Demand: the quantity of a product that consumers are able and willing to purchase at various prices over a period of time
Market: where or when buyers and sellers meet to trade or exchange products.
It is important to remember that a want and demand are entirely different what consumer’s want they may not actually purchase.
Notional Demand: The desire for a product
Effective Demand: The willingness and ability to buy a product
The definition of demand assumes that the only factor affecting demand is price, economists refer to this as ceteris paribus
Ceteris Paribus: Assuming other variables remain unchanged
The relationship between demand and quantity is INVERSE
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Change in Demand Due to: | Effect on Demand Curve |
An increase in consumer incomeA rise in price of substitutesA fall in price of complementsA positive change in tastes and fashion | A shift to the RIGHT |
A fall in consumer incomeA fall in the price of substitutesA rise in the price of complementsA negative change in tastes and fashion | A shift to the LEFT |
Tastes & Fashions:
Over time these are constantly changing, If something is fashionable then it will be in high demand.
Tastes are more personal; vegetarians would never buy beef of chicken
Total Revenue/Expenditure = Price X Quantity
Supply: The quantity of a product that producers are willing and able to provide at different market prices over a period of time
Economists assume that the motives of a producer are governed by profit
Relationship between Price and Quantity Supplied
Suppliers always want to supply at a high price!
There is a normal positive relationship between the two, if price rises, supply rises
Producer Surplus: The difference between the price a producer is willing to accept and what is actually paid.
Determinants of Supply:
Costs of Production:
These would increase if a company had to pay more for labour or for certain natural resources. Banks cut cost by replacing labour with machines
Size & nature of the industry:
In a competitive industry minor increases in costs can have a big effect on supply. In a more inelastic market, the cost can be passed onto the consumer without it having a great effect.
VAT for example, this increases the price for the consumer which affects the ability of the producer to supply. Regulations can lead to higher costs of productions but Subsidy’s can lower them
Factors Suppliers cannot control:
Weather! Hugely important in the agricultural industry
Change in Supply Due to: | Effect on Supply Curve |
A fall in raw material costsAn improvement in labour efficiencyA reduction in the rate of indirect taxationA positive technological advanceAny other positive factor | A shift to the RIGHT |
An increase in raw material costsAn increase in labour costsAn increase in the rate of indirect taxationAny other negative factor | A shift to the LEFT |
Equilibrium Price: The price where demand and supply are equal
Disequilibrium Price: Any position in the market where demand and supply aren’t equal
In practice markets are very unstable and operate in disequilibrium, this is when we get excess demand/ supply
Surplus: an excess of supply over demand
For example the supplier feels that their product can be sold at £400 and at this price they will supply 1140 holidays but then consumers only buy 650 of those because the price is high, there is too much SUPPLY therefore the operator has to decrease the price. Sales!!!
When supply is greater than demand price will fall!