Understanding Demand and Supply in Economics
Explore the concept of demand and supply in economics, including factors influencing demand, market demand, demand extension, the relationship between demand and the price of other goods, and the basics of supply in a competitive market setting. Learn how price, consumer preferences, and other factors impact the buying and selling dynamics in the marketplace.
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Presentation Transcript
Demand Desire refers to people's willingness to own a good. Demand is the amount of a good that consumers are willing and able to buy at a given price.
Factors influencing demand the price of the good; the income of consumers; the demand for alternative goods which could be used (substitutes); the demand for goods used at the same time (complements); whether people like the good (consumer taste).
Market demand The market for DVDs brings together all the potential buyers and sellers of the product Market demand is the total quantity of a good or service all potential buyers would choose to buy at any given price. Influenced by the same factors as individuals Number of potential buyers influences total demand at any price
Demand extension At a higher price, a consumer buying a DVD has less income left over This is the real income effect of a price increase If the price of DVDs goes up, consumers may find other goods more attractive and choose to buy something else other than DVDs This is referred to as the substitution effect of a price increase
Demand and the price of other goods Demand for goods responds to changes in the price of other related goods Substitutes if there is an increase in the price of one cereal, consumers may switch their consumption to another cereal. Complements if there is a decrease in the price of cars, there is an increase in demand for both cars and petrol Whether goods are substitutes or complements depends on how the demand for one good responds to a change in price of another.
Supply There is a relationship between price and the quantity supplied of a good by firms This is in a competitive market, where individual firms can t influence the price of the good or service they are selling. We need to assume that firms aim to maximise profits the difference between a firms total revenue and total costs
Influences on Supply Production costs The technology of production Taxes and subsidies The price of related goods Firms expectations about future prices
Costs and technology Profit maximisers are influenced by the cost of production If the cost of factors of production (inputs) increases, firms will supply less output at every price This will shift the supply curve to the left If a new technology of production is introduced, firms can produce more cost effectively so they will produce more output at every price This will shift the supply curve to the right
Taxes and Subsidies The government imposes a sales tax like VAT on a good or service Consumers will pay a price higher than the revenue received by firms Firms will (cp) be prepared to supply less output at every price The supply curve shifts to the left If the government pays firms a subsidy to produce a good, this will reduce their costs and induce them to supply more output at any given price The supply curve will shift to the right
Prices of other goods A firm can face a situation in which there are alternative uses to which their factors of production may be put If a rise of price in a good raises its profitability, this may encourage a firm to switch production from other goods Switching costs can be high providing the increase in price is large enough If a firm produces goods jointly (by-products), an increase in the price of one might make a firm produce more of the other (like complements in demand)
Prices of other goods A firm can face a situation in which there are alternative uses to which their factors of production may be put If a rise of price in a good raises its profitability, this may encourage a firm to switch production from other goods Switching costs can be high providing the increase in price is large enough If a firm produces goods jointly (by-products), an increase in the price of one might make a firm produce more of the other (like complements in demand)
