1.2 revision (demand/supply) Flashcards
What is demand?
Demand is the quantity consumers are
willing and able to buy at a stated
price
Law of demand
As price increases, quantity demanded decreases and if price decreases, quantity demanded increases
At low demand and high supply, due to a surplus prices fall (they want to sell off the stock), At high demand and low supply, due to a shortage of goods prices rise.
Demand curve
The demand curve slopes downwards from left to right (negative slope).
There’s always an inverse (change in the opposite way in relation to something else) relationship between price and quantity demanded.
What is supply?
The amount that sellers are willing
and able to supply and sell at a given price
The higher the price of a particular good and
service, the more that will be offered to the
market.
Suppliers
Businesses that provide resources (eg, raw materials)
PED
Price Elasticity of Demand
The responsiveness of quantity in relation to a change in price
YED
Income Elasticity of Demand
The responsiveness of quantity demanded in relation to a change in income
Factor affecting demand
Changes in taste, fashion, trends
Other factors affecting demand
Income, complementary goods, price of substitutes, competitors, advertising and branding, demographics, external shocks, seasonal demand,
Movement on demand and supply curve
A price change will cause a movement along the curve
Shift in demand
Changes in any of the factors other than price causes the demand curve to shift either:
Left (Less demanded at each price)
or
Right (More demanded at each price)
Movement - Contraction along demand curve
Up the curve
Fall in the quantity demanded caused by rises in prices.
Movement - Extension along demand curve
Down the curve
Increases in demand caused by a fall in prices.
Supply curve
This has a positive
slope because at
higher prices a
greater quantity will
be supplied to the
market and at a lower
price less will be
supplied.
Why does it slope upwards?
The profit motive: When the market price rises following an increase in
demand, it becomes more profitable for businesses to increase their output.
Production and costs: When output expands, a firm’s production costs tend to
rise, therefore a higher price is needed to cover these extra costs of
production.
New entrants coming into the market: Higher prices may create an incentive
for other businesses to enter the market leading to an increase in total supply.
Movement - Contraction along the supply curve
Down the curve
Movement - Extension along the supply curve
Up the curve
Shifts in supply
Left - A reduction in supply
or
Right - An increase in supply
Factors affecting supply
Changes in the cost of production, Government subsidies, New technology, Indirect taxes, External shocks
Interaction of supply and demand
Interaction of supply and demand
Equilibrium price
In any market the price is set where the wishes of consumers are
matched exactly with those of producers/supply. This is known as the
equilibrium price- where supply and demand are equal.
The equilibrium price is also known as the market clearing price
because the amount supplied is all bought up by the consumers. No
buyers left without goods and no sellers left with unsold goods. THE
MARKET IS CLEARED.
Key terms:
Free market
Ceteris paribus
Free market: where prices of goods and
services are determined by supply and
demand
Ceteris paribus: when other conditions
remain the same
Market forces can cause changes in the
price of an item. Example?
For example if there is poor weather and
there are few strawberries, the price will go
UP per batch as they are rarer and
demand has not changed.
If there is a good summer and lots of new
farms produce strawberries there will be a
great supply, they will be in every shop and
so price will go DOWN
Supply is affected by demand. Changes in demand can cause…
If demand increases, suppliers will put their prices high in order to make profit, as there is rising demand. Therefore prices will increase for
customers.
If demand were to fall, the opposite would happen, suppliers will be forced to lower their prices. If not they would be left with surplus and unsold stock.
