Demand and Supply
Factors Affecting Demand
• The price of the good or service itself
• The price of other goods and services
• Expected future prices
• Changes in consumer tastes and preferences
• The level of income
• The size of the population and its age distribution
The ceteris paribus assumption is used in economic analysis to examine one factor
assuming that all the other factors that could affect say, demand, remain constant.
The law of demand states that consumers will demand more of particular product at a lower price,
and less at a higher price.
•
The typical demand curve slopes downwards from left to right, illustrating the same
relationship between price as stated in the law of demand
Movements along the demand curve
Price $
D
Contraction
P2
P1
Expansion
P3
D
0
•
•
Q2
Q1
Q3
Quantity demanded
A contraction in demand occurs when an increase in price from 0P1 to 0P2 causes the quantity
demanded to fall from 0Q1 to 0Q2.
An expansion in demand occurs when a decrease in price from 0P1 to 0P3 causes the quantity
demanded to rise from 0Q1 to 0Q3.
Increases in Demand
A movement in the demand curve to the right is called an increase in demand.
• Consumers are willing and able to buy more of the produce at each possible price than before.
At price 0P1, consumers originally demanded 0Q1 goods. However, following an increase in
demand, consumers now demand more of the product (0Q2) at the same price.
• Consumers are willing and able to buy a given quantity at a higher price than before.
Consumers were originally willing to pay 0P1 to obtain a quantity of 0Q1 of the product.
However, following the increase in demand, consumers are now prepared to purchase the
same quantity (0Q1) of the product at a higher price (0Q2).
Demand and Supply / 1
D2
Price $
D1
P2
P1
D2
D1
Q1
0
Quantity demanded
Q2
Decreases in Demand
D1
Price $
D2
P2
P1
D1
D2
0
•
•
•
Q2
Q1
Quantity demanded
A movement in the demand curve to the left is called a decrease in demand.
Consumers are willing and able to buy less of the product at each possible price than before.
At price 0P1, consumers originally demanded 0Q1. However, following a decrease in demand
(which shifts the demand curve to the left, from D1D1 to D2D2) consumers now demand less
of the product (0Q2) at the same price.
Consumers are willing and able to buy a given quantity at a lower price than before.
Originally, consumers were prepared to pay 0P2 to obtain a quantity 0Q2 of the product.
Following the increase in demand, consumers are only prepared to pay a lower price (0P1) to
purchase the same quantity (0Q2) of the same product.
Demand and Supply / 2
Factors influencing supply
•
•
•
•
•
•
The price of the good or service
The price of other goods or services
The state of technology
Changes in the cost of factors of production
The quantity of the good available
Climatic and seasonal influences
The law of supply states that as the price of a certain product rises, producers will supply
more of that product.
Movements along the supply curve
Price $
P3
Expansion
P1
P2
Contraction
0
•
•
•
Q2
Q1
Q3
Quantity supplied
A movement in the supply curve to the right is called an increase in supply
Firms are willing and able to supply more of a product at each price level than before. At
price 0P1, firms originally supplied 0Q1 goods. Following and increase in supply, firms can
now supply more of the good (OQ2) at the same price.
Firms are willing and able to supply a give quantity at a lower price than before. Originally,
firms were only willing to supply quantity 0Q1 at the price 0P1. Following the increase in
supply, firms are now prepared to supply the same quantity 0Q1 at the lower price 0P2.
Increases in supply
•
•
•
A movement in the supply curve to the right is called an increase in supply.
Firms are willing and able to supply more of a product at each price level than before. At
price 0P1, firms originally supplied 0Q1 goods. However, following an increase in supply,
firms can now supply more of the good (0Q2) at the same price.
Firms are willing to supply a given quantity at a lower price than before. Originally, firms
were only willing to supply quantity 0Q1 at the price 0P1. Following the increase in supply,
firms are now prepared to supply the same quantity 0Q1 at the lower price 0P2.
Demand and Supply / 3
Price $
S1
S2
P1
P2
S1
0
S2
Q1
Q2
Quantity supplied
Decreases in supply
•
•
•
A movement in the supply curve to the left is called a decrease in supply.
Firms are willing and able to supply less of a good at each price level than before. At price
0P1, firms originally supplied quantity 0Q1 of the product. Following the decrease in supply,
firms now supply less of the product (0Q2) at the same price.
Firms are willing to supply a given quantity at a lower price than before. Originally, firms
were only willing to supply quantity 0Q1 at the price 0P1. Following the increase in supply,
firms are now prepared to supply the same quantity at the lower price 0P2.
Price $
S2
S1
P1
P2
S2
0
Demand and Supply / 4
S1
Q2
Q1
Quantity supplied