Topic Three Notes

6.1 Factors Affecting Market Demand

The main factors affecting market demand are:

• The price of the G or S itself.
• The price of other G or S.
• Expected future prices.
• Changes in tastes & preferences.
• Income levels.
• Population size & age distribution.

6.2 Movements Along the Demand Curve

The law of demand states that the quantity demanded by consumers falls as prices rise.

• Rise in price -----> Decrease in quantity demanded.

A contraction occurs when there is an increase in price.

An expansion occurs when decrease in price.

Expansions and contractions only occur when there is a change in price!!!

6.3 Shifts in Demand

Any factor, other than price will cause a shift in demand:

• A movement in the demand curve to the right is called an increase in demand.
• A movement in the demand curve to the left is called a decrease in demand.

6.4 Price Elasticity of Demand

Elastic demand: A strong response to a change in price.

Unit elastic demand: Total amount spent by consumers remains unchanged.

Inelastic demand: A weak response to a price change.

The more elastic the demand, the greater its response to a change in price.

• Perfectly elastic(horizontal line): change in price will totally eliminate demand for the good.
• Perfectly inelastic(vertical line): change in price has no effect on quantity demanded.

Business firms and Government need to understand price elasticity of demand so they can set the optimum price and taxes that will maximise revenue.

6.5 Total Outlay Method

Total outlay method calculates the price elasticity of demand by looking at the effect of changes in price on the revenue earned by the producer.

• If price increases & TO increases = inelastic demand.
• If price increases & TO decreases = elastic demand.
• If Price stays constant & TO stays the same = unit elastic demand.

7.1 Factors Affecting Market Supply

Supply is the quantity of a G or S that all firms in a particular industry are willing and able to offer for sale at different prices, at a given point in time.

Main factors affecting supply:

• The price…