Supply and Demand
Demand
Demand - Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
Effective Demand - When a desire to buy a product is backed up by an ability to pay.
Derived Demand - The demand for a factor of production used to produce another good or service, e.g. steel.
Law of Demand
Downward sloping/inverse relationship
The Income Effect - When the price of a normal good falls, ceteris paribus, the consumer can maintain the same consumption for less expenditure, increasing 'real income'.
The Substitution Effect - When the price of a good falls, ceteris paribus, the product is now relatively cheaper than an alternative and some consumers switch their spending from the alternative.
Non-Price Factors Influencing Demand (1)
Health benefits
Fashion/trends
Influencers/media
Quality
Promotion/marketing
Durability
Non-Price Factors Influencing Demand (2)
Religion/morality
Interest rates
Change in distribution of income
Change in the size and age structure of a population
Seasonal factors
Convenience/accessibility
Supply
Supply - Quantity of a good or service that producers are willing and able to supply at a given price in a given time period.
Law of Supply
Upward sloping/positive relationship
The Profit Motive - When market price rises following an increase in demand, it becomes more profitable for businesses to increase their output.
Production and Costs - When output expands, production costs tend to rise; so, a higher price is needed to cover extra costs.
New Entrants into the Market - Higher prices may create an incentive for other businesses to enter the market, leading to an expansion of supply.
Non-Price Factors Influencing Supply (1)
Change in the unit costs of production
Change in exchange rate
Level of productivity
Advancements in technology
New producers
Non-Price Factors Influencing Supply (2)
Weather conditions
Taxation
Subsidies
Regulations
Excess Demand
Quantity demanded > available supply
Happens when the current market price is set below the equilibrium price
Results in queuing and an upward pressure on price
Higher prices ration demand to consumers with effective demand
Higher prices - in theory - stimulate an expansion of supply as producers respond to higher prices
Excess Supply
A state of disequilibrium in a market
When supply > demand and there are unsold goods (sometimes called a 'glut')
Surpluses put downward pressure on the market price
As prices fall, there is an expansion of demand which cuts the surplus and takes the market towards equilibrium
The Price Mechanism
Signalling - Prices adjust to demonstrate where resources are required. Prices rise and fall to reflect scarcities and surpluses.
Incentives - Consumers send information about changing wants and needs through choice. Higher prices act as an incentive to raise output as suppliers stand to make a better profit.
Rationing - Prices ration scarce resources when demand outstrips supply. When there is a shortage, price is bid up - leaving only those with a willingness and ability to pay to purchase a product.