Unit 2.1 -Demand and Supply curves

• Effective demand


  The want or willingness of consumers to buy a product, combined with the ability to pay for it
• Demand and supply


  1. Explain individual and market demand and supply

  2. Explain the determinants of demand

  3. Explain the determinants of supply

  4. Analyse causes of a shift in the demand curve (D)

  5. Analyse causes of a shift in the supply curve (S)

  6. Distinguish between the shift in the demand or supply curve and the movement along these curves

  
• The market for a good or service consists of all those producers willing and able to supply it and all those consumers willing and able to demand it
• Demand


  • The want or willingness of consumers to buy a product - Notional demand
  • Effective demand - a consumer must also have enough money to buy the product
  • Inverse relationship - as price rises, quantity demanded decreases, as price falls, quantity demanded increases
  • A demand curve slopes downwards

  
• Changes in price cause a change in quantity demanded - movement along the demand curve
• Demand characteristics


  • Linear relationship - straight line curve
  • Continuous relationship
  • Time-based relationship
  • Ceteris paribus (all other factors held constant)
• Factors affecting demand


  • Income: normal goods vs inferior goods
  • Price and availability of substitute goods or complementary goods
  • Fashion, taste and attitudes
• Demand schedule


  • 100000 units at $50
  • 150000 units at $40
  • 200000 units at $30
  • 260000 units at $20
  • 370000 units at $10
  • 450000 units at $5
• Normal goods


  As income rises, consumers are willing and able to buy more
• Inferior goods


  The demand for inferior goods decreases when consumer income rises
• Substitutes


  Goods that can satisfy the same want, so a change in demand for one product will have the opposite effect on the substitute good
• Complements


  Goods in joint demand, so a change in demand for one product will have the same effect on the complementary good
• The demand curve is the sum of all individual consumer demands for a particular product
• A rise in demand


  The market demand curve shifts outwards
• Possible causes of a rise in demand

  • An increase in disposable incomes after tax
  • A rise in the price of substitutes
  • A fall in the price of a complement
  • Tastes and fashion favour the product
  • An increase in advertising
  • A rise in the population
  • Other factors, e.g. hot weather increases demand for cold drinks and sun creams
• A fall in demand

  The market demand curve shifts inwards
• Possible causes of a fall in demand

  • A fall in disposable incomes after tax
  • A fall in the price of substitutes
  • A rise in the price of a complement
  • Tastes and fashion favour other products
  • A fall in the population
  • Other factors, e.g. hot weather reduces the demand for winter coats
• Supply


  • The willingness and ability of firms to make a product available to consumers
  • As price rises, the quantity supplied by producers extends because production becomes more profitable
  • As price falls, the quantity supplied by producers contracts because production becomes less profitable
  • A supply curve slopes upwards

  
• The market supply curve is the sum of all individual producers' decisions about the supply of a particular product

  
• A rise in supply

  The market supply curve shifts outwards
• Possible causes of a rise in supply

  • Other products become less profitable to produce
  • A fall in the cost of factors of production
  • An increase in the supply of resources
  • Technical progress and improvements in production processes and machinery
  • An increase in business optimism and expectations of profit
  • The government subsidizes production and/or cuts taxes on profits
  • Other factors, e.g. good weather boosts crop harvests
• A fall in supply

  The market supply curve shifts inwards
• Possible causes of a fall in supply

  • Other products become more profitable to produce
  • A rise in the cost of factors of production
  • A fall in the supply of resources
  • Technical failures, such as a cut in power supplies or mechanical breakdowns
  • A fall in business optimism and profit expectations
  • The government withdraws subsidies and/or increases taxes on profits
  • Other factors, e.g. wars and natural disasters
• Joint supply


  A product or process that can yield two or more outputs
• A market is in equilibrium where market demand equals market supply
• At the equilibrium market price, the quantity consumers wish to buy is exactly equal to the quantity producers wish to sell

  
• If a market is in equilibrium there are no pressures to change the market price
• A market is in disequilibrium if the quantity consumers wish to buy is not matched by the quantity producers wish to sell
• If market demand rises

  The market price increases
• If market supply falls

  The market price increases
• If market demand falls

  The market price decreases
• If market supply rises

  The market price decreases