Demand and Supply

HideShow resource information

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.
  • 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.

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.
    • 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…

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Demand and Supply resources »