What is the law of demand and supply?

 The Law of Demand and Supply is fundamental in economics and explains how the price and quantity of goods and
services are determined in a market.
 The law of supply and demand allows you to set the price a little higher during spikes to increase profits, keep the sales at
a steady pace so you can reduce the strain on your inventory levels, or keep the same price and order more inventory to
meet the demand.
Law of demand
 The law of demand states that a higher price leads to a lower quantity demanded and that a lower price leads to a higher
quantity demanded.
 The Law of Demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded
increases
 Example: Businesses use the law of demand to set prices. For instance, during sales or discounts, the price of a product
is reduced, leading to an increase in the quantity demanded.
Law of supply
 The law of supply is a basic economic concept. It states that an increase in the price of goods or services increases their
supply. Supply is defined as the quantity of goods or services that suppliers are willing and able to provide to customers
 Example: In labor markets, higher wages can attract more workers, increasing the supply of labor.

Market
 A market is any place or venue where buyers and sellers can exchange goods and services. A market may be physical,
like a retail outlet, or virtual, like an online brokerage with no physical contact between buyers and sellers.
Goods market
 Goods market is any place where buyers and sellers of goods meet for potential transactions. All the grocery, birthday,
and holiday shopping you participate in every month takes place in the goods market.
 The goods market refers to the market where tangible products (goods) are bought and sold.
Consumer market/goods
 A consumer market is a market when individuals purchase products or services for their own personal use, as opposed to
buying it to sell themselves. Consumer markets consist primarily of products that people use as part of their everyday
lives.’
 The consumer market refers to the marketplace where goods and services are sold directly to individuals or households
for personal use. These are products that are consumed by the end-user rather than used in the production of other goods
or services. Consumer goods are the tangible items that are purchased in this market.
 Example: food,clothing, vehicle
Labor market
 Job market, refers to the supply of and demand for labor, for which employees provide the supply and employers provide
the demand.
 The labor market is the marketplace where employers and workers interact to exchange labor for wages.
Stock market
 The stock market is a financial marketplace where shares of publicly traded companies are bought and sold. It plays a
vital role in the economy by allowing companies to raise capital and investors to buy ownership stakes in companies,
potentially earning returns in the form of dividends or capital gains.
 The stock market is where investors buy and sell shares of companies.
Demand market
 A demand market refers to the market conditions or environment characterized by the demand side of the economy,
where the focus is on consumers' willingness and ability to purchase goods and services at various prices. In this context,
"demand market" can be understood as the collective behavior of buyers in a specific market, which determines the
quantity of a good or service that is demanded at different price levels.
Demand schedule
 A demand schedule is a table that shows the quantity demanded at each price. A demand curve is a graph that shows the
quantity demanded at each price. Sometimes the demand curve is also called a demand schedule because it is a
graphical representation of the demand schedule
 show the relationship between the price of a product and the quantity demand for that particular product. In demand
schedules, the quantity demanded of a product falls as the price of the product rises.
 A demand schedule is a table that shows the quantity of a good or service that consumers are willing to purchase at
various prices over a specific period of time. It is a fundamental tool in economics for analyzing consumer behavior and
understanding how changes in price affect the quantity demanded.

Demand function
  A demand function in managerial economics is a mathematical expression revealing the relationship between the quantity
of a good or service that customers are willing and able to purchase, and its determinants such as price, income level,
tastes and prices of related goods or services.
 The general form of a demand function can be written as: Where:
 Qd = Quantity demanded
Qd=f(P,I,Pr,T,E)  P = Price of the good
 I = Consumer income
 A simple linear demand function might be:  Pr = Prices of related goods (substitutes and complements)
 T = Consumer tastes and preferences
Qd=a−bP  E = Expectations about future prices
Where:
 a = The quantity demanded when the price is zero (intercept)
 b = The rate at which demand decreases as the price increases
(slope)
 P = Price of the good

Demand curve
 A demand curve is a graphical representation of the relationship between the price of a good or service and the quantity
demanded by consumers over a specific period. It typically slopes downward from left to right, reflecting the law of
demand, which states that, all else being equal, as the price of a good or service decreases, the quantity demanded
increases, and vice versa.
 Downward Slope: The negative slope indicates an inverse relationship between price and quantity demanded.
 Axes:
The vertical axis (Y-axis) represents the price of the good or service.
The horizontal axis (X-axis) represents the quantity demanded.
 Movement Along the Curve: A change in price leads to a movement along the demand curve. This is referred to as a
change in quantity demanded.
 Shifts in the Curve: If factors other than price change (e.g., consumer income, preferences, or the prices of related goods),
the entire demand curve can shift to the left (decrease in demand) or to the right (increase in demand).
 An increase in income typically shifts the demand curve to the right, indicating higher demand at each price level.
 The demand curve is a fundamental concept in economics that visually represents how price influences consumer
purchasing behavior.
 as the price rises, the demand falls; as a result, the curve slopes down from left to right
Non price Variable
 Non-price variables are factors other than the price of a good or service that can influence the demand or supply of that
good or service. When these variables change, they can cause the demand or supply curve to shift, leading to changes in
the equilibrium price and quantity in a market.
Non price Variable affecting demand
 Normal Goods: When consumer income increases, the demand for normal goods (goods for which demand increases as
income rises) typically increases.
 Inferior Goods: For inferior goods (goods for which demand decreases as income rises), an increase in income may lead
to a decrease in demand.
 Changes in consumer preferences can significantly impact demand. For example, if a health trend makes a particular food
popular, the demand for that food will increase.
 Substitutes: If the price of a substitute good rises, the demand for the original good may increase. For example, if the price
of coffee rises, the demand for tea (a substitute) may increase.
 Complements: If the price of a complementary good rises, the demand for the original good may decrease. For example, if
the price of printers rises, the demand for ink cartridges (a complement) may decrease.
 If consumers expect future prices to rise, they may increase their current demand. Conversely, if they expect prices to fall,
they may delay purchases, reducing current demand.
 An increase in the population or the market size leads to an increase in demand. Conversely, a decrease in the number of
buyers leads to a decrease in demand.
 Changes in population demographics, such as age distribution, gender ratios, or cultural composition, can influence
demand for certain goods and services.
Non-Price Variables Affecting Supply
 Changes in the cost of inputs like labor, raw materials, or technology can affect the supply. An increase in production
costs usually decreases supply (shifting the supply curve to the left), while a decrease in costs increases supply.
 Advances in technology can improve production efficiency, leading to an increase in supply.
 Taxes, subsidies, and regulations can impact supply. For example, a subsidy for a particular industry might increase
supply, while a new tax could decrease it.
 An increase in the number of sellers in a market typically increases supply, while a decrease in the number of sellers
reduces supply.
 If producers expect higher prices in the future, they might reduce current supply to sell more in the future. Conversely, if
they expect prices to fall, they might increase current supply.
 Events like natural disasters, weather changes, and social factors (like strikes) can disrupt production and affect supply.

Income effect
 income effect refers to the change in the quantity of a good or service demanded by consumers resulting from a change in
their real income or purchasing power.
  Real Income: Refers to the purchasing power of income, which is income adjusted for changes in prices (inflation or
deflation).
 Nominal Income: Refers to the amount of money received in actual terms, without adjusting for changes in the price level.
 When consumers' real income increases, they can afford to purchase more goods and services, which typically leads to
an increase in the quantity demanded.
 Conversely, if real income decreases (due to higher prices or lower nominal income), consumers may purchase fewer
goods and services, leading to a decrease in quantity demanded.
 The income effect is often discussed alongside the substitution effect, which occurs when a change in the price of a good
causes consumers to substitute it with another good.
 While the income effect reflects changes in purchasing power, the substitution effect reflects changes in the relative prices
of goods. Together, they explain how consumers adjust their consumption in response to changes in prices and income.
Real income
 Real income refers to the purchasing power of a person's income after accounting for inflation. It represents the quantity of
goods and services that can be purchased with a given amount of nominal income, adjusting for changes in price levels
over time.
 This adjusts nominal income for inflation, providing a more accurate picture of what your income can actually buy. If prices
rise (inflation), real income may decrease even if nominal income stays the same.
Nominal Income
 This is the amount of money earned in current dollars, without adjusting for inflation. It’s the actual number you see on
your paycheck or in your bank account.
Inflation
 Inflation erodes purchasing power, meaning that if your nominal income doesn’t increase at the same rate as inflation,
your real income declines, and you can afford less than before.
 Conversely, if inflation is low or if nominal income increases faster than inflation, your real income rises, allowing you to
buy more goods and services.
 Real income is a crucial indicator of economic well-being. It helps to assess whether individuals or households are better
off over time, considering changes in prices.
 Understanding real income is essential for evaluating how well people are doing economically. It is a more accurate
measure than nominal income because it considers the cost of living, which directly affects the standard of living.
 Real income, also known as real wage, is how much money an individual or entity makes after adjusting for inflation.
Formula:
Real Income = Nominal Income
Price Level (CPI)

Here, the Consumer Price Index (CPI) or

another measure of the price level is used to
adjust nominal income to reflect changes in
the cost of living.
Substitution effect
 is a concept in economics that describes how consumers react to a change in the price of a good or service by
substituting it with another similar good that has become relatively more attractive. It occurs when the price of a good
changes, making it more or less expensive relative to other goods, leading consumers to reallocate their spending to
maintain their level of utility or satisfaction.
 the substitution effect is often considered alongside the income effect, which describes changes in consumer purchasing
behavior due to changes in real income resulting from price changes.
 When the price of a good decreases, the substitution effect will lead to an increase in the quantity demanded, as the good
becomes relatively cheaper. The income effect may also increase demand if the good is normal, but it could decrease
demand if the good is inferior.
 Suppose the price of coffee rises significantly. Consumers may react by purchasing more tea instead, as it becomes
relatively cheaper compared to coffee. The substitution effect explains the increase in tea consumption as consumers shift
away from the now more expensive coffee.
 pricing Strategies: Businesses need to understand the substitution effect when setting prices, as it affects consumer
choices and can impact overall demand for their products.
 Policy Implications: Governments consider the substitution effect when implementing taxes or subsidies. For example, a
tax on cigarettes might lead to increased demand for nicotine patches or vaping products as substitutes.
 Consumer Behavior Analysis: The substitution effect helps economists and marketers understand how consumers will
react to price changes, which is crucial for predicting market trends and consumer spending patterns.
 The substitution effect is a fundamental concept in understanding how changes in prices influence consumer decisions,
affecting the demand for goods and services in the market.

Substitute goods
 Substitute goods are products or services that can be used in place of each other to satisfy the same need or want. When
two goods are substitutes, an increase in the price of one typically leads to an increase in the demand for the other, and
 vice versa. This is because consumers will switch to the cheaper alternative when the price of one good rises, assuming
the two goods provide similar utility or satisfaction.
 Substitute goods serve a similar function or purpose. For example, butter and margarine can both be used as spreads, so
they are considered substitutes.
 Consumers often choose between substitutes based on factors like price, availability, brand preference, and perceived
quality. When the price of one good rises, consumers are likely to switch to its substitute if it offers similar satisfaction at a
lower cost.
Complements
 complementary goods (or complements) are products or services that are typically used together, where the consumption
of one good enhances the value or utility of the other. When two goods are complements, an increase in the price of one
usually leads to a decrease in the demand for the other, and vice versa, because the two goods are often consumed as a
pair or in conjunction with each other.
 Complementary goods are consumed together. The use or consumption of one good is often dependent on the availability
or use of the other. For example, printers and ink cartridges are complementary goods because you need both to print
documents.
Income
 Income refers to the money or other forms of earnings received by an individual, household, or business over a specific
period, usually in exchange for labor, services, investments, or other sources. It is a fundamental concept in economics as
it directly affects purchasing power, living standards, and overall economic activity.
 Wages and Salaries: Money earned from employment or self-employment. This is the most common type of income for
individuals and is usually paid on an hourly, weekly, or monthly basis.
 Bonuses and Commissions: Additional income earned based on performance, sales, or other criteria beyond regular
wages.
 Interest: Income earned from savings accounts, bonds, or other interest-bearing financial instruments.
 Dividends: Payments made to shareholders by companies from their profits, typically from owning stocks.
 Capital Gains: Income realized from the sale of assets like stocks, bonds, or real estate when sold for more than the
purchase price.
 Profits: Earnings derived from operating a business after subtracting expenses from revenue.
 Royalties: Payments received for the use of intellectual property, such as patents, trademarks, or copyrights.
 Rental Income: Money earned from leasing or renting out property, such as apartments, houses, or commercial real
estate.
 Government Benefits: Income received from government programs, such as social security, unemployment benefits,
pensions, or welfare.
 Gifts and Inheritance: Money received as a gift or inheritance from individuals or estates.
 Gross Income: The total income earned before any deductions, such as taxes, retirement contributions, or insurance
premiums.
 Net Income: Also known as "take-home pay," it is the income that remains after all deductions have been made. It reflects
the actual amount available for spending, saving, or investing.
 Disposable Income: The amount of money left after paying taxes. It is the income available for saving, spending, or
investing. Economists often use disposable income to gauge an individual's or household's ability to consume and save,
which in turn drives economic growth.
 Nominal Income: The actual amount of money earned without any adjustment for inflation. It is the income measured in
current dollars.
 Real Income: Nominal income adjusted for inflation, reflecting the actual purchasing power of the income. It shows what
the income can actually buy in terms of goods and services, which is crucial for understanding changes in living standards
over time.
Taste
 taste (or preferences) refers to the individual likes, dislikes, and priorities that influence consumer choices and demand for
goods and services. Tastes are subjective and vary from person to person, and they are a fundamental aspect of
consumer behavior in economic theory.
Financial markets
 The term ‘financial markets,’ is a fairly broad one, referring to a marketplace where financial assets can be bought and
sold. For example, the selling of equities, bonds and currencies.
 Financial markets are the lifeline behind capitalist economies, allowing businesses and entrepreneurs to buy and sell their
financial holdings. As such, they create securities products which provide a return for those who have excess funds
(investors) and then make these available to those who need additional capital (borrowers).

Gross Domestic Product (GDP)

 To measure a nation’s economic performance and activity from a very broad sense, experts usually look at their gross
domestic product (GDP).
 measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a
country in a given period of time
  refers to the total monetary value of all the completed goods and services that have been produced within a country’s
borders in a set period of time.
Gross National Product (GNP)
 Related to GDP, gross national product (GNP) is another important economic measure used to assess a country’s growth
or depreciation. It’s an estimate of the total value of all the final goods and services produced by a country’s residents.
 Usually, it’s calculated by taking the sum of all personal consumption expenditures: private domestic investment,
government spend, net exports, and any income earned by residents who invest overseas, away from the income earned
within the country’s economy by foreign residents.
Interest rate
 An interest rate is the proportion of a loan that is charged in addition to the money they borrow, expressed as a
percentage of the outstanding loan. Typically, interest rates are calculated on an annual basis and are therefore referred
to as the annual percentage rate (APR).
 interest rates apply to most lending transactions; from borrowing money to purchase homes, launching a business, or
even paying for university tuition fees - most of us will take out a loan at some point in our lives and pay interest as a
result.
Inflation
 It refers to the decline of the purchasing power of a given currency over time, leading to a rise of the cost of living.
 there is a rise in the price we pay for goods and services.
 The rise is often expressed as a percentage and means that a unit of currency will effectively buy you less than it did
before.
Economic Growth
 economic growth is an increase in the production of economic goods and services, compared between one period of time
and another.
 Economic growth can be measured by physical capital (actual goods), human capital (a larger working population than
before), labour productivity (a better working-age population) or technology (the tools the working population use to
produce goods and services).
 it's measured in terms of gross national product (GNP) or gross domestic product (GDP), pitching these metrics at
different periods of time to see if there has been an increase in the numbers.
Security
 security’ refers to a financial asset or instrument that has economic value and can be purchased, sold or traded. That is,
it’s a fungible asset which holds some form of monetary value.
 Equity: Provides ownership rights to holders
 Debt: Usually loans are repaid with periodic payments
 Hybrids: A combination of debt and equity
 Some of the most common examples include stocks, bonds and mutual fund shares.
Macroeconomics
 Macroeconomics is a particular branch of economics that examines the behaviour and performance of an economy as a
whole.
 Looking at a country’s wider economic picture, it focuses on the aggregate changes in an economy, such as
unemployment, growth rate, GDP, inflation and more.
 As a field of study, it attempts to measure how well an economy is performing, understand what forces drive it, and how its
performance can be improved. Researchers will look at two main areas: long-term economic growth and performance in
shorter-term business cycles.
Microeconomics
 The opposite of macroeconomics is microeconomics - a branch of economics which examines the financial decision-
making process of individuals, households and businesses.
 Generally, it applies to markets of goods and services, dealing with individual and economic issues, including: what buying
habits people have, what factors influence their choices, and how their decisions impact the goods markets in terms of
price, supply and demand. Essentially, it provides a more comprehensive understanding of market performance compared
to macroeconomics.
 Microeconomics can help explain a whole range of financial queries we may have, including why some goods and
services are valued higher than others, and how we as individuals will respond to different prices.