Supply and demand Flashcards
What is demand?
Demand is the amount of a good or service a consumer is both willing and able to purchase.
What is the economic law of demand?
Economic law of demand states that an inverse relationship between the price of a good or service and quantity demanded.
So as price goes up, quantity demanded falls, as price goes down, quantity demanded goes up.
What do the factors other than price do to demand curve?
Any factor other than price can cause an entire shift to demand curve. – shift can move to the left which would be a decrease in demand or to the right which would be an increase in demand.
Causes of shift in demand
- Price of substitutes – A substitute product is an alternative.
- Alternative brands – If an alternative brand is available and the product is not available then this will affect demand. – if customers are able to buy a similar product with a similar brand profile demand may be affected.
- Changes in consumer income – As consumer income rises then demand for some products fall e.g. microwave meals – consumer buy fresh food instead. As it rises consumer also have more disposable income to spend on luxuries.
- Trends and fads in fashion and tastes. – As trends in good or services rise then demand for product will rise.
- Marketing can help to stimulate demand e.g. promotions can help to encourage sales.
- Advertising can stimulate demand and increase sales. As products are heavily advertised would experience an increase in demand.
- UK population is getting older, this means that products or services will be in higher demand. It is also rising so demand for goods is likely to rise.
- Time of the year – Some products reach peak demand at certain times of the year in the UK.
Supply
Supply is the amount of a good or service that a producer is willing and able to put out on the market.
As price paid by customer increases on a product or service, normally a business will want to supply more, in anticipation of higher profits.
Factors that cause a shift in supply
- Cost of production increases e.g. due to rise of raw materials or minimum wage. Business may decided to produce less, prices may go up, the product will have lower sales and therefore lower revenue
- Introduction of new technology – New technology means that more goods can be supplied - mass production methods improved to increases capacity – using new technology means that costs can be reduced and means they can offer lower prices which would drive up demand.
- Indirect taxes – When government increases tax on goods such as petrol then supply will decrease. VAT/ customs tax / Excise tax are all indirect taxes when applied to goods makes them less attractive. Can lead to a decrease in supply.
- Government subsidies – Payment from the government to encourage more suppliers to enter the market and supply more. With a subsidy increase in supply because costs have been lowered thanks to subsidy.
Equlilibrium price
This Is the price where quantity demanded is equal to quantity supplied.
