3.3 demand and supply curves

• The relationship between the price and quantity supplied is positive, meaning that higher prices incentivize producers to supply more. The supply curve slopes upwards.
• Excess demand puts upward pressure on prices as buyers compete for limited supply.
• Excess supply leads to downward pressure on prices as sellers reduce prices to clear excess stock.
• Substitutes : A rise in the price of substitutes increases the demand for the product
• complements: A rise in the price of a complement reduces the demand for the good
• Income of Consumers:

  • Changes in consumers' income levels can shift demand either to the left or right, depending on whether the good is a normal or inferior good.
• 1. Consumers’ Tastes and Preferences:

  • Shifts in preferences can cause changes in demand for a product.
• the higher the income, the more buying power, so demand increases for normal goods 
• the higher the income, the more buying power, so demand decreases for inferior goods 
• free market : any place where buyers meet suppliers to exchange goods and services, free from government intervention
• Equilibrium is where demand = supply
• at the point of equilibrium the market has cleared
• disequilibrium is where demand ≠ supply
• equilibrium in a free market represents allocative efficiency.
• Allocative efficiency is reached when no one can be made better off without making someone else worse off.
• Adam smith, said that even if we have disequilibrium the free market has special functions / forces that returns the market back to equilibrium.
• the market forces/prices are : ARSI:

  Allocate Scarce resources efficiently

  Ration scarce resources by encouraging / discouraging consumption

  Signal excess demand / supply and need for an increase / decrease in resources

  incentivise producers to increase / decrease output to increase profit.
• Excess demand leads to an upward pressure on prices mean that there is an increase in prices
• Higher prices :

  • signal that there has been an excess of demand to consumers & producers, signalling the need for more resources in the market
  • incentivise firms to increase output to increase profit, supply expands
  • ration scarce resources by discouraging consumption : demand contracts
  • and so prices allocate scarce resources efficiently
• excess supply reduces prices
• when there is excess supply:

  • there is a downward pressure on prices
  • so prices naturally fall
• Lower prices :

  • signal that there has been an excess supply to consumers & producers
  • they signal that there is less need for resources in the market
  • incentivising firms to decrease supply & liquidate stocks and so make more profit : supply contracts
  • ration scarce resources by encouraging consumption: demand expands
  • and so prices allocate scarce resources efficiently