Demand
• The quantity of a good or service that
consumers are willing and able to buy at a
given price in a given time period
• The Law of Demand:
‘there is an inverse
relationship between price
and quantity demanded for
all normal goods’
(↑p → ↓Qd; ↓p → ↑Qd)
P
D
Q
Supply
• The quantity of a good or service that
producers are willing and able to provide to
the market at a given price in a given time
period
P
•There is usually a
positive relationship
between price and
quantity supplied
(↑p → ↑ Qs; ↓p → ↓ Qs)
S
Q
The Demand Curve
P
• A movement
along the
demand
curve caused
by a change
in price
Contraction
Extension
D
Q
The Supply Curve
P
S
Extension
Contraction
Q
• A movement
along the
supply curve
caused by a
change in
price
Equilibrium Market Price
• A state of equality between demand and supply in a
market – at a state of rest – all parties are happy
P
P1
S
At P1, Qs > Qd  price will fall as
suppliers try to dispose of the
surplus stock
At P2, Qd > Qs  price will rise as
buyers are willing to pay a higher
price to secure some stock.
Pe
P2
D
Qe
Q
Movement comes to rest where
D=S – called market equilibrium
Charting Demand & Supply
Supply
Demand
Price
Quantity
Price
Quantity
£3
4
£3
16
£6
8
£4.50
14
£7.50
10
£7.50
10
£12
16
£12
4
1. Plot the above data on a graph
2. At what price do these two lines intersect
3. How much will be demanded at a price of £13.50
4. What is the consumer expenditure at the market equilibrium.
5. What is the firm’s revenue at the market equilibrium.
Shifts in the Demand Curve
P
P
D1
D
Q
Q1
• Changes impacting a
market, other than
price, will cause the
demand curve to
shift outward or
inward
Q
• This outward / rightward shift shows an increase in Qd
at any price
Shifts in the Demand Curve
P
P
D
D1
Q1
Q
Q
• This inward/ leftward shift shows a decrease in Qd at
any price
What shifts the demand curve?
• Changing price of substitutes
• Changing price of complements
• Changing incomes
• Changes in tastes & preferences
• Changes in interest rates
• Advertising
Decide whether the following events would cause a
movement along a demand curve (extension or
contraction) or a shift in the demand curve
(increase or decrease) for Ford Cars.
• A fall in the price of petrol
• A fall in the price of Saab cars
• A fall in the price of Ford cars
• A rise in real disposable incomes
• An advertising campaign for Ford cars
• An increase in the punctuality and comfort of rail
travel
Shifts in the Supply Curve
Changes impacting producers in the market, other than price, will
shift the supply curve.
P
P
S1
S
S
P
P
Q1
Q
Q
Inward / leftward shifts in supply
indicate a decrease in quantity
supplied at every price.
S1
Q
Q1
Q
Outward / rightward shifts in
supply indicate an increase in
quantity supplied at every price.
What shifts the supply curve?
• Changing costs of production
• Changing gov’t taxes & subsidies
• Changes in climate / environment
• Changing prices of substitute
use for resources
• Number of producers in the market
Decide whether the following events would cause a
movement along a supply curve (extension or
contraction) or a shift in the supply curve (increase
or decrease) for Ford Cars.
• The use of advanced technology in Ford car plants
• A fall in the cost of car components
• A strike by Ford car workers
• A rise in the productivity of ford car workers
• A rise in the indirect tax imposed on cars
• A rise in the price of Ford cars
Shifts in Demand or Supply
P
A SHIFT in one curve will
cause a MOVEMENT
ALONG the other curve.
S
P1
A shift in one curve will
NEVER cause a shift in
the other curve.
P
D1
D
Q
Q1
Two curve may shift
simultaneously, but of their
own accord.
Q
This INCREASE in demand has caused an EXTENSION of supply.
Market price has increased; quantity has increased.
Shifts in Demand or Supply
P
A SHIFT in one curve will
cause a MOVEMENT
ALONG the other curve.
S1
S
P1
P
D
Q1 Q
Q
A shift in one curve will
NEVER cause a shift in
the other curve.
Two curves may shift
simultaneously, but of their
own accord.
This DECREASE in supply has caused a CONTRACTION in demand.
Market price has increased, quantity has decreased.