LO:

Supply: the willingness and ability of a supplier to sell a product

Law of supply

  • P & Qs (Quantity Supply)

  • +ve relationship (direct) assuming cetris paribus

  • e.g. P⬆, Qs ⬆/ SS expands

Supply curve

  • show relationship between price of a product & quantity supplied

  • ss curve slopes upwards from left → right 

  • positive slope

Factors that influence sellers

P factors

  • Qd - increase/decrease

  • DD - expand/contract

P of the product itself (ΔQs) 

  • changes Qs

  • increase in P → Qs increases/SS expands

  • decrease in P → Qs decreases/SS contracts

Change in Qs vs change in SS

Change in P of the product itself - changes Qs

  • Decrease in P:

    • ⬇ in Qs - contraction in ss

    • movement down the same ss curve

      • movement down the same ss curve

  • Increase in P:

    • ⬆ in Qs - expansion in ss movement up the same curve

Change in non-P determinants of SS

  • factors that ENCOURAGES ss:

    • increase in ss → increase in Qs at every price

    • rightward shift of the entire ss curve

  • factors that DISCOURAGES ss

    • decrease in ss → decrease in Qs at every price

    • leftward shift of the entire ss curve

Non P factor

  • DD - increases

  • DD - decrease

Cost of production (ΔSS)

  • increase wages → increase in C.o.P → less profitable → decrease SS

  • decrease in C.o.P → increase SS

Technology (ΔSS)

  • improvement → ⬇C.o.P

P of alternative product firms could produce (ΔSS)

  • e.g. Perodua, Msia’s local car manufacturer produces both Axia & Myvi. Price of Axia increases how will perodua react to this change?

    • The production of Axia will increase and the SS Axia expands and SS myvi decreases

*Expectation of sellers (ΔSS)

  • sellers expect price of petrol to increase next week. How will they react to this expectation?

    • SS will decrease this week & expand next week

Number of sellers in the market (ΔSS)

Taxes & subsidies (ΔSS)

  • impose tax → c.o.p ⬆ → less profitable → SS decrease (vice versa)

*Unpredictable events & weather