Demand and Supply
- Created by: Juliette_Emma_Moss
- Created on: 02-12-13 02:16
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Demand & Supply
Demand;
Introduction:
- Demand refers to the willingness and ability of someone to pay for a good or a service at a given price.
- There is a negative relationship between price and quantity demanded.
- When there is a fall in price and a resultant increase in quantity demanded than there is an expansion.
- When there is a rise in price and a resultant fall in quantity demanded than there is a contraction. (Expansion and contraction are also used in supply theory in a similar context.)
Types of Goods and Services:
- Substitute goods are goods and services that can be used instead of one another:
- i.e. Pepsi and Coca Cola.
- If the price of a substitute good or service were to increase:
- The quantity demand of its competing opponent will increase:
- For instance, if the price of Coca Cola was to rise, its quantity demanded will fall, than there will be a resultant increase in the quantity demanded of Pepsi.
- The quantity demand of its competing opponent will increase:
- Complementary goods are goods and services that need to be used together to produce the desired effect:
- i.e. DVD discs and DVD recorders/players.
- If the price of a complementary good increases than there is a good chance of the quantity demanded of its partner good decreasing:
- These goods are in joint demand:
- For instance, if the price of DVD players were to increase than the quantity demanded of DVD players would decrease, causing a fall in the quantity demanded of DVDs because less and less people would own a DVD player.
- These goods are in joint demand:
Income:
- Generally if there is an increase in income than there is also an increase in quantity demanded and vice versa.
- Income is split into three types:
- Real income (the amount of money that you earn, such as your salary, after having been adjusted for inflation).
- Disposable income (the amount of money that is kept after your taxes are paid):
- Discretionary income (the amount of money that is left after you have paid your mortgages and loans – in essence this is the money that is left for you to spend as you wish).
Factors that Affect Demand:
- Price (only ever causes extensions or contractions along the demand curve):
- Prices go down, quantity demanded goes up, c.p.
- Prices go up, quantity demanded goes down, c.p.
- Income:
- Real income (adjusted for inflation).
- Disposable income (after income tax is deducted).
- Income tax affects demand more than supply
- A lower income tax would mean that a person has more money to spend and so increases aggregate demand in an economy.
- Supply is affected by indirect taxes and corporate taxes.
- Income tax affects demand more than supply
- Discretionary income (disposable income after committed interest repayments, such as loans and mortgages, are paid).
- In economics, the letter Y is usually used to denote income.
- Increase in income usually leads to an increase in quantity demanded but not always:
- Just because you earn more does not mean you are going to end up buying and eating more food.
- Or because when one is richer they will not purchase inferior goods in…
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