DEMAND AND SUPPLY

                                             DEMAND

Our wants become a demand when we have the money to back up our 

desires. We call this effective demand, i.e., how much consumers will be 

prepared to buy at a particular price.  

Assuming ceteris paribus, as price increases demand will fall and as prices 

decreases demand will rise. This leads to a downward sloping demand curve.

A change in price will lead to a movement along the demand curve. An 

increase in price will lead to demand contracting and a decrease in price will 

cause demand to expand 

A number of factors will cause the demand curve to shift, either to the right 

(increase in demand) or left (decrease in demand): 

•  Income - when income rises demand for a normal good will also rise.

•  The price of other goods - if the price of a substitute good falls then 

demand will fall (e.g., Coca-Cola and Pepsi). If the price of a 

complement good falls then demand will rise (e.g., computers and 

computer games). 

•  Population - an increase in population is likely to lead to an increase in 

demand. 

•  Changes in fashion - as goods go out of fashion demand for them will 

fall.

•  Changes in legislation - e.g., demand for gun in the UK decreased 

after it became illegal to own one.

•  Advertising - this aims to influence consumer choice.

•  The time of the year - e.g., demand for holidays in Spain will be lower 

in the winter and demand for gas will be higher during the winter. 

                                             SUPPLY

If the price of a good increases, ceteris paribus then firms are likely to be 

more willing to supply larger amounts. This leads to an upwards sloping 

supply curve. A change in price will lead to a movement along the supply 

curve, whilst a change in any other factor will lead to a shift in the supply 

curve.

We are able to identify two main reasons for the supply curve being upwards 

sloping: 

•  Incentives for increasing production - if the price of particular good 

rises then producers will find it more financially rewarding to devote 

resources to that good and away from others.

•  Theory of increasing costs - due to the increasing opportunity costs of 

production as less and less well suited resources are switched to it, a 

higher price must be available in the market place to make it 

economically viable to use these resources.