Demand and Supply

The Law of Demand

This suggests that as the price of a good falls, more of it is demanded. There is an inverse replationship between price and quantity demanded.

The Market Demand Curve

Here, as the price of a good increases from P1 to P2 on a diagram, the Quantity Demanded increases from Q1 to Q2

Shifts of Demand

Main conditions of demand are:

• The price of Substitute goods
• The price of Complementary goods
• Personal Income (disposable income)
• Tastes and Preferences
• Population Size, thus effecting market size

If any of the conditions of demand change, the position of the demand curve changes.

The demand curve moves to the right if there is an Increase in demand, and to the left if their is a decrease in demand.

A rightward shift (increase) of the demand curve can be caused by:

• An increase in the price of a substitute
• A fall in the price of a complementary good
• An increase in personal/disposable income
• A successful advertising campaign of a good (increasing sales)
• An increase in population (the market)

Normal and Inferior Goods

When disposable income increases, demand moves to the right, but only if it's a Normal Good.

A Normal good is a good for which as Demand increases as Income Increases. 

An Inferior good however, Demand decreases as Income Increases. For example, Public Transport. - Here, as Incomes rise people turn to Private Transport so the demand for Public Transport falls. 

These goods can change depending on Taste, Age and Personal Income.

Composite Demand and Derived Demand

Composite Demand is the demand for a good which has more than one use. Here, an increase in the demand for one use of the good, reduces the supply available for the other use. For example, If more wheat is used for Bio-fuel, less wheat is available for Food.

Derived Demand occurs when good is necessary for the production of other goods. For example, the demand fro Capital Goods is derived from the demand for Consumer/Finished Goods. If the demand for cars falls, so does the demand for car parts & machinery (capital goods) which make the cars.

Movement Along the Demand Curve

A movement along the demand curve only takes place when the good's price changes. 

Providing the slope is downward sloping, a fall in prices, leads to more of the good being demanded. This is called extention of demand.

Likewise, a Contraction of Demand is when a rise in prices results in less of the good being demanded.  

The law of supply

The law of supply states that as a good's price rises, more is supplied. There is therefore, a Positive/Direct relationship between price and quantity supplied. 

Market Supply Curve

The main reason for an upward sloping supply curve stems from the Business Objective of Profit Maximisation. It is assumed than firms always want to make the biggest available profit, so a firm will only want to supply more of a good if it is profitable.

Shifts of Supply

A rightward shift of supply is an Increase in Supply, whereas a leftward shift in supply is a Decrease in Supply. An increase in the costs of production is the main problem for firms, and if this happens, firm reduce the quantity of goods they are supplying as the costs have risen and  their is less chance of making profit.

Conditions of Supply:

• Costs of Production, inculding: Wage costs, Price of raw materials, costs of borrowing and energy costs.
• Technical Progress
• Taxes imposed on firms (VAT_
• Subsidies granted by the government to firms.

Joint Supply and Competing Supply

Joint Supply occurs when the production of one good then leads to the supply of a by-product. For example, the slaughter of a cow for meat could lead to an extra cow hide, which produces leather. Here, the meat is the main product and leather the by-product. 

Competing Supply - For example, the increased demand for bio-fuels means diverted crop production away from food supply to the supply of fuel for cars. Because farmers can earn more money from growing bio-fuels to supply energy firms, the supply curve of crops for food moves to the left.

Competitive and Uncompetitive Markets

Highly competitive markets usually lack entry barriers meaning new firms can easily enter the market, and existing firms can exit with ease.

Monopoly

Here, there is no competition at all, and there is only one firm in the market, which is protected by entry barriers. Monopolies can often cause firms to exploit consumers, often by increasing prices, restricting consumer choice and the output of products available.

The Equilibrium price

This occurs where the demand and supply curve meets on a curve diagram. 

Three key functions of prices in a economy:

1) The Signalling Fucntion

• Here, prices provide information that allows all traders in the market to plan and control their economic activities by pricing goods and services to signal to the consumers/buyers.

2) The Incentive Function

• The information signalled by relative prices, such as the price of Tomatoes relative to the price of lettuce, creates incentives for people to change their economic behaviour. 

3) The Rationing/Allocative Function

• When income is limited, people tend to ration their money on certain products. Spending more on one good, means spending less on another.