2.1-2.2 Demand and Supply

• Demand

  Different quantities of goods that consumers are willing and able to buy at different prices
• Law of demand


  As price falls, quantity demanded rises; as price rises, quantity demand falls
• As the price is high, the quantity of demand is low, and vice versa
• 5 Shifters of Demand

  • Taste and preferences
  • Price of related goods
  • Income
  • Future price expectations
  • Number of consumers
• Taste and preferences affecting demand

  1. Advertising

  2. Trends

  3. New information
• Price of related goods affecting demand

  1. Substitutes

  2. Complements
• Income affecting demand


  1. Normal goods

  2. Inferior goods
• Future price expectations affecting demand

  Future expectations of price can shift demand
• Number of consumers affecting demand

  More consumers means more are willing and able to pay
• Supply


  Different quantities of goods that producers are willing and able to produce
• Law of supply


  As the price increases, quantity supplied increases; as price decreases, quantity supplied decreases
• 6 Shifters of Supply (factors)


  • Changes in costs of factors of production (FOPs)
• Price increases


  Quantity supplied increases
• As price increases


  Producers have more profit and wish to supply where products with more profitability
• As price decreases


  Quantity supplied decreases
• Shifters of Supply (factors)

  • Changes in costs of factors of production (FOPs)
  • Number Firms
  • Technology
  • Government intervention - taxes and subsidies
  • Future price expectations
• Changes in costs of factors of production (FOPs)


  1. The cost of inputs (resources) will impact how much is supplied

  2. The use of slaves will reduce the cost of input, increasing supply
• Number Firms


  1. More sellers = increased supply

  2. Fewer sellers = decreased supply
• Technology


  1. Increase in technology means more effective production methods

  2. Likely by lowering the cost of production
• Government intervention - taxes and subsidies


  1. The introduction or change of a tax will affect the amount supplied

  2. The tax on alcohol will increase costs to produce, decreasing the supply

  3. A tax is essentially an increase in the costs of production

  4. The government grants money to producers so that more of that item is produced - subsidies

  5. Money is given to the firm for every solar panel they produce, increasing supply

  6. Acts as a decrease in the cost of production
• Future price expectations


  1. When a big event like the Olympics occurs, there is a huge tourism influx

  2. Increases prices for hotels etc., more suppliers hoping to make a profit

  3. Expectation of a higher price will lead more producers to the market
• Factors of supply


  1. Joint supply - goods that are supplied together from the production of one product

  2. Competitive supply - two goods competing for the same resources for production
• Competitive supply


  1. Corn is used to make biofuel, therefore decreasing the supply of edible corn

  2. Will grow biofuel corn at the expense of normal corn

  3. Increase in the price of biofuel decrease in the supply of regular corn
• Explaining a shift


  1. Labelled axis and curves

  2. Arrow to show directions

  3. Stated reason regarding the curve
• Consumer Surplus is the difference between what you are willing to pay and what you actually pay
• Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for