Demand and Supply
Demand and Supply
Mr Cooney
Price rises when quantity supplied Price rises when quantity supplied
is scarce and
is scarce and demand increasesdemand increases
Price decreases when quantity Price decreases when quantity supplied
supplied increases increases and as and as a resula resultt demand increases
Demand
Demand
The amount consumers desire to purchase
The amount consumers desire to purchase
at various prices at any given time
at various prices at any given time
Demand does not necessarily mean a
Demand does not necessarily mean a
consumer WILL buy, but refers to a good or
consumer WILL buy, but refers to a good or
service they WOULD LIKE
Effective Demand
Effective Demand
••
Consumers must be willing to
Consumers must be willing to
buy
buy
AND be
AND be
capable of
capable of
paying
paying
the price set by the
the price set by the
supplier
Law of Demand
Law of Demand
If Price rises
If Price rises
–
–
Quantity demanded
Quantity demanded
falls
falls
P
QD
P
QD
If Price falls
If Price falls
–
–
Quantity demanded
Quantity demanded
rises
rises
P
QD
Individual Demand
Individual Demand
Individual Demand Schedule
Individual Demand Schedule
••
Lists the different quantities of a good
Lists the different quantities of a good that an
that an
individual consumer is prepared to buy at each
individual consumer is prepared to buy at each
price
Demand Schedule
Demand Schedule
(Demand for coffee monthly) (Demand for coffee monthly) (1) (1) (2) (2) (3) (3) (4)(4) Price Price (cent per g) (cent per g) Chris’s Chris’s demand demand (g) (g) David’s David’s demand demand (g) (g) Total market Total market demand demand (kg’s: 000s) (kg’s: 000s) A A 20 20 28 28 16 16 700700 B B 40 40 15 15 11 11 500500 C C 60 60 5 5 9 9 350350 D D 80 80 1 1 7 7 200200 E E 100 100 0 0 6 6 100100
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 A A Demand Demand Point
Point Price Price per per g g Market Market DemandDemand
A
A 20 20 cent cent 700 700 kilogrammeskilogrammes
P P r r i i c c e e ( ( c c e e n n t t p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point
Point Price Price per per g g Market Market DemandDemand A
A 20 20 cent cent 700 700 kilogrammeskilogrammes B
B 40 40 cent cent 500 500 kilogrammeskilogrammes
A A B B P P r r i i c c e e ( ( c c e e n n t t p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point
Point Price Price per per g g Market Market DemandDemand A
A 20 20 cent cent 700 700 kilogrammeskilogrammes B
B 40 40 cent cent 500 500 kilogrammeskilogrammes C
C 60 60 cent cent 350 350 kilogrammeskilogrammes
A A B B C C P P r r i i c c e e ( ( c c e e n n t t p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point
Point Price Price per per g g Market Market DemandDemand A
A 20 20 cent cent 700 700 kilogrammeskilogrammes B
B 40 40 cent cent 500 500 kilogrammeskilogrammes C
C 60 60 cent cent 350 350 kilogrammeskilogrammes D
D 80 80 cent cent 200 200 kilogrammeskilogrammes
A A B B C C D D P P r r i i c c e e ( ( c c e e n n t t p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Point
Point Price Price per per g g Market Market DemandDemand A
A 20 20 cent cent 700 700 kilogrammeskilogrammes B
B 40 40 cent cent 500 500 kilogrammeskilogrammes C
C 60 60 cent cent 350 350 kilogrammeskilogrammes D
D 80 80 cent cent 200 200 kilogrammeskilogrammes E
E 100 100 cent cent 100 100 kilogrammeskilogrammes
A A B B C C D D P P r r i i c c e e ( ( c c e e n n t t p p e e r r g g ) ) E E
Demand Curve
Demand Curve
•• At higher prices, consumers are generally willing to purchase lessAt higher prices, consumers are generally willing to purchase less than at lower prices
than at lower prices
•• Demand curve is said to have a negative slope - downward slopingDemand curve is said to have a negative slope - downward sloping from left to right
from left to right
•• There are at least three accepted explanations of why demand There are at least three accepted explanations of why demand curves slope
curves slope downwdownwards:ards: - The law of
- The law of diminishing marginal utilitydiminishing marginal utility
- The
- The income effectincome effect
- The
- The substitution effectsubstitution effect
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000
P
P
Q
Q
D
D
Utility = Satisfaction/Benefit
Utility = Satisfaction/Benefit
Marginal = Always means Extra
Marginal = Always means Extra
••
Diminishing Marginal Utility
Diminishing Mar
ginal Utility means tha
means that the
t the extr
extra
a
satisf
satisfaction is falling as you
action is falling as you consume an additional
consume an additional
product.
product.
••
E.g. If you eat 1 bar of chocolate you get quite a lot of
E.g. If you eat 1
bar of chocolate you get quite a lot of
benefit = YUM YUM
benefit = YUM YUM
••
If you continue eating and you begin
If you continue eating and you begin your 5
your 5
ththBar, Do
Bar, Do
you get the same
you get the same benefit?? = BARF
benefit?? = BARF
•
•
Theref
Theref
ore the Law
ore the Law
of Diminishing Marginal Utility
of Diminishing Marginal Utility
states that as more of a product is consumed the
states that as more of a product is consumed the
marginal (extr
marginal (extr
a) benefit to the
a) benefit to the
consumer falls, hence
consumer falls, hence
consumers are prepared to pay less.
The income effect
The income effect
••
The
The
income
income
and
and
substitution
substitution
effect can also be used to
effect can also be used to
explain why the demand
explain why the demand curve slopes downwards.
curve slopes downwards.
••
If we assume that money income is fixed, the income
If we assume that money income is fixed, the income
eff
effect suggests that, as the
ect suggests that, as the price of a
price of a good falls,
good falls,
real
real
income
-income -
that is, what consumers can buy with
that is, what consumers can buy with
their
their
money income
money income
(Their Spending Power)-
(Their Spending Power)-
rises and
rises and
consumers increase their demand.
consumers increase their demand.
••
Therefore, at a lower price, consumers can buy more
Therefore, at a lower price, consumers can buy more
from the same money income, and,
from the same money income, and,
ceteris paribus
ceteris paribus
(with other things the same)
(with other things the same)
demand will rise.
demand will rise.
Conversely, a rise in price will reduce real income and
Conversely, a rise in price will reduce real income and
for
The substitution effect
The substitution effect
••
In addition, as the price of one good falls, it
In addition, as the price of one good falls, it
becomes
becomes
relatively less expensive
relatively less expensive
. Th
. Theref
erefore,
ore,
assuming other alternative products stay at the
assuming other alternative products stay at the
same price, at lower prices the good appears
same price, at lower prices the good appears
cheaper, and consumers will switch from the
cheaper, and consumers will switch from the
expensive alternative to the relatively cheaper
expensive alternative to the relatively cheaper
one.
one.
••
It is important to remember that whenever the
It is important to remember that whenever the
price of any resource changes it will trigger both
price of any resource changes it will trigger both
an income and a substitution effect.
(i) Define the economic terms: individual (consumer)
(i) Define the economic terms: individual (consumer)
demand; market demand.
demand; market demand.
•
•
Individual demand:
Individual demand:
the quantity of a good an
the quantity of a good an
individual
individual consumer demands
consumer demands at diff
at different
erent
prices.
prices.
•
•
Market demand:
Market demand:
total quantity of a good th
total quantity of a good that
at
all consumers demand
(ii) Explain, with the aid of labelled
(ii) Explain, with the aid of labelled diagrams, the relationshipdiagrams, the relationship between individual (consumer) demand and market demand. between individual (consumer) demand and market demand.
••
T
T
•• To deriTo derive theve the market demandmarket demand add the quantity demanded by eachadd the quantity demanded by each individual consumer at each price
individual consumer at each price to calculate the overall quantityto calculate the overall quantity demanded by the market at each price.
demanded by the market at each price.
(ii) Explain, with the aid of labelled
(ii) Explain, with the aid of labelled diagrams, the relationshipdiagrams, the relationship between individual (consumer) demand and market demand. between individual (consumer) demand and market demand.
D
D 2 2 P
P r r i i c c e e
P P Q Q11 QQ2 2 Quantity Quantity
An Increase in Demand
An Increase in Demand
D D 1 1D
D 1 1 P
P r r i i c c e e
P P Q Q2 2 QQ11 Quantity Quantity
A Decrease in Demand
A Decrease in Demand
D D 2 2Trudie Murray ©
Trudie Murray ©
Factors affecting the demand for a
Factors affecting the demand for a
good
good
The Demand Function
The Demand Function
Dx = f ( Px, Pog, Y, T, E, G, U)
Dx = f ( Px, Pog, Y, T, E, G, U)
The Demand Function
The Demand Function
Dx = f ( Px, Pog, Y, T, E, G, U)
Dx = f ( Px, Pog, Y, T, E, G, U)
••
Px = Goods which obey and do not obey the Law of
Px
= Goods which obey and do not obey the Law of
Demand
Demand
••
Pog = Price of Complimentary Goods and Cost of
Pog
= Price of Complimentary Goods and Cost of
Substitute Goods
Substitute Goods
••
Y
Y = Income of consumer
= Income of consumer
••
T
T = Consumer tastes and preferences
= Consumer tastes and preferences
••
E
E = Consumers expectations regarding future prices
= Consumers expectations regarding future prices
••
G
G = Government regulations
= Government regulations
These all affect DEMAND
These all affect DEMAND
Demand for a good depends on its
Demand for a good depends on its own priceown price
NOTE: Price only causes a movement along the demand curve
NOTE: Price only causes a movement along the demand curve
not a SHIFT
not a SHIFT
If price rises quantity demanded
If price rises quantity demanded fallsfalls If price falls quantity demanded rises If price falls quantity demanded rises
P P 22 P P 11 Q Q 2 2 Q Q 11 Quantity Demanded Quantity Demanded
Demand for a good depends on the price of other
Demand for a good depends on the price of other goods
goods
•
•
Complimentary
Complimenta
ry Goods
Goods
Goods which are used
Goods which are used jointlyjointly. The . The use of one use of one involvinvolves the es the useuse of the other - E.g. bread and butter, cars and petrol
of the other - E.g. bread and butter, cars and petrol
•
•
Substitute Goods
Substitute Goods
Goods which satisfy the same needs
Goods which satisfy the same needs and thus can beand thus can be considered as alternatives to each other
considered as alternatives to each other – – E.g. Coke and Pepsi E.g. Coke and Pepsi or Tea and Coffee
Compliment
Complimentary
ary Goods
Goods
D 1 D 1 D 2 D 2 D 2 D 2 D 1 D 1 An increase in price of a An increase in price of a
complementary good causes the complementary good causes the demand for good X to fall
demand for good X to fall
An fall in price of a complementary An fall in price of a complementary good causes the demand for good X to good causes the demand for good X to rise
Substitute Goods
Substitute Goods
(The Substitute Effect)
(The Substitute Effect)
D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2 An increase in price of a
An increase in price of a substitutesubstitute good causes the demand for good X good causes the demand for good X toto rise
rise
An fall in price of a substitute good An fall in price of a substitute good causes the demand for good X to fall causes the demand for good X to fall
Demand for a good depends on level of income (The
Demand for a good depends on level of income (The
Income Effect)
Income Effect)
•
•
Normal Goods
Normal Goods
A normal good is a
A normal good is a good with a positive income effgood with a positive income effect. A riseect. A rise in income causes more of it to be
in income causes more of it to be demanded, while a fall indemanded, while a fall in income causes less of it to be demande
income causes less of it to be demandedd
•
•
Inferior Goods
Inferior Goods
An inferior good is a
An inferior good is a good with a negative income effect. Agood with a negative income effect. A rise in income causes less of it
rise in income causes less of it to be demanded, while a fall into be demanded, while a fall in income causes more of it to be demanded
Normal Goods
Normal Goods
D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2A rise in income causes the demand for A rise in income causes the demand for a normal good to
a normal good to increase from D1 toincrease from D1 to D2
D2
An fall in income causes the
An fall in income causes the demanddemand for a normal good to fall from D1 to D2 for a normal good to fall from D1 to D2 P P Q Q P P Q Q
Inferior Goods
Inferior Goods
D 1 D 1 D 2 D 2 D 2 D 2 D 1 D 1 An increase in income causes theAn increase in income causes the demand for an inferior good to fall demand for an inferior good to fall from D1 to D2
from D1 to D2
A decrease in income causes the A decrease in income causes the demand for an inferior good to rise demand for an inferior good to rise from D1 to D2 from D1 to D2 P P Q Q P P Q Q
4. TASTE:
4. TASTE:
Demand depends on Consumer Tastes
Demand depends on Consumer Tastes
••
If the movement in taste or preferences is in favour
If the movement in taste or preferences is in favour
of the good it causes an increase in demand which
of the good it causes an increase in demand which
shifts the demand curve to the right
shifts the demand curve to the right
••
If the movement in taste or preferences is against the
If the movement in taste or preferences is against the
good it causes a fall in demand which shifts the
good it causes a fall in demand which shifts the
demand curve to the left
demand curve to the left
Movem
Movement i
ent in
n T
Taste
aste
D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2 A movem
A movement in taste in ent in taste in favour of a goodfavour of a good causes demand to increase
causes demand to increase
A movement in taste against a good A movement in taste against a good causes demand to fall
causes demand to fall P P Q Q P P Q Q
5. Demand for a good
5. Demand for a good depends on the
depends on the expecta
expectations of
tions of
consumers
consumers
••
Demand for a good will shift to the right if
Demand for a good will shift to the right if
consumers expect:
consumers expect:
1.
1. The The priprice oce of gof good od X tX to be o be highigher her in tin the fhe futuuture re e.g. e.g. prpropeopertyrty 2.
2. A sA scacarcrcitity oy of gf good ood X iX in tn the he futfuturure ee e.g. .g. oioill 3.
3. TheTheir iir incncomomes tes to be ho be higigheher in tr in the fhe fututurure e.e e.g. pg. prromomototioionn
••
Demand for a good will shift
Demand for a good will shift to the left if
to the left if
consumers expect:
consumers expect:
1.
1. The The prpricice oe of gf gooood X d X to to be be lolowewer ir in tn the he fufututurere 2.
2. A plA plenentitifuful sul supppply ly of gof gooood X id X in thn the fue fututurree 3.
Consumer
Consumer Expectations
Expectations
D 2 D 2 D 1 D 1 D 1 D 1 D 2 D 2
Demand for Good X will rise if Demand for Good X will rise if
consumers expect higher future prices, consumers expect higher future prices, scarcity or higher future incomes
scarcity or higher future incomes
Demand for Good X will fall if Demand for Good X will fall if
consumers expect lower future prices, consumers expect lower future prices, abundance or lower future incomes abundance or lower future incomes
6. Demand for a
6. Demand for a
good depends on government
good depends on government
regulations
regulations
••
If the government implement a programme which
If the government implement a programme which
reduces/increases consumption of a particular
reduces/increases consumption of a particular
product than demand for this good will be
product than demand for this good will be aff
affected
ected
E.g.
E.g. The smoking
The smoking ban /
ban / educational
educational campaign
campaign to
to
reduce alcohol consumption (Cause demand
reduce alcohol consumption (Cause demand to
to
shift left)
shift left)
The cycle to work scheme cause demand for
The cycle to work scheme cause demand for
bicycles to shift right
Government Regulations
Government Regulations
D 2 D 2 D 1 D 1If the government implement a If the government implement a policy to restrict consumption policy to restrict consumption demand for Good X will fall demand for Good X will fall Example:
Example:
The Smoking Ban The Smoking Ban
Government Regulations
Government Regulations
D 1 D 1 D 2 D 2 Example: Example:The Cycle to Work The Cycle to Work
Scheme Scheme
7. Demand for a good depends on
7. Demand for a good depends on unplanned
unplanned
factors
factors
••
If there is a sudden heat wave
If there is a
sudden heat wave
–
–
an unplanned factor
an unplanned factor
–
–
this may result in an increase in demand for
this may result in an increase in demand for
sunscreen and a decrease in the demand of home
sunscreen and a decrease in the demand of home
heating oil
heating oil
••
If flash floods occur across the country
If flash floods occur across the country
–
–
an
an
unplanned factor
unplanned factor
–
–
this may result in an increase in
this may result in an increase in
the demand
Unplanned Factors
Unplanned Factors
D 1 D 1 D 2 D 2Factors such as weather Factors such as weather
can effect the demand can effect the demand for goods
for goods – – e.g. a sudden e.g. a sudden heat wave would
heat wave would
increase the demand for increase the demand for
sunscreen sunscreen
(EQ) Two factors that would cause a shift in a
(EQ) Two factors that would cause a shift in a
demand curve for concert
EQ: Distinguish between the economic meanings of a
EQ: Distinguish between the economic meanings of a ‘movement along a‘movement along a demand curve’
demand curve’ and aand a ‘shift in a demand curve’‘shift in a demand curve’ for concert tickets. Illustratefor concert tickets. Illustrate
your answer using diagrams
Exceptions to the Law of Demand
Exceptions to the Law of Demand
P
P
D
D
••
Giffen Goods
Giffen Goods
••
Goods of ostent
Goods of
ostentatious consumption
atious consumption
(snob goods)
(snob goods)
••
Goods affected by consumers’ expectations
Goods affected by consumers’ expectations
Giffen Goods
Giffen Goods
•
• Giffen goods are those which are consumed in greater quantitiesGiffen goods are those which are consumed in greater quantities
when their price rises.
when their price rises. These goods are named after the ScottishThese goods are named after the Scottish economist
economist Sir Robert GiffenSir Robert Giffen, who is credited with identifying them, who is credited with identifying them by
by Alfred MarshallAlfred Marshall in his highly influential in his highly influential Principles ofPrinciples of Economics
Economics (1895). (1895).
•• In essence, a Giffen good is aIn essence, a Giffen good is a staplestaple food, such as bread or rice, food, such as bread or rice,
which forms are large percentage of the diet of the poorest sections which forms are large percentage of the diet of the poorest sections of a society, and for which there are no close substitutes.
of a society, and for which there are no close substitutes.
•• From time to time the poor may supplement their diet with higherFrom time to time the poor may supplement their diet with higher quality foods, and they may even consume the odd luxury (E.g.
quality foods, and they may even consume the odd luxury (E.g.
Meat), although their income will be such that they will not be able Meat), although their income will be such that they will not be able to save. A rise in the price of such a staple food will not result in a to save. A rise in the price of such a staple food will not result in a typical substitution effect, given there are no close substitutes. typical substitution effect, given there are no close substitutes.
•• If the real incomes of the poor increase they would tend to If the real incomes of the poor increase they would tend to reallocate some of this income to luxuries, and if real incomes reallocate some of this income to luxuries, and if real incomes de
decrease they wcrease they would buy more of the staple good, meaning it isould buy more of the staple good, meaning it is an
Goods of ostentatious consumption
Goods of ostentatious consumption
(Snob/Veblen Goods)
(Snob/Veblen Goods)
•• Snob goods are a second possible exception to the geneSnob goods are a second possible exception to the gene ral law of demanral law of demand.d. These goods are named after the American sociologist,
These goods are named after the American sociologist, Thorsten VeblenThorsten Veblen, who,, who, in the early 20th
in the early 20th centurycentury, identified a 'new' , identified a 'new' high-spending leisure class.high-spending leisure class.
•• According to Veblen,According to Veblen, a rise in the price of hia rise in the price of high status luxury ggh status luxury goods might leadoods might lead
members of this leisure class to increase in their consumption, rather than
members of this leisure class to increase in their consumption, rather than
reduce it.
reduce it. The purchasThe purchase of such higher e of such higher priced goods wpriced goods wouldould conferconfer
status
status(make these people seem (make these people seem Cool/WealthCool/Wealthy/Rich) on y/Rich) on the purchaserthe purchaser - a- a process which Veblen called
process which Veblen called conspicuous consumptionconspicuous consumption..
••
Some commodities by their Some commodities by their exexclusiveness or expensivenessclusiveness or expensiveness are attractivare attractive to some buyers. A rise e to some buyers. A rise in price makes themin price makes them
more exclusive, and therefore, more attractive to those with more exclusive, and therefore, more attractive to those with
the incomes to purchase them. A fall in
the incomes to purchase them. A fall in price may lead to aprice may lead to a fall in quantity demanded as they may no longer a
fall in quantity demanded as they may no longer appear asppear as ex
exclusive to the rich clusive to the rich and are still outside and are still outside the price range ofthe price range of the poor.
Goods the purchase of which is influenced by
Goods the purchase of which is influenced by
expect
expect
ations as
ations as
to future prices
to future prices
/ Speculative goods
/ Speculative goods
••
If prospective buyers think that prices
If prospective buyers think that prices are
are
lik
likely to be even higher in
ely to be even higher in the future, the
the future, the
current level of demand may not
current level of demand may not fall even if
fall even if
prices increase
prices increase
•
•
E.g. if a person is considering buying a house
E.g. if a person is considering buying a house
the possibility that prices are likely to be
the possibility that prices are likely to be
even higher in the future will probably
even higher in the future will probably
stimulat
Goods of Addiction
Goods of Addiction
••
In the case of those goods to which a person
In the case of those goods to which a person
becomes addicted
becomes addicted
e.g. drugs
e.g. drugs
, they no longer
, they no longer
act
act rationally
rationally..
••
They become so addicted to the drug that in
They become so addicted to the drug that in
order to get the same 'buzz'
order to get the same 'buzz' from
from
consumption of the drug, demand for the
consumption of the drug, demand for the
commodity may increase, even when the price
commodity may increase, even when the price
of the commodity increases.
Supply
Supply
••
The quantity of a good that firms are willing to
The quantity of a good that firms are willing to
mak
make available over a particular pe
e available over a particular period of time
riod of time
••
The supplier determines the level of output it
The supplier determines the level of output it
is willing
is willing to supply at the prevailing marke
to supply at the prevailing markett
price
Individual Supply
Individual Supply
•
•
Individual supply
Individual supply
:
:
the quantity of a good an
the quantity of a good an
individual
individual firm is willing
firm is willing to supply at differ
to supply at different
ent
prices.
Market Supply
Market Supply
••
Market supply
Market supply
: the total quantity of a good
: the total quantity of a good
that all firms
that all firms are willing to supply at d
are willing to supply at diff
ifferent
erent
prices.
(EQ) Explain, with
(EQ) Explain, with the aid of labelled diagrams, the relationshipthe aid of labelled diagrams, the relationship
between individual (firm) supply and market supply.
(EQ) Explain, with
(EQ) Explain, with the aid of labelled diagrams, the relationshipthe aid of labelled diagrams, the relationship
between individual (firm) supply and market supply.
Supply Schedule
Supply Schedule
((supply of coffee monthlysupply of coffee monthly))
Price of Price of Coffee Coffee (cent per g) (cent per g) Bean Bean Grower X's Grower X's supply supply (kg’s)(kg’s) Total Market Total Market supply supply (kg’s: 000s) (kg’s: 000s) A A 20 20 50 50 100100 B B 40 40 70 70 200200 C C 60 60 100 100 350350 D D 80 80 120 120 530530 E E 100 100 130 130 700700
Supply Curve
Supply Curve
••
At higher prices, suppliers are willing to
At higher prices, suppliers are willing to
produce more of a good or service and
produce more of a good or service and supply
supply
it to the market
it to the market
••
Supply curve is said to have a positive slope
Supply curve is
said to have a positive slope
–
–
upwards from left to right indicating a
upwards from left to right indicating a positive
positive
relationship between supply and price
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 A A Supply Supply P P QQ A A 20 20 100100 P P r r i i c c e e ( ( c c e e n n t t s s p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 A A B B P P r r i i c c e e ( ( c c e e n n t t s s p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 C C 60 60 350350 A A B B C C P P r r i i c c e e ( ( c c e e n n t t s s p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 C C 60 60 350350 D D 80 80 530530 A A B B C C D D P P r r i i c c e e ( ( c c e e n n t t s s p p e e r r g g ) )
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 P P QQ A A 20 20 100100 B B 40 40 200200 C C 60 60 350350 D D 80 80 530530 E E 100 100 700700 A A B B C C D D E E P P r r i i c c e e ( ( c c e e n n t t s s p p e e r r g g ) )
P P Q Q S S xx Increase Increase S S 11
Increase in Supply
Increase in Supply
P P Q Q S S 22 S S XX S S 1 1 Increase Increase Decrease Decrease
Increase/Decrease in Supply
Increase/Decrease in Supply
Factors effecting the supply of a good
Factors effecting the supply of a good
The Supply Function
The Supply Function
The Supply Function
Sy = f ( Py, Pr, C, Tch, Tx, N, U)
Sy = f ( Py, Pr, C, Tch, Tx, N, U)
••
Py
Py = Price of Good Y
= Price of Good Y
••
Pr
Pr = Price of related goods
= Price of related goods
••
C
C = Cost of
= Cost of Production
Production
••
T
Tch
ch = S
= State of T
tate of Technolo
echnology
gy
••
T
Txx
–
–
T
Taxation / Su
axation / Subsidy
bsidy
••
N
N
–
–
number of sellers in the industry
number of sellers in the industry
Supply of a good depends on its own price
Supply of a good depends on its own price
(Causes a movement along supply curve)
(Causes a movement along supply curve)
If price rises quantity supplied rises
If price rises quantity supplied rises
If price falls quantity supplied falls
If price falls quantity supplied falls
P P 22 P P 11 Q Q 1 1 Q Q 22 Quantity Supplied Quantity Supplied
Supply of a good depends on prices of related goods
Supply of a good depends on prices of related goods
S 2 S 2 S 1 S 1 S 1 S 1 S 2 S 2 An increase in price of a
An increase in price of a related goodrelated good will cause a fall in the supply of Good will cause a fall in the supply of Good Y
Y
An fall in price of a related good will An fall in price of a related good will cause an increase in the supply of cause an increase in the supply of Good Y
Supply of a good depends on
Supply of a good depends on the cost of production
the cost of production
••
Causes of an increase in the cost of production:Causes of an increase in the cost of production:•• A rise in labour costsA rise in labour costs
•• A rise in A rise in the cost of raw materialsthe cost of raw materials
•• An increase in taxesAn increase in taxes
•• A reduction in subsidiesA reduction in subsidies
••
Causes of a decrease in Causes of a decrease in the cost of productionthe cost of production::
•• A fall in labour costsA fall in labour costs
•• A fall in the A fall in the cost of raw materialscost of raw materials
•• A reduction in taxesA reduction in taxes
Supply of a good depends on cost of production
Supply of a good depends on cost of production
S 2 S 2 S 1 S 1 S 1 S 1 S 2 S 2
An increase in the cost of production An increase in the cost of production will cause a fall in the supply of Good will cause a fall in the supply of Good Y
Y
An fall in the cost of production will An fall in the cost of production will cause an increase in the supply of cause an increase in the supply of Good Y
Supply of a good depends on the state of technology
Supply of a good depends on the state of technology
S 1 S 1
S 2
S 2
An improvement in the state of An improvement in the state of
technology will cause an increase in technology will cause an increase in the supply of Good Y
the supply of Good Y
We do not generally discuss We do not generally discuss
a ‘fall’ in technology – a ‘fall’ in technology – we we assume any new method of assume any new method of production is an option
production is an option for afor a firm
Supply of a good depends on
Supply of a good depends on the rat
the rates of
es of
taxation / granting of subsidies
taxation / granting of subsidies
••
A reduction in taxes will result in a reduction in
A reduction in taxes will result in a reduction in
the cost of raw materials / production and supply
the cost of raw materials / production and supply
will increase.
will increase.
••
An increase in subsidies
An increase in
subsidies grant
granted to a firm
ed to a firm for ra
for raw
w
materials / labour employed will result in a
materials / labour employed will result in a
reduction in costs and supply will increase
reduction in costs and supply will increase
Supply of a good depends on the rates of
Supply of a good depends on the rates of
taxation / granting of subsidies
taxation / granting of subsidies
S 2 S 2 S 1 S 1 S 1 S 1
An increase in the level of taxa
An increase in the level of taxation /tion / decrease in subsidies will cause a fall in decrease in subsidies will cause a fall in the supply
the supply of Good of Good YY
S 2
S 2
An fall in the level of taxation / An fall in the level of taxation / increase in subsidies will cause an increase in subsidies will cause an increase in the supply of Good Y increase in the supply of Good Y
6. Supply of a
6. Supply of a good depends on the number of
good depends on the number of
sellers in the industry
sellers in the industry
••
If the number of sellers in the industry decrease
If the number of sellers in the industry decrease
(due to
(due to rat
rationalisation) than
ionalisation) than overall quantity
overall quantity
supplied will also decrease
supplied will also decrease
••
If the number of sellers in the industry increase
If the number of sellers in the industry increase
than overall quantity supplied will also i
6. Supply of a
6. Supply of a good depends on the number
good depends on the number
of sellers in the industry
of sellers in the industry
S 2
S 2
S 1 S 1
A decr
A decrease in the ease in the number of sellers innumber of sellers in industry will cause a fall in the supply industry will cause a fall in the supply of Good Y of Good Y S 1 S 1 S 2 S 2
An increase in the number of
An increase in the number of sellers insellers in industry will cause a rise in the supply industry will cause a rise in the supply of Good Y
7. Supply of a good depends on factors outside the control of a 7. Supply of a good depends on factors outside the control of a
firm / unforseen circumstances firm / unforseen circumstances
••
Favourable or unfavourable unplanned
Favourable or unfavourable unplanned
factors:
factors:
••
WeWeather conditions e.g. floods or ather conditions e.g. floods or sunshinesunshine••
StrikesStrikes••
Shortage of raw materialsShortage of raw materials7. Supply of a good depends on factors outside the
7. Supply of a good depends on factors outside the
control of a firm
control of a firm
S 2 S 2 S 1 S 1 S 1 S 1 S 2 S 2Favourable unplanned factors will Favourable unplanned factors will cause an increase in supply and a
cause an increase in supply and a shiftshift to the right
to the right
Unfavourable unplanned factors will Unfavourable unplanned factors will cause a decrease in supply and a
cause a decrease in supply and a shiftshift to the left
Outline FOUR factors, other than price,
Outline FOUR factors, other than price, which affect thewhich affect the
supply curve of an individual
supply curve of an individual firm. In each case explain howfirm. In each case explain how
the factor affects the supply curve.
Outline FOUR factors, other than price,
Outline FOUR factors, other than price, which affect thewhich affect the
supply curve of an individual
supply curve of an individual firm. In each case explain howfirm. In each case explain how
the factor affects the supply curve.
Market Equilibrium
Market Equilibrium
••
If no interference in the market occurs (by
If no interference in the market occurs (by
government or other agency) price will
government or other agency) price will
eventually settle at the level
eventually settle at the level where quantity
where quantity
demanded equals quantity supplied. This
demanded equals quantity supplied. This
position is called
Market Equilibrium
Market Equilibrium
0 0 20 20 40 40 60 60 80 80 100 100 0 0 11000 0 22000 0 33000 0 44000 0 55000 0 66000 0 77000 0 880000 Price Price quantity quantity D1 D1 S2 S2Market Equilibrium and Price
Market Equilibrium and Price
••
If the price on the market is above the
If the price on
the market is above the
equilibrium price,
equilibrium price, there will be a downward
there will be a downward
pressure on the price
pressure on the price
••
Quantity supplied will exceed quan
Quantity supplied
will exceed quantity
tity
demanded and
demanded and producer
producers will lower the price
s will lower the price
to get rid of surplus
to get rid of surplus stock
stock
Market Equilibrium and Price
Market Equilibrium and Price
••
If the price on the market is below the
If the price on
the market is below the
equilibrium price, there will be a upward
equilibrium price, there will be a upward
pressure on the price
pressure on the price
••
Quantity demanded will exceed quan
Quantity demanded
will exceed quantity
tity
supplied. Scarcity would exist and price would
supplied. Scarcity would exist and price would
increase
increase
An Increase in Demand
An Increase in Demand
Causes:
Causes:
••
A decrease in the price of the good itselfA decrease in the price of the good itself••
An increase in the price An increase in the price of a substitute goodof a substitute good••
A fall in the price of A fall in the price of a complimentary gooda complimentary good••
An increase in income (if the An increase in income (if the good is normal)good is normal)••
A change in A change in taste in favtaste in favour of our of the goodthe good••
Expectations of higher prices in future or Expectations of higher prices in future or scarcityscarcityA Decrease in Demand
A Decrease in Demand
Causes:
Causes:
••
An increase in the price of the good itselfAn increase in the price of the good itself••
An fall in the price of An fall in the price of a substitute gooda substitute good••
A increase in the price A increase in the price of a complimentary goodof a complimentary good••
An fall in income (if the good is An fall in income (if the good is normal)normal)••
A change in A change in taste awataste away from the y from the goodgood••
Expectations of lower prices in future or greaterExpectations of lower prices in future or greater suppliessupplies