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Basic Market Demand and Supply

Tutor2u Economics
AS Economics
March 2001

Market Demand and Supply


Demand: Buyers in the market

Demand:
 The quantity of a product consumers are willing and able to
buy at different prices in a specified time period

Factors that affect demand


 Tastes and preferences
 Income available to the consumer
 Prices of other goods and services
Substitute goods
Complementary goods
 Interest rates
 Consumer population

Market Demand and Supply


Increasing Demand

More is demanded at each price


 Increase in consumer
population P
 Increase in income
 Tastes shift toward the good
in question
 Price of substitute
(complement) rises (falls)
 Change in interest rates D2
D1

Q1 Q2 Q

Market Demand and Supply


The Demand for Beef

Fall in consumer incomes


Increase in the price of chicken
A government tax on hamburger producers
A successful advertising campaign
Rise in the price of Yorkshire Puddings
A fall in the price of lamb

Market Demand and Supply


Facts About Demand

Demand is a price-quantity relationship


Quantity demanded is the quantity that consumers are willing
and able to buy at a specified price
A change in the price of the good itself does not shift demand -
it causes a movement ALONG a demand curve…..
Demand curves normally slope downward – why?
The demand curve for a product can shift (outwards or inwards)
when the conditions of demand change

Market Demand and Supply


Market Supply

Market Supply –
 The quantity that producers are willing and able to OFFER for
sale at different prices during a specified period of time

Factors that affect market supply


 Technology
 The cost of factor resources used in production
Wage costs
Raw material prices
 The prices of “related goods”
 The number of producers / suppliers in the market
 Government taxes and subsidies

Market Demand and Supply


Increasing Supply

Decreases in production costs (raw price s1 s2


material costs and wage costs)
Increases in the number of
producer/sellers.
Increase in the price of a by-product
Technology advances
Government subsidy of producers -
reduces their costs

quantity

More is supplied at each price

Market Demand and Supply


Facts About Supply

It’s a price quantity relationship


The “quantity supplied” is the amount sellers are willing and
able to offer for sale at a single price--it’s a single number.
The change in the price of the good itself does not shift supply--
it causes a movement ALONG the supply curve.
Supply curves normally slope upward. Why?
 Rising prices act as an incentive for producers to expand output –
potential for higher profits
 Increased output may lead to higher costs of production

Market Demand and Supply


Market Equilibrium

S
P
Equilibrium established
when market demand =
P2 market supply
P1 At P2 there is excess supply
(S>D)
P3
At P3 there is excess
demand (D>S)

Q1 Q

Market Demand and Supply


Shifts in Demand and Price

A change in market demand will


lead to a change in market price S2

If demand shifts outwards from


D1 to D2 – we see a rise in both P2
price and quantity P1

Total spending by consumers will D2


rise
D1

Q1 Q2 Q

Market Demand and Supply


Changes in Supply and Price

S1
P S2
In the example shown we see
an outward shift in the supply
curve
P1 Market price falls from P1 to
P2
P2
Equilibrium quantity rises from
Q1 to Q2
Does the consumer benefit?
D

Q1 Q2 Q

Market Demand and Supply


The Market for Oranges

In the market for oranges, what is the effect on price


and quantity traded of the following?:
 A severe freeze adversely affects the orange crop
 New information about the health benefits of juice
 Crack down in illegal workers employed in the orange
harvests
 Increases in the income of consumers
 Rising demand / property prices in Spain
 Development of a cost-saving harvesting technology

Market Demand and Supply


A Fall in Market Supply

Freeze causes a fall in


S2 market supply at each
P S1 price level
Result is an increase in
equilibrium price and a
fall in quantity traded
P2
Consumers get squeezed?
P1
What happens to the total
revenue for producers?

Q2 Q1 Q

Market Demand and Supply


A Rise in Market Demand

P Change in consumer
S1
tastes and preferences
causes an outward shift
in demand
P2 Increase in demand puts
the pressure on available
P1 supply
Increase in equilibrium
market price and quantity
D D2 Total spending increases
Producers enjoy higher
Q1 Q2 Q total revenue / profits

Market Demand and Supply