Demand
The relationship between demand and price
- The income effect
- The substitution effect
The demand curve (downwards slope)
- Assumptions
- The axes (price and quantity)
- Illustrates how much would be demanded at each price
Data can be gathered by asking or by experimenting by actual changing the price
What determines the slope of the demand curve?
What makes it more horizontal or vertical?
THE PRICE ELASTICITY OF DEMAND – how price sensitive are my customers?
Other determinants of demand:
Tastes (technology, trends, fashion)
Number and price of substitute goods
Number and price of complementary goods
Income
Distribution of income
Expectations (of the price)
Movement along and shifts in the demand curve
Possible causes of a rise in demand
Tastes shift towards this product
Rise in price of substitute products
Fall in price of complementary goods
Rise in income and product is normal or luxury
Fall in income and product is inferior
Expectations of a rise in price
Supply
Relationship between supply and price
o As price rises, firms supply more
It is worth incurring the extra unit costs
They switch from less profitable goods
In the long run, new firms will be encouraged to enter the market
The supply curve (upwards slope)
o Assumptions
o The axes (price and supplied quantity)
o Illustrates how much would be supplied at each price
Other determinants of supply:
Costs of production
Profitability of alternative products
Profitability of goods in joint supply
Nature and other random shocks
Aims of producers
Expectation of producers
, Movements along and shifts in the supply curve
Possible causes of a rise in supply at any price level
Fall in costs of production
Reduced profitability of alternative products that could be supplied
Increased profitability of goods in joint supply
Benign shocks
Expectations of a fall in price
The determination of price
Equilibrium price and output
o Response to shortages and surpluses
o Significance of ‘’equilibrium’’
Demand and supply curves lead to an equilibrium price
The free-market economy
Advantages
o Transmits information between buyers and sellers
o No need for costly bureaucracy
o Incentives to be efficient
o COMPETITIVE markets respond to consumer wishes
Problems
o Competitions may be limited
o Inequality
o Environment and social goals may be ignored
The mixed economy
o Types of intervention
Use of taxes, subsidies and benefits
Legislation and regulation
Direct provision by the government
Government intervention:
Minimum price to protect producers
Minimum price will be above equilibrium or free market price
Examples: agricultural products, labour
Minimum price will lead to supply surplus
Maximum price to protect consumers
Maximum price will be below equilibrium or free market price
Examples: bread, medicines, rent, interest
Maximum price will lead to demand surplus
Price Elasticity of Demand
Determinants of price elasticity of demand
o Number and closeness of substitute goods
o Proportion of income spend on the goods
o The time period
The relationship between demand and price
- The income effect
- The substitution effect
The demand curve (downwards slope)
- Assumptions
- The axes (price and quantity)
- Illustrates how much would be demanded at each price
Data can be gathered by asking or by experimenting by actual changing the price
What determines the slope of the demand curve?
What makes it more horizontal or vertical?
THE PRICE ELASTICITY OF DEMAND – how price sensitive are my customers?
Other determinants of demand:
Tastes (technology, trends, fashion)
Number and price of substitute goods
Number and price of complementary goods
Income
Distribution of income
Expectations (of the price)
Movement along and shifts in the demand curve
Possible causes of a rise in demand
Tastes shift towards this product
Rise in price of substitute products
Fall in price of complementary goods
Rise in income and product is normal or luxury
Fall in income and product is inferior
Expectations of a rise in price
Supply
Relationship between supply and price
o As price rises, firms supply more
It is worth incurring the extra unit costs
They switch from less profitable goods
In the long run, new firms will be encouraged to enter the market
The supply curve (upwards slope)
o Assumptions
o The axes (price and supplied quantity)
o Illustrates how much would be supplied at each price
Other determinants of supply:
Costs of production
Profitability of alternative products
Profitability of goods in joint supply
Nature and other random shocks
Aims of producers
Expectation of producers
, Movements along and shifts in the supply curve
Possible causes of a rise in supply at any price level
Fall in costs of production
Reduced profitability of alternative products that could be supplied
Increased profitability of goods in joint supply
Benign shocks
Expectations of a fall in price
The determination of price
Equilibrium price and output
o Response to shortages and surpluses
o Significance of ‘’equilibrium’’
Demand and supply curves lead to an equilibrium price
The free-market economy
Advantages
o Transmits information between buyers and sellers
o No need for costly bureaucracy
o Incentives to be efficient
o COMPETITIVE markets respond to consumer wishes
Problems
o Competitions may be limited
o Inequality
o Environment and social goals may be ignored
The mixed economy
o Types of intervention
Use of taxes, subsidies and benefits
Legislation and regulation
Direct provision by the government
Government intervention:
Minimum price to protect producers
Minimum price will be above equilibrium or free market price
Examples: agricultural products, labour
Minimum price will lead to supply surplus
Maximum price to protect consumers
Maximum price will be below equilibrium or free market price
Examples: bread, medicines, rent, interest
Maximum price will lead to demand surplus
Price Elasticity of Demand
Determinants of price elasticity of demand
o Number and closeness of substitute goods
o Proportion of income spend on the goods
o The time period
