EMA1310 – Foundations and Applications of Economics
Demand
Demand is the quantity of goods and services people will buy at a given price and time/
The Law of Demand
 There is a negative relationship between quantity and price, assuming all other factors
remain constant i.e. when one increases, the other decreases.
The Demand Curve
 Movement along the demand curve represents a change in quantity demanded due to a
change in price.
 Shifts in the demand curve occur when factors other than price change.
Determinants
 Determinants of demand include income, taxes, prices of substitutes and complements,
advertising, taste and fashion, expectations, credit availability, population size, and
weather.
 Changes in these determinants cause shifts in the demand curve.
Exceptional Demand Curve
 Veblen goods (luxury goods) and Giffen goods (goods lacking substitutes) have
exceptional demand curves.
Supply
 Supply is defined as the willingness and ability of producers to produce goods and
services at a given price and time.
 There is a positive relationship between quantity supplied and price, assuming all other
factors are constant.
The Supply Curve
 A movement along the supply curve happens when there is a change in price.
 Shifts in the supply curve occur when factors other than price change.
Determinants
 Determinants of supply include production costs, technology, government policies,
organisational changes, prices of related products, prices of joint products, nature,
producer aims, expectations, and industry size.
 Changes in these determinants cause shifts in the supply curve.
The Price and Output Determination
 The market is where buyers and sellers trade goods and services.
 The price mechanism determines the market-clearing price and output.
 Price and output are determined by the intersection of the supply and demand curves.
 If the market price is above the equilibrium price, there is excess supply (surplus), which
is eliminated by reducing the price.
 If the market price is below the equilibrium price, there is excess demand (shortage),
which is eliminated by increasing the price.
Consumer and Producer Surplus
Consumer Surplus
 Consumer surplus measures the welfare consumers gain from consuming goods and
services.
 It is the difference between what consumers are willing to pay and what they actually
pay, represented by the area under the demand curve and above the price.
Producer Surplus
 Producer surplus is the difference between the actual price producers receive and the
minimum acceptable price.
 The difference between what the supplier is willing to perceive and the actual price.
Elasticity
 The responsiveness of one variable to a change in another variable e.g. the
responsiveness of demand to a change in price.