Supply and demand

• Demand and Supply

  The market determines price based on demand and supply
• Price mechanism

  The economic system where the forces of supply and demand interact to determine the prices of goods and services in a market
• Demand

  The relationship between price and the quantity demanded at that price
• As price increases

  Demand will decrease
• As price decreases

  Demand will increase
• Demand curve

  Economists model the relationship between price and quantity demanded
• As the price of a good or service changes

  It will change the quantity of the good or service that consumers demand
• Expansion of demand

  As price decreases, quantity demanded increases
• Contraction of demand

  As price increases, quantity demanded decreases
• Impacts on demand other than price

  Increase or decrease the quantity at all price points of a particular good or service that buyers are prepared to demand at a given price, causing a shift in the demand curve
• Impacts on demand other than price

  • Change in preferences and tastes
• Favourable shift in demand

  Shift to the right
• Unfavourable shift in demand

  Shift to the left
• Supply

  The quantity of a particular good or service that producers are willing to sell at a given price over a period of time
• As price increases

  Supply will increase
• As price decreases

  Supply will decrease
• As the price of a good or service changes

  It will change the quantity of the good or service that producers are willing to supply
• Expansion in supply

  Increase in the price of a good or service, suppliers will be more willing and able to supply as there is potential for higher profits
• Non-price supply factors

  Impacts on supply due to factors other than price, increasing or decreasing the quantity at all price points of a particular good or service that producers are prepared to supply at a given price, causing a shift in the supply curve
• Non-price supply factors

  • Increase in the price of production, such as from an increase in the factors of production
• Favourable shift in supply

  Shift to the right
• Unfavourable shift in supply

  Shift to the left
• Market equilibrium

  The price and quantity where demand and supply are equal
• Equilibrium is represented as Pe and Qe
• If the price is set above equilibrium price

  It creates a surplus (oversupply or glut) of goods & services
• If the price is set above equilibrium

  Suppliers are more willing and able to supply, leading to too much supply and not enough demand, so prices will decrease until equilibrium is reached
• If the price is set below equilibrium price

  It creates a shortage (undersupply) of goods & services
• If the price is set below equilibrium

  Suppliers are less willing and able to supply, leading to too much demand and not enough supply, so buyers bid up the price until equilibrium is reached
• Importance of pricing for business

  Businesses use demand and supply theory to determine the optimal pricing for their products or services
• Setting Equilibrium Prices

  1. Demand and supply intersect at a point known as equilibrium, where the quantity demanded equals the quantity supplied

  2. Businesses aim to set their prices close to this equilibrium point to ensure that the quantity they produce meets consumer demand, avoiding excess inventory or shortages
• Determining Price Levels

  1. By understanding the demand curve, businesses can gauge how changes in price might impact the quantity consumers are willing to purchase

  2. Combining these insights allows businesses to set prices at levels that balance consumer demand with production costs