ECO - 2.3-2.6 Demand, Supply, Price

• Demand


  The quantity of goods and services that consumers are willing and able to purchase at different prices, over a particular period of time, ceteris paribus
• Demand is also known as effective demand - demand that is supported by the ability to pay
• Willing


  Consumers must desire the goods
• Able


  Consumers must have the purchasing power or money to buy the goods
• Ceteris paribus


  All other things remain unchanged
• Law of demand


  The quantity demanded of any good will increase as its price falls and vice versa. There is an inverse relationship between price and quantity demanded, ceteris paribus

  
• The demand curve is downward-sloping

  
• Reasons for downward-sloping demand curve

  • Income effect: If price of a good falls, consumers' purchasing power increases and they can afford to purchase more
  • Substitution effect: If price of a good rises, consumers may switch to purchasing rival products which are close substitutes

  
• Individual demand


  Demand by an individual consumer who is willing and able to buy that particular product, at different prices
• Market demand


  Total demand by all consumers who are willing and able to buy that particular product, at different prices
• Demand schedule


  A table that displays the different quantities demanded of a product (by one consumer or all consumers in the market), at different prices
• To derive the market demand curve, we sum the quantities demanded at every price

  
• Changes in demand curve

  1. Movement along the demand curve: A change in the price of the good itself results in a change in quantity demanded

  2. Shift in the demand curve: A change in any other factors/determinants/conditions of demand (except for price of the good itself) can result in an increase or decrease in demand for the good

  
• Non-price determinants of demand

  • Households' income
  • Prices of related goods
  • Population
  • Taste and preferences
  • Seasonal changes
  • Consumer expectations
  • Government policies
  • Interest rates

  
• A change in the price of the good leads to a change in quantity demanded of the same good, ceteris paribus. This is represented by a movement along the demand curve

  
• A change in any of the non-price determinants will lead to a change in demand of the good, ceteris paribus. This is represented by a shift of the demand curve

  
• Supply


  The quantity of goods and services that producers are willing and able to sell at different prices, over a particular period of time, ceteris paribus
• Supply is also known as effective supply
• Willing


  Producers must have the desire to produce
• Able


  Producers must have the power or money to produce the goods
• Law of supply


  As price increases, quantity supplied also increases. There is a direct relationship between price and quantity supplied, ceteris paribus

  
• The supply curve is upward-sloping
• Reason for upward-sloping supply curve

  • Higher price means more revenue and profits can be earned - an incentive for firms to raise quantity supplied

  
• Individual supply


  Supply by an individual firm who is willing and able to sell that particular product, at different prices
• Market supply


  Total supply by all firms in the industry who are willing and able to sell that particular product, at different prices
• Supply schedule


  A table that displays the different quantities supplied for a product (by one producer or all producers in the market), at different prices
• Changes in supply curve

  1. Movement along the supply curve: A change in the price of the good itself results in a change in quantity supplied

  2. Shift in the supply curve: A change in any other factors/determinants/conditions of supply (except for price of the good itself) can result in an increase or decrease in supply of the good
• Individual supply schedule


  Represents the quantity supplied by an individual firm at various levels of price
• Individual supply curve


  Plotted based on information from the individual supply schedule
• Market supply schedule


  Shows the relationship between the total quantity supplied by ALL firms at various levels of price
• Market supply curve


  Plotted based on information from the market supply schedule
• Changes in supply curve

  1. Movement along the supply curve

  2. Shift in the supply curve
• Movement along the supply curve

  • A change in the price of the good itself results in a change in quantity supplied
  • Upward movement - rise in price leads to increase in quantity supplied
  • Downward movement - fall in price leads to decrease in quantity supplied

  
• Shift in the supply curve

  • A change in any other factors/determinants/conditions of supply (except price of the good) can result in an increase or decrease in supply for the good
  • Shift to the right - increase in supply
  • Shift to the left - decrease in supply
• Non-price factors/determinants/conditions of supply

  • Cost of production
  • Price of related goods
  • Expectations of future prices
  • Size of industry
  • Government policies
  • Other factors
• Cost of production


  If cost of production increases, production becomes less attractive as less profits are earned at every price, hence firms will reduce supply of the good
• Price of related goods - Joint supply

  An increase in the price of one good produced in joint supply leads to an increase in the supply of the other good
• Price of related goods - Competitive supply

  An increase in the price of one good in competitive supply leads to a decrease in the supply of the other good
• Expectations of future prices

  Expected increase in future price of the good leads producers to reduce current supply temporarily and stock up the good

  
• Size of industry


  As new firms enter the industry, total number of suppliers increase, causing market supply for the industry to rise