Demand and Supply Mr Cooney
Price rises when quantity supplied is scarce and demand increases
Price decreases when quantity supplied increases and as a result result demand increases
Demand The
amount consumers desire to purchase at various prices at any given time
Demand
does not necessarily mean a consumer WILL buy, but refers to a good or service they WOULD LIKE to buy
Effective Demand
• Consumers must be willing to buy AND be capable of paying the price set by the supplier
Law of Demand If Price rises – Quantity Quantity demanded falls P
QD
If Price falls – Quantity Quantity demanded rises
P
QD
Individual Demand Individual Demand Schedule • Lists the different quantities of a good that an individual consumer is prepared to buy at each price
Demand Schedule (Demand for coffee monthly) (1) Price (cent per g)
(2) Chris’s demand
(3) David’s demand
(4) Total market demand
(g)
(g)
(kg’s: 000s)
A
20
28
16
700
B
40
15
11
500
C
60
5
9
350
D
80
1
7
200
E
100
0
6
100
Point
Price per g
A
20 cent
Market Demand
100
700 kilogrammes
80 ) g r e p t n e c ( e c i r P
60
40
Demand A
20
0 0
100
200
300
40 0
5 00
6 00
700
800
100
Point
Price per g
Market Demand
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
80 ) g r e p t n e c ( e c i r P
60
B
40
20
A
0 0
1 00
2 00
300
40 0
50 0
60 0
700
800
Point
Price per g
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
C
60 cent
350 kilogrammes
100
Market Demand
80 ) g r e p t n e c ( e c i r P
C
60
B
40
20
A
0 0
1 00
2 00
300
40 0
50 0
60 0
700
800
100
80 ) g r e p t n e c ( e c i r P
D
60
Point
Price per g
Market Demand
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
C
60 cent
350 kilogrammes
D
80 cent
200 kilogrammes
C
B
40
20
A
0 0
1 00
2 00
300
40 0
50 0
60 0
700
800
Price per g
A
20 cent
700 kilogrammes
B
40 cent
500 kilogrammes
C
60 cent
350 kilogrammes
D
80 cent
200 kilogrammes
E
100 cent
100 kilogrammes
E
100
80 ) g r e p t n e c ( e c i r P
Point
D
60
Market Demand
C
B
40
20
A
0 0
1 00
2 00
300
40 0
50 0
60 0
700
800
Demand Curve
P
100
80
60
D
40
20
Q
0 0
100
200
300
400
500
600
700
• At higher prices, consumers are generally willing to purchase less than at lower prices • Demand curve is said to have a negative slope - downward sloping from left to right • There are at least three accepted explanations of why demand curves slope downwards: downwards: - The law of diminishing marginal utility - The income effect - The substitution effect
800
Utility = Satisfaction/Benefit Marginal = Always means Extra • Diminishing Marginal Marginal Utility means that that the extra extra satisfaction satisfaction is falling as you consume an additional product. • E.g. If you eat 1 bar of chocolate you get quite a lot of benefit = YUM YUM • If you continue eating and you begin your 5th Bar, Do you get the same benefit?? = BARF • Theref Therefore ore the Law of Diminishing Marginal Utility states that as more of a product is consumed the marginal (extra) (extra) benefit to the consumer falls, hence consumers are prepared to pay less.
The income effect • The income and substitution effect can also be used to explain why the demand curve slopes downwards. • If we assume that money income is fixed, the income effect effect suggests that, as the price of a good falls, real income -that is, what consumers can buy with their money income (Their Spending Power)- rises and consumers increase their demand. • Therefore, at a lower price, consumers can buy more from the same money income, and, ceteris paribus (with other things the same) demand will rise. Conversely, a rise in price will reduce real income and force force consumers to cut back on their demand.
The substitution effect • In addition, as the price of one good falls, it becomes relatively less expensive. Theref Therefore, ore, assuming other alternative products stay at the same price, at lower prices the good appears cheaper, and consumers will switch from the expensive alternative to the relatively cheaper one. • It is important to remember that whenever the price of any resource changes it will trigger both an income and a substitution effect.
(i) Define the economic terms: individual (consumer) demand; market demand.
• Individual demand: the quantity of a good an individual consumer demands at different different prices. th at • Market demand: total quantity of a good that all consumers demand at different different prices.
(ii) Explain, with the aid of labelled diagrams, the relationship between individual (consumer) demand and market demand.
(ii) Explain, with the aid of labelled diagrams, the relationship between individual (consumer) demand and market demand.
• T
•
To derive deri ve the market demand add the quantity demanded by each individual consumer at each price to calculate the overall quantity demanded by the market at each price.
An Increase in Demand
P
e c i r P
D 1 Q1
Q2
Quantity
D 2
A Decrease in Demand
P
e c i r P
D 2 Q2
Q1
Quantity
D 1
Factors affecting the demand for a good The Demand Function
Dx = f ( Px, Pog, Y, T, E, G, U)
Trudie Murray ©
The Demand Function Dx = f ( Px, Pog, Y, T, E, G, U) • Px = Goods which obey and do not obey the Law of Demand • Pog = Price of Complimentary Goods and Cost of Substitute Goods • Y = Income of consumer • T = Consumer tastes and preferences • E = Consumers expectations regarding future prices • G = Government regulations • U = Unplanned factors
These all affect DEMAND
Demand for a good depends on its own price NOTE: Price only causes a movement along the demand curve not a SHIFT If price rises quantity demanded falls If price falls quantity demanded rises
P2
P1
Q2
Q1
Quantity Demanded
Demand for a good depends on the price of other goods
• Complimentary Complimentary Goods Goods which are used jointly. jointly. The use of one involves involves the use of the other - E.g. bread and butter, cars and petrol
• Substitute Goods Goods which satisfy the same needs and thus can be considered as alternatives to each other – E.g. Coke and Pepsi or Tea and Coffee
Complimentary Complimentary Goods
D1 D2 An increase in price of a complementary good causes the demand for good X to fall
D2 D1 An fall in price of a complementary good causes the demand for good X to rise
Substitute Goods (The Substitute Effect)
D2 D1 An increase in price of a substitute good causes the demand for good X to rise
D1 D2 An fall in price of a substitute good causes the demand for good X to fall
Demand for a good depends on level of income (The Income Effect)
• Normal Goods A normal good is a good with a positive income effect. effect. A rise in income causes more of it to be demanded, while a fall in income causes less of it to be demanded demande d
• Inferior Goods An inferior good is a good with a negative income effect. A rise in income causes less of it to be demanded, while a fall in income causes more of it to be demanded
Normal Goods P
P
D2 D1 Q
A rise in income causes the demand for a normal good to increase from D1 to D2
D1 D2
Q
An fall in income causes the demand for a normal good to fall from D1 to D2
Inferior Goods P
P
D1 D2 Q
An increase in income causes the demand for an inferior good to fall from D1 to D2
D2 D1
Q
A decrease in income causes the demand for an inferior good to rise from D1 to D2
4. TASTE: Demand depends on Consumer Tastes
• If the movement in taste or preferences is in favour of the good it causes an increase in demand which shifts the demand curve to the right • If the movement in taste or preferences is against the good it causes a fall in demand which shifts the demand curve to the left • E.g. Fashion Styles etc.
Movement Movement in in Taste P
P
D2 D1 Q
A movement movement in taste in favour of a good causes demand to increase
D1 D2
Q
A movement in taste against a good causes demand to fall
5. Demand for a good depends on the expectations expectations of consumers
•
Demand for a good will shift to the right if consumers expect: 1. 2. 3.
•
The price price of of good good X to to be higher higher in the the futu future re e.g. prope property rty A sca scarc rcit ity y of of good good X in in the the futur future e e.g. e.g. oil oil Their Their inc incom omes es to to be hig highe herr in the the fut futur ure e e.g. e.g. pr promot omotio ion n
Demand for a good will shift to the left if consumers expect: 1. 2. 3.
The pric price e of of goo good d X to be lowe lowerr in in the the futu future re A plen plenti tifu full supp supply ly of goo good d X in in the the futu futurre Their Their inco income mess wil willl be be lowe lowerr in in the the futur future e
Consumer Expectations
D2 D1 Demand for Good X will rise if consumers expect higher future prices, scarcity or higher future incomes
D1 D2 Demand for Good X will fall if consumers expect lower future prices, abundance or lower future incomes
6. Demand for a good depends on government regulations
• If the government implement a programme which reduces/increases consumption of a particular product than demand for this good will be affected affected E.g.
The smoking ban / educational campaign to reduce alcohol consumption (Cause demand to shift left) The cycle to work scheme cause demand for bicycles to shift right
Government Regulations
Example: The Smoking Ban D1 D2 If the government implement a policy to restrict consumption demand for Good X will fall
Government Regulations
Example: The Cycle to Work Scheme D2 D1
7. Demand for a good depends on unplanned factors •
•
If there is a sudden heat wave – an unplanned factor – this may result in an increase in demand for sunscreen and a decrease in the demand of home heating oil If flash floods occur across the country – an unplanned factor – this may result in an increase in
the demand for Wellingtons Wellingtons.
Unplanned Factors
D2 D1
Factors such as weather can effect the demand for goods – goods – e.g. e.g. a sudden heat wave would increase the demand for sunscreen
(EQ) Two factors that would cause a shift in a demand curve for concert ticke tickets: ts:
EQ: Distinguish between the economic meanings of a ‘movement along a demand curve’ and a ‘shift in a demand curve’ for concert tickets. Illustrate your answer using diagrams
Exceptions to the Law of Demand P D • Giffen Goods ostentatious consumption • Goods of ostentatious (snob goods)
• Goods affected by consumers’ expectations • Addictive Goods
Giffen Goods • Giffen goods are those which are consumed in greater quantities when their price rises. These goods are named after the Scottish economist Sir Robert Giffen, who is credited with identifying them by Alfred Marshall in his highly influential Principles of Economics (1895). • In essence, a Giffen good is a staple food, such as bread or rice, which forms are large percentage of the diet of the poorest sections of a society, and for which there are no close substitutes. • From time to time the poor may supplement their diet with higher quality foods, and they may even consume the odd luxury (E.g. Meat), although their income will be such that they will not be able to save. A rise in the price of such a staple food will not result in a typical substitution effect, given there are no close substitutes. • If the real incomes of the poor increase they would tend to reallocate some of this income to luxuries, and if real incomes decrease decrease they would would buy more of the staple good, meaning it is an inferior good
Goods of ostentatious consumption (Snob/Veblen Goods) •
Snob goods are a second possible exception to the gene ral law of demand. demand. These goods are named after the American sociologist, Thorsten Veblen, who, in the early 20th century, century, identified a 'new' high-spending leisure class.
•
According to Veblen, a rise in the price of high hi gh status luxury goods goods might lead members of this leisure class to increase in their consumption, rather than reduce it. The purchase purchase of such higher priced goods would would confer status(make status (make these people seem Cool/Wealth Cool/Wealthy/Rich) y/Rich) on the purchaser - a process which Veblen called conspicuous consumption.
exclusiveness or expensiveness • Some commodities by their exclusiveness are attractive attractive to some buyers. A rise in price makes them more exclusive, and therefore, more attractive to those with the incomes to purchase them. A fall in price may lead to a fall in quantity demanded as they may no longer appear a ppear as exclusive exclusive to the rich and are still outside the price range of the poor.
Goods the purchase of which is influenced by expectations expect ations as to future prices / Speculative goods
• If prospective buyers think that prices are likely likely to be even higher in the future, the current level of demand may not fall even if prices increase • E.g. if a person is considering buying a house the possibility that prices are likely to be even higher in the future will probably stimulate stimulat e demand at current prices.
Goods of Addiction • In the case of those goods to which a person becomes addicted e.g. drugs, they no longer act rationally. rationally. • They become so addicted to the drug that in order to get the same 'buzz' from consumption of the drug, demand for the commodity may increase, even when the price of the commodity increases.
Supply • The quantity of a good that firms are willing to make make available over a particular period pe riod of time • The supplier determines the level of output it is willing to supply at the prevailing market market price
Individual Supply • Individual supply: the quantity of a good an individual firm is willing to supply at different different prices.
Market Supply • Market supply: the total quantity of a good that all firms are willing to supply at diff d ifferent erent prices.
(EQ) Explain, with the aid of labelled diagrams, the relationship between individual (firm) supply and market supply.
(EQ) Explain, with the aid of labelled diagrams, the relationship between individual (firm) supply and market supply.
Supply Schedule (supply of coffee monthly)
Price of Coffee (cent per g)
Bean Grower X's supply (kg’s)
Total Market supply (kg’s: 000s)
A
20
50
100
B
40
70
200
C
60
100
350
D
80
120
530
E
100
130
700
Supply Curve • At higher prices, suppliers are willing to produce more of a good or service and supply it to the market • Supply curve is said to have a positive slope – upwards from left to right indicating a positive relationship between supply and price
100
A
P
Q
20
100
80
60 ) g r e p s t n e c ( e c i r P
40
20
A
Supply 0 0
1 00
20 0
30 0
400
5 00
60 0
70 0
800
P
Q
A
20
100
B
40
200
100
80
) g r e p s t n e c ( e c i r P
60
40
B
A
20
0 0
1 00
20 0
30 0
400
5 00
60 0
70 0
800
P
Q
A
20
100
B
40
200
C
60
350
100
80
) g r e p s t n e c ( e c i r P
60
C
40
B
A
20
0 0
1 00
20 0
30 0
400
5 00
60 0
70 0
800
P
Q
A
20
100
B
40
200
C
60
350
D
80
530
100
80
) g r e p s t n e c ( e c i r P
D
60
C
40
B
A
20
0 0
1 00
20 0
30 0
400
5 00
60 0
70 0
800
100
80
) g r e p s t n e c ( e c i r P
P
Q
A
20
100
B
40
200
C
60
350
D
80
530
E
100
700
E
D
60
C
40
B
A
20
0 0
1 00
20 0
30 0
400
5 00
60 0
70 0
800
P
Increase in Supply S x
S 1
Increase
Q
Increase/Decrease in Supply
P
S 2
Decrease
S X
S 1
Increase
Q
Factors effecting the supply of a good The Supply Function Sy = f ( Py, Pr, C, Tch, Tx, N, U)
The Supply Function Sy = f ( Py, Pr, C, Tch, Tx, N, U) • • • • • • •
Py = Price of Good Y Pr = Price of related goods C = Cost of Production State of Technolo Technology gy Tch = State Taxation / Subsidy Su bsidy Tx – Taxation N – number of sellers in the industry U = Factors outside the control of the firm
Supply of a good depends on its own price (Causes a movement along supply curve) If price rises quantity supplied rises If price falls quantity supplied falls
P2
P1
Q1
Q2
Quantity Supplied
Supply of a good depends on prices of related goods S1 S2 S1
An increase in price of a related good will cause a fall in the supply of Good Y
S2
An fall in price of a related good will cause an increase in the supply of Good Y
Supply of a good depends on the cost of production • Causes of an increase in the cost of production: • • • •
A rise in labour costs A rise in the cost of raw materials An increase in taxes A reduction in subsidies
• Causes of a decrease in the cost of production: • • • •
A fall in labour costs A fall in the cost of raw materials A reduction in taxes An increase in subsidies
Supply of a good depends on cost of production S1 S2 S1
An increase in the cost of production will cause a fall in the supply of Good Y
S2
An fall in the cost of production will cause an increase in the supply of Good Y
Supply of a good depends on the state of technology S1 S2
We do not generally discuss a ‘fall’ in technology – we we assume any new method of production is an option for a firm
An improvement in the state of technology will cause an increase in the supply of Good Y
Supply of a good depends on the rates rates of taxation / granting of subsidies
• A reduction in taxes will result in a reduction in the cost of raw materials / production and supply will increase. granted to a firm for raw raw • An increase in subsidies granted materials / labour employed will result in a reduction in costs and supply will increase
Supply of a good depends on the rates of taxation / granting of subsidies S1 S2 S1
S2
An fall in the level of taxation / An increase in the level of taxation taxa tion / decrease in subsidies will cause a fall in increase in subsidies will cause an increase in the supply of Good Y the supply of Good Y
6. Supply of a good depends on the number of sellers in the industry
• If the number of sellers in the industry decrease (due to rationalisation) rationalisation) than overall quantity supplied will also decrease • If the number of sellers in the industry increase than overall quantity supplied will also increase i ncrease
6. Supply of a good depends on the number of sellers in the industry S1
S2 S1
A decrease decrease in the number of sellers in industry will cause a fall in the supply of Good Y
S2
An increase in the number of sellers in industry will cause a rise in the supply of Good Y
7. Supply of a good depends on factors outside the control of a firm / unforseen circumstances
• Favourable or unfavourable unplanned factors: • Weather Weather conditions e.g. floods or sunshine • Strikes • Shortage of raw materials • Transport failure
7. Supply of a good depends on factors outside the control of a firm S2
S1 S2
Favourable unplanned factors will cause an increase in supply and a shift to the right
S1
Unfavourable unplanned factors will cause a decrease in supply and a shift to the left
Outline FOUR factors, other than price, which affect the supply curve of an individual firm. In each case explain how the factor affects the supply curve.
Outline FOUR factors, other than price, which affect the supply curve of an individual firm. In each case explain how the factor affects the supply curve.
Market Equilibrium • If no interference in the market occurs (by government or other agency) price will eventually settle at the level where quantity demanded equals quantity supplied. This position is called the market market equilibrium
Market Equilibrium
Price
100
80
60
40
20
D1 S2
0
quantity
0
1 00
2 00
30 0
400
5 00
6 00
70 0
80 0
Market Equilibrium and Price • If the price on the market is above the equilibrium price, there will be a downward pressure on the price quantity • Quantity supplied will exceed quantity demanded and producers producers will lower the price to get rid of surplus stock
• P
Market Equilibrium and Price • If the price on the market is below the equilibrium price, there will be a upward pressure on the price quantity • Quantity demanded will exceed quantity supplied. Scarcity would exist and price would increase
• P
An Increase in Demand Causes: • A decrease in the price of the good itself • An increase in the price of a substitute good • A fall in the price of a complimentary good • An increase in income (if the good is normal) • A change in taste in favour favour of the good • Expectations of higher prices in future or scarcity • Favourable unplanned factors
A Decrease in Demand Causes: • An increase in the price of the good itself • An fall in the price of a substitute good • A increase in the price of a complimentary good • An fall in income (if the good is normal) • A change in taste away away from the good • Expectations of lower prices in future or greater supplies • Implementation of government regulations
An Increase in Supply Causes: • A fall in the price of a related good • A fall in the cost of production • An improvement in technology • Favourable unplanned factors • A reduction in taxation taxation / granting of subsidy • Increase in the number of sellers in the industry
A Fall in Supply Causes: • A rise in the price of a related good • A rise in the cost of production • Unfavourable unplanned factors • An increase in taxation taxation / decrease in subsidies • A decrease in the number of sellers in the industry
