Demand and Supply Curves Learning Objectives; Define Demand & Effective Demand. Explain the importance of individual and market demand and supply. Explain the factors that affect demand Explain the factors that affect supply Analyze the causes of a shift in the demand curve Analyze the causes of a shift in the supply curve Distinguish between the shift in the demand or supply curve and the movement along these curves Key Terms Price Mechanism; Refers to the means of allocating resources in a market economy. Consumers; refers to individuals or households who buy goods and services for their own use or for others. Market; Is where buyers and sellers get together to trade. Labor Market; Is where individuals services are bought and sold. Demand Demand; refers to the quantity of a product that consumers are willing and able to buy at a different price per period of time ceteris paribus. Quantity: numerical amount of the product Product: goods or services Factors that Affect Demand Price of the Product; as the price of a product decreases, the quantity demanded increases, and vice versa. Income of consumers; an increase in consumer income leads to an increase in demand for normal goods and for inferior goods there is an increase in demand when income decreases. Consumer Preferences and Tastes; Products that become more fashionable or desirable may experience an increase in demand, while those falling out of favor may see a decrease in demand Factors that Affect Demand Prices of Related Goods; If the price of a substitute good (a product that can replace another) rises, it often leads to an increase in demand for the original product. If the price of a complementary good (a product often used together with another) rises, it can lead to a decrease in demand for both products Expectations of Future Prices: If consumers expect that the price of a product will increase in the future, they may buy more of it now, increasing current demand and vice versa Normal Goods and Inferior Goods Normal Goods; Is where the quantity demanded increases as income increases. Examples; cars, housing, restaurant meals, quality clothing. Inferior Goods; Is where the quantity demanded increases as income decreases. Example; used or second clothes, low-grade rice and vegetables. Terms Substitute; an alternative good. Complement; a good consumed with another Subsidy; direct payments made by governments to producers of goods and services The Demand Curve Demand Curve; Is a line plotted on a graph that represents the relationship between the quantity demanded and the price of a product. Price $ 500 480 360 240 D 50 100 150 200 Quantity Demanded Price ($) Quantity Demanded 500 50 480 100 360 150 240 200 Key Terms Market Demand; Refers to the total amount demanded by consumers Demand Schedule; Refers to the data from which a demand curve is drawn on a graph Classwork Use the information provided in the table below to draw a demand curve for PCs. State the relationship between the price and the quantity demanded. Price of PC ($) Quantity Demanded 1600 3000 1400 4000 1200 5000 1000 6000 800 7000 Notional Demand & Effective Demand Notional Demand; Is where buyers may want to buy a product but which is not always backed up by the ability to pay. Notional demand is the willingness to buy a product. Effective Demand; Refers to a demand that is backed by the ability to pay. Effective demand is been able to buy or pay for a product. Relationship Between Price and Quantity Demanded There is an inverse relationship between price and quantity demand. This means that; When price goes up, there is a decrease in quantity demanded. When price goes down, there is an increase in quantity demanded. Supply Supply; Refers to the quantity of a product that producers are willing and able to sell at different prices over a time period ceteris paribus. Factors Affecting Supply Costs; the cost of producing and distributing products to consumers determines the quantity of goods supplied. More is supplied when cost is kept at minimal level and vice versa. The size and nature of the industry; a growth in an industry leads to more products been supplied and a decline reduces the quantity of products supplied. Consumer demand; As more customers demand a good, companies will focus on increasing the supply of that good and a vice versa. Change in price of other products; If a competitor lowest its price, less products will be supplied by other firms who keep price unchanged and a vice versa. Government policy; a new tax on a product may reduce the quantity supplied and subsidies will usually result in an increase in supply. Natural factors; weather conditions affects the quantity supplied of mainly agricultural products. Supply Curve Supply Curve; Is a line plotted on a graph that represents the relationship between the quantity supplied and the price of the product. Key Terms Supply Schedule; Is a data from which a supply curve is drawn on a graph. Supply Chain; Refers to all the stages of a product’s progress from raw materials, production and distribution until it reaches the consumer. Relationship Between Price and Quantity Supplied There is a positive or direct relationship between price and quantity supplied. This means that; When price goes up, there is an increase in quantity supplied When price goes down, there is a decrease in quantity supplied. Causes of a Shift in the Demand Curve When non-price factors affect demand change, the outcome is a shift (move) to the right or left of the demand curve. A shift to the right indicates that demand increases. A shift to the left means demand decreases. Causes of a Right Shift of the Demand Curve An increase in income An increase in the price of substitute A decrease in the price of complements Favorable change in fashion and taste. Causes of a Left Shift of the Demand Curve Decrease in income Decrease in the price if substitute An increase in the price of complements An unfavorable change in fashion and taste. Causes of a Shift in the Supply Curve The supply curve is drawn on the assumption that other than price, all other factors that might affect supply are unchanged. When these non-price factors change, there will be a shift to the right or to the left of the supply curve. Causes of a Shift to the Right in the Supply Curve Decrease in the costs of production Growth in the size of the industry Decrease in tax Note; a shift to the right means supply increases. Causes of a Shift to the Left in the Supply Curve An increase in the cost of production Decline in the size of the industry An increase in price of competitor’s goods Increase in tax Note: a shift to the left means supply decreases. How to Distinguish Between a Shift in Demand or Supply Curve and Movement Along the Curves A movement along the demand or supply curve shows the quantity demanded or the quantity supplied responds to a change in the price of the product A shift of a demand or supply curve is in response to a change in any of the non-price determinants of demand and supply. Such shift are to the right or left depending on the cause. Key Terms Indirect Tax: It is a tax levied on goods and services. Extension of Demand or Supply: Refers to an increase in the quantity demanded or quantity supplied. Contraction of demand or supply: Refers to a decrease in the quantity demanded or quantity supplied.
