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.
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