Demand, Supply, and Price Elasticity

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  • Created by: Adrian
  • Created on: 12-05-13 06:50


 Demand is the want or willingness of consumers to buy goods and services. Effective demand is when consumers must have enough money to buy commodities given a number of possible prices. 

 The inverse relationship between price and quantity demanded is the increase in demand when price falls and a decrease in demand when price rises. Supply has a porportional relationship. 


An extension of demand is the increase in quantity demanded as price falls. An contraction of demand is the decrease in quantity demanded as price rises.

At times, the demand curve will shift right (this means that  consumers now demand more of a product at each and every price than they did before.) This can be because of the following reasons:

 Change in consumers’ income: Demand is the quantity that a buyer is willing and able to buy. Therefore, it is clear that as income rises, consumers will attain the oppurtunity to buy more. On the other hand, as income falls, the demand will usually fall.

 Changes in taxes: Disposable income is the amount of income people have left after a deduction of taxes. A change in the level of income tax are likely to result in a change in the quantity of goods and services demanded.

 Prices and avaliability of other goods: Complementary goods are goods or services, which go with other products. For example, a phone may require earphones. Complementary goods are said to be in joint demand. Substitutes, however, have a different relationship. A rise in the price of one other substitue may result in the demand for the alternative. Many firms take consider this, and they gather information on changes in the prices and quality of competing and complementary products, to maximise their sales revenues and profits.

 Changes in taste, habits, fashion, and weather

Prices of complements and substitutes: If the price of a complement lowers, that means the demand for the other product will rise. If the price of a substitute rises, then the demand for the other de substitute will increase.

 Population change: Most of the time, an increase in population will tend to increase the demand for many goods and services in a country. In addition, the growing number of middle aged and elderly people may result in a changing pattern of demand. 

Normal Goods and Inferior Goods: 

If the demand for a product rises as income rises, it is considered a normal good, while if demand tends to fall as incomes rise, it is an inferior good. An example of an inferior good can be an outmoded nokia phone, because consumers would prefer to buy a good of higher quality if their incomes rise. 



As price rises, quantity supplied rises because firms will expect to earn more profits and that total revenue will exceed costs. As price decreases, quantity spplied decreases. 

Factors Affecting Supply: 

Changes in the cost of factors of production: A fall in the costs of land, labour and capital (the




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