Supply And Demand

Question 1

What is a Market?

Answer 1

Where goods and services are bought and sold
The price charged and quantity sold or each good or service are determined by the levels of demand and supply in the market
The levels of demand and supply in a market are shown using diagrams. These diagrams demonstrate the price level and quantity demanded/supplies of goods or services

Question 2

How is market price determined?

Answer 2

Market Forces”
DEMAND & SUPPLY

Question 3

Demand

Answer 3

Demand is the quantity of a good/service that consumers are willing and able to buy at a given price, at a particular time.

Question 4

Law of demand:

Answer 4

Market price is low – more people will purchase the product, therefore increasing the amount of revenue to be made
Market price is high – fewer people will purchase the product, therefore reducing the amount of revenue to be made
Result is a downward sloping demand curve

Question 5

The Demand Curve

Answer 5

Movements along the demand curve are therefore caused by changes in price

Tip – movement along refers to when there is a change in price for the product in the question

Question 6

Demand Curve for Coca Cola (example)

Answer 6

• At price P2 the quantity Q2 is demanded

• A decrease in price from P2 to P3 causes an extension in demand – it rises from Q2 to Q3
• An increase in price from P2 to P1 causes a contraction in demand – it falls from Q2 to Q1
• So, movement along the demand curve is caused by changes in price

Question 7

Changes in Demand

Answer 7

Changes
in
Demand
cause a Shift in the Demand Curve
A demand curve moves to the right (D1) when there is an increase in the amount demanded at every price
A demand curve moves to the left (D2) when there is a decrease in the amount demanded at every price

Question 8

Factors that affect demand

Answer 8

• income
  -Advertising
• changes in population
• change in taste and fashion
• complimentary goods
• substitute goods
• Government legislation

Question 9

Demand (income)

Answer 9

● Income. Changes to people’s real income, the amount of goods/services that a consumer can afford to purchase with their income, can affect the demand for different types of goods differently.
● Consider:
If our disposable income went up what would we buy more of?
If our disposable income went down what would we buy more of?

Question 10

Demand (income- normal goods)

Answer 10

● Income. Normal Goods (e.g.chocolate) are those which people will demand more of if their real income increases. This means that a rise in real income causes the demand curve to shift to the right – people want to buy more of the good at each price level.

Question 11

Demand (income- inferior goods)

Answer 11

● Income. Inferior goods (e.g. cheap clothing) are those which people demand less of if their real income increases. This means that a rise in real income causes the demand curve to shift to the left
– people demand less at each price level since they’ll often switch to more expensive goods instead.

Question 12

Demand (income- luxury goods)

Answer 12

● Income. Luxury goods (e.g. gym membership) fall into the category of normal goods but tend to be more sensitive to changes in real income.
● E.g. if real income increases then the demand for gym membership will increase causing the demand curve to shift to the right – people demand more at each price level.
● However a decrease in real income may see many people quickly cancel their gym membership causing the demand curve to shift the left – people demand less at each price level.

Question 13

Demand (advertising)

Answer 13

● Advertising. A successful advertising campaign can cause demand curves to shift to the right. However, bad publicity will have the opposite effect and cause a shift to the left.

Question 14

Demand (changes in population)

Answer 14

● Changes in population. The UK has an ageing population with those of retirement age forming a larger population of the population. This has resulted in a shift in demand to the right for retirement homes, stair lifts and other elderly
products and services.

Question 15

Demand (change in taste and fashion)

Answer 15

● Change in taste and fashion. Can cause demand curves to shift to the right if something is popular and to the left when it is out of fashion.

Question 16

Demand (complementary goods)

Answer 16

● Changes in demand in one market can affect demand in other markets.
● Complimentary goods. Are goods that are often used together, so their in joint demand. E.g. if demand for holidays abroad increases, demand for luggage or perhaps suntan lotion will increase.

Question 17

Demand (substitute goods)

Answer 17

● Changes in demand in one market can affect demand in other markets.
● Substitute goods. A good used instead of another. E.g. if train fares increase some people may switch to private transport and travel by car, shifting the demand curve for petrol to the right.
● E.g. If the price of airline tickets were to increase, then it is likely that demand for holidays in the UK would increase shifting the demand curve to the right.

Question 18

Demand (Government legislation)

Answer 18

●Government legislation. May also have an impact on the demand curve for certain products.
●E.g. legislation passed making child seats compulsory in vehicles there was a significant increase in demand at any given price.

Question 19

Movement along demand curve

Answer 19

movement along refers to when there is a change in price for the product in the question

Question 20

Supply

Answer 20

● As we know demand is all about what consumers are willing and able to pay for, supply is all about firms’ willingness to supply goods/services at different prices.
● Therefore supply is the quantity of a good or service that producers supply to the market at a given price, at a particular time.

Question 21

Supply curve

Answer 21

Supply curves usually slope upwards. This means the higher the price charged for a good, the higher the quantity supplied.

Question 22

Changes in supply

Answer 22

Changes in supply cause a Shift in the Supply Curve

Question 23

Changes in supply

Answer 23

A supply curve moves to the right (S1), when there is an increase in the amount supplied at every price

Question 24

Supply

Answer 24

● Producers and sellers aim to maximise their profits. Other things being equal, the higher the price for a good or service the higher the profit.
● Higher profit provides an incentive to expand production and increase supply, which explains why the quantity supplies of a good/service increases as price increases.
● However increase supply often means increase costs. Therefore firms will only produce more if prices increase by more
than the costs.

Question 25

Factors that affect supply

Answer 25

• change in costs
• weather
• introduction of new technology
• legislation
• number of suppliers

Question 26

Supply (change in costs)

Answer 26

● Change in costs. An increase in one or more of the costs of production (e.g. raw materials, labour) will decrease producers’ profits and cause the supply curve to shift to the left, therefore reducing supply.
● If a cost of production decreased, the supply curve would shift to the right, therefore increasing supply.
● E.g. an increase in the cost of cocoa, will lead to a reduction in the supply of chocolate, but a decrease in the cost of packaging will lead to an increase in supply.

Question 27

Supply (weather)

Answer 27

● Weather. Can have a significant impact on the supply of agricultural products. Increased output is likely to result from a good harvest – shifting the supply curve to the right. Bad weather would have the opposite effect.

Question 28

Supply (introduction of new technology)

Answer 28

● Introduction of new technology. For example in production techniques can increase supply by increasing productivity and reducing production costs – moving the supply curve to the right.

Question 29

Supply (legislation)

Answer 29

● Legislation. E.g. Increasingly businesses find their costs increasing because they have to comply with new anti-pollution legislation. This shifts the supply curve to the left.
● E.g when the government imposes tax on a good or service, this too will cause the supply curve to shift to the left.

Question 30

Supply (number of suppliers)

Answer 30

● Number of suppliers. An increase in the number of suppliers in a market (including new firms) will increase supply to the market, shifting the supply curve to the right.
● A decrease in the number of suppliers will shift the curve to the left.