Supply and Demand: Learning Objectives

Supply and demand
Learning Objectives
Explain Supply, demand and Interaction
of supply and demand.
Starter
• What might happen to
sales of these products if
there was a recession in
the economy?
• What might happen to
sales of these products if
free Wi-Fi was
introduced?
• What other factors might
encourage more people
to buy these products?
The relationship between price
and demand.
• Demand refers to the amount that
consumers are willing and able to buy at
any given price.
• A demand curve shows this relationship
between price and quantity demanded.
• It slopes downwards from left to right,
because as price falls, people are more
willing to buy a good.
Demand Schedule-Information
used to draw demand curve
Demand curve showing inverse
relationship- Own price causes
movement along the demand curve
Effect of price changes - Ceteris
paribus
• A change in the price of a good or service will
lead to a change in the quantity demanded.
This is shown on the demand curve as a
movement along (up or down) the curve. In
Figure 1, a fall in price from £1.50 to £1, for
example, will result in a movement along the
curve from point X to point Y.
• The demand curve itself has not moved from
its original position. Price changes only lead
to an extension (rise) or contraction (fall) in
the quantity demanded.
Non-price factors affecting
demand-they cause leftward or
rightward shift
Factors causing demand curve
to shift right:
• an increase in income (for normal goods)
• a fall in income (for inferior goods)
• successful advertising and branding
• fall in price of complementary goods
• rise in price of substitute goods
• good becomes more fashionable.
• Favourable demographics changes
• Favourable seasons
Factors causing demand curve
to shift left:
• a fall in income (for normal goods)
• a rise in income (for inferior goods)
• rise in price of complementary goods
• fall in price of substitutes
• good becomes less fashionable.
• Unfavourable seasons
Key terms:
• Normal good – one for which demand

increases as income rises
• Inferior good – one for which demand
falls as income rises
• Complementary good – a good that is
bought with another good, i.e. the two go
together well
• Substitute good – a good that is bought
instead of another good, i.e. consumers
choose between one or the other
External shocks-other factors
• Factors beyond the control of businesses
can have an impact on the demand for
products. Some key examples are outlined
below.
• Competition.
• Government.
• Economic climate.
• Social and environmental factors.
The relationship between price
and supply.
• Supply refers to the amount that
producers are willing and able to sell at
any given price.
• The supply curve shows this relationship
between price and quantity supplied.
• It slopes upwards from left to right,
because, as price rises, producers will
supply more because of the potential for
higher profit.
Supply Schedule
Supply curve with Positive
relationship
Fixed supply-Supply venues for
cinemas, theatres and sports
stadium
Non-price factors affecting
supply
Factors causing supply to shift
right:
• an increase in productivity
• improvement in technology for production
• increased availability of materials
• a fall in price of raw materials
• a fall in labour/capital costs
• introduction of a subsidy
• a rise in the number of firms in the industry.
Factors causing supply to shift
left:
• a fall in productivity
• reduced availability of raw materials
• a rise in price of raw materials
• a rise in labour/capital costs
• imposition of a tax
• a fall in the number of firms in the industry.
External shocks-Other factors
• Factors beyond the control of businesses
can have an impact on the supply of
products. Some examples are outlined
below.
• World events.
• Weather.
• Government economic policies
Interaction of supply and demand
Explanation
• P is known as the market clearing
price(Market equilibrium) – the price at
which supply exactly meets demand. If the
price is too high, then supply > demand,
and we have excess supply, or a surplus
or glut.
• To get rid of the excess supply,
producers will have to lower the price, and
so the market clearing price will eventually
be reached.
Continuation...
• If the price is too low, then demand >
supply, and we have excess demand or a
shortage.
• To get rid of the excess demand, the
price will rise towards the market clearing
price, causing consumers to leave the
market as the good becomes more
expensive than the price they are willing to
pay.
Continuation...
• Figure 1 also shows the total revenue or
total expenditure at the equilibrium price.
• Total revenue is the amount of money
generated from the sale of output. It is
calculated by multiplying price and
quantity.
Total revenue (TR) = Price (P) × Quantity (Q)

Changes in Demand
Explanation
• In Figure 3(a), an increase in demand for
a product is shown by a shift in the
demand curve to the right from D to D1
• This changes the equilibrium price
because supply and demand are now
equal at a different point. The price is
forced up from P to P1 and the amount
sold in the market has gone up from Q to
Q1.
Continuation..
• If demand were to fall, the opposite would
happen. The demand curve would shift to
the left from D to D2 and the price would
fall to P2. The amount traded in the market
would fall from Q to Q2
Changes in demand and supply
together
Explanation
• Demand might increase and supply
decrease at the same time. This is shown
in Figure 6.The original equilibrium price is
P where S = D. The increase in demand is
represented by a shift to the right from D
to D1 The decrease in supply is
represented by a shift to the left from S to
S1.The new equilibrium price, where D1 =
S1 is P1. The price is higher and the
amount sold in the market has fallen from
Q to Q1
Disequilibrium in the market
Explanation
• Excess demand: If the price charged in a
market is below the equilibrium price,
supply and demand will not be equal.
• Excess supply: If the price charged is set
above the equilibrium price, again, supply
and demand are not equal.

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Supply and demand

• Normal good – one for which demand

Total revenue (TR) = Price (P) × Quantity (Q)

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