Chapter 2 – Demand and Supply 8/10

Market: Where buyers and sellers come together to carry out and economic transaction

Demand ~> Quantity of goods and services that consumers are willing and able to

purchase at a given price in a given time period

Law of Demand ~> As the price(P) of product falls, the quantity demanded(Qd) of the

product will usually increases, ceteris paribus. Also works in vice versa.

Simplified = If P ↑, Qd↓ and if If P↓ , Qd↑. ceteris paribus

Determinants of Demand

Price

1) Income effect

• When price falls, the consumers will have a rise in real income, income adjusted

to inflation which reflects the amount their incomes will buy.

• Rise in real income increases demand.

2) Substitution effect

• When the price of a product falls, it will become more attractive to consumers.

• The consumers substitute cheaper product with product with no change in price

• Less people buy product with no change in price

Non-price determinants ~> TOPIC

1) Tastes/Preferences

A change in tastes either increases or decreases the quantity demanded at each

and every price. Unpredictable but market research may help predict it.

2) Other factors

Size of population ~> Pop'n ↑, demand ↑. Why?: More people, more demand

Government policy changes ~> Laws and changes in tax affects demand. EG:

Law passed that all bikers wear helmets ~>↑ in demand for helmets

Change in age structure of population ~> Different age groups have different

demands. EG: Increase in old people increases demand for walking sticks

Change in income distribution ~> ↑ in income for poor ↑ in demand for basic

necessities. ↑ in income for rich ↑ in demand for wants.

Seasonal changes ~> Change in season causes change in demand.

EG:If season = Summer

Demand for icecream ↑

Demand for hot drinks ↓

Sadistic Goose Chokes Crabs Slowly = SGCCS

3) Price of other products

Substitutes ~> (explained in substitution effect)

Complements ~> Products that are often bought together.

EG: If demand for printers ↑

Demand for ink cartridges ↑

4) Income

Normal goods ~> Income ↑, Demand for normal goods ↑. EG: Air travel

Inferior goods ~> Income ↑, Demand for inferior goods ↓. EG: Cheap wine

5) C
Difference between shift in demand curve and movement along demand curve

• Shift = change in non-price determinants

• Movement = change in price

Graphs of Demand

• Law of demand and movement on demand curve shown. Factor = price.

• Shows effects of change in non-price determinants = shift

Linear Demand function

• QD = a – bP

• “a” = Quantity that would be demanded if the price was 0

• “b” = Slope of the curve

• Change in “a” = shifts in demand curve, left and right

• Change in “b” = change in slope of the curve

Graph(sketch)
Supply ~> Willingness and ability of producers to produce a quantity of a good or service

at a given price in a given time period

Law of Supply ~> As the price of product rises, the quantity supplied(Qs) of the product

will usually increase, ceteris paribus. Also works in vice versa.

Simplified = If P ↑, Qs↑ and if If P↓ , Qs↓. ceteris paribus

Determinants of Supply = Senile Ecstatic Goose Picks Crabs = SEGPC

1) State of technology

Technology improves ~> Quantity supplied ↑, S.Curve shifts outwards (vice versa)

2) Expectations

Producers decides about how to supply their goods based on expectations on

future prices.

EG: Producers withhold goods to raise prices to supply them in the future at higher

prices. If demand is perceived to fall in the future, producer may withhold supply in

the future.

3) Government intervention

Indirect taxes ~> Tax on consumption/expenditure raises prices. Less of product at

every price. S.Curve shifts inwards

Subsidies ~> Payments made by gov to firms that reduce production costs. More

of the product at every price. S.Curve shifts outwards

4) Price of other products

If price of one product increases, producers will switch their production to produce

this product to benefit from the higher price at which this product is supplied

5) Cost of CELL

Cost of CELL ↑, price ↑, S.Curve shifts inwards(vice versa)

Difference between shift in supply curve and movement along supply curve

• Shift = change in non-price determinants

• Movement = change in price

Graphs of Supply

• Shows law of supply and movement on supply curve. Factor = price.

• Shows effect of change in non-price determinants of supply = shift.

Linear Supply function

• QS = c + dP

• “c” = Quantity that would be supplied if the price was 0

• “d” = Slope of the curve

• Change in “c” = shifts in demand curve, left and right

• Change in “d” = change in slope of the curve

Graph(sketch)