SECTION 2 [Tr.
Kim’s notes]
CHAPTER 3: DEMAND AND SUPPLY
CHAPTER 3.1: DEMAND
Demand - the amount of a particular good or service that all consumers are willing and able to
buy at a given price,at a given amount in time.
Effective demand - the willingness and ability to buy a product at a given price
Quantity demanded - the amount of good or service demanded at each price level
Market demand - sum of all individual demand for a product (it is found by adding up the
individual demand at each price level)
According to the law of demand:
● As price rises, demand contracts - shown by a movement along the demand curve
● As price falls, demand expands - shown by a movement along the demand curve
● Only the price of the product affects the movement along the demand curve
NON PRICE DETERMINANTS OF DEMAND
● An increase in demand is shown by the shift in demand curve horizontally to the right
● A decrease in demand is shown by the shift in demand curve horizontally to the left
FACTORS OF DEMAND
1. Changes in consumer’s income
● A rise in consumer’s real income increases the purchasing power of consumers,
thus allowing them to demand more goods and services. This results in an
increase in demand.
● A fall in consumer’s real income decreases the purchasing power of consumers,
thus they will demand less goods and services resulting in a decrease in
demand.
2. The size and demographics of the population (age, gender)
● An increase in population will increase demand for more goods and services.
● An increase in the ageing population may increase the demand for walking sticks
● An increase in women in the population may increase the demand for lipsticks
3. Changing habits and preferences
● Changes in habits, tastes and fashion can affect the demand of all goods and
services. Fashionable clothes may experience an increase in demand while
those that have become unfashionable may decrease in demand.
4. Change in the price of complements
● Complements refer to goods and services that are in joint demand (demanded
together) Eg. Car and petrol, shoes and polish
● If the demand of cars decreases, the quantity demanded for cars will contract,
shown by a movement along the demand curve. This will also result in a fall in
demand for petrol and so the demand curve for petrol will shift horizontally
inwards to the left
5. Changes in price of substitutes
● Substitutes refer to goods and services that are in competitive demand, because
buying more of one product means buying less of another close substitute. Eg
tea and coffee
● If the price of coffee rises, the quantity demanded for coffee falls, shown by a
movement along the demand curve for coffee. This will probably encourage
consumers to buy more tea instead, as it is now relatively cheaper. So, the
demand for tea will increase, shown by the shift of the demand for tea
horizontally to the right .
6. Advertising
● Advertisements and commercials are used to inform, remind and persuade
consumers to buy a firm’s product resulting in an increase in demand for the
product.
7. Weather conditions may affect the demand for ice creams, sun screen, umbrellas and
more.
8. Government policies
● If the government introduce, or change rules and regulations, such as raising the
minimum age at which people buy alcohol or cigarettes, this could lead to a
decrease in demand for such products
● If the government educate more people to buy such cars, resulting an increase in
demand for such products.
9. Changes in the overall level of economic activity
● If the economy is experiencing economic growth , the demand for most goods
and services will increase.
● In times of recession, such as the financial crisis of 2008, the demand for most
goods and services around the world declined.
EXAM PRACTICE:
a) Using an appropriate demand diagram, explain the impact on the demand for Apple
smartphones in the following cases.
1. An increase in the price of Apple smartphones
2. An increase in the price of Samsung smartphones
3. An increase in consumer’s income
4. A successfully advertising campaign promoting Samsung’s latest smartphones.
b) What is meant by demand?
c) Briefly outline 2 factors affecting the demand for rice?
d) What is the difference between the shift and movement when referring to demand curves?
e) Which of the following statements explain why there might be a decrease in the demand of
sugar?
1. Demand for coffee and tea has increased
2. There is an increase in the supply of land to produce sugars
3. New technologies increase the output of sugar
4. Consumers are more aware of health issues related to sugar
f) Which of the following products are considered to be complementary goods?
1. Shampoo and conditioner
2. Apples and oranges
3. Sugar and tea
4. Tea and coffee
CHAPTER 3.2: SUPPLY
Supply is defined as the ability and willingness of producers to provide goods and services at a
given price at a given time.
As stated by the law of supply:
● A rise in price will cause expansion/extension along the supply curve as producers earn
higher profits if they supply more.
● A fall in price will cause contraction along the supply curve as producers will make less
profits than before
● Therefore, a change in price will result in a movement along the upwards sloping supply
curve
*CETERIS PARIBUS - a term used to suggest that only factor changes (in this case ‘price’ ),
while all the other factors remain constant.
DETERMINANTS/NON-PRICE FACTORS AFFECTING SUPPLY
● Refers to factors which result in a horizontal shift of the supply curve (either to the left or
the right)
1. Cost of production- if the price of raw materials and the cost of other factors of
production falls, supply will increase, shown by a horizontal shift of the supply curve to
the right (vice versa)
2. Taxes - increase the cost of production which reduces supply, shown by a horizontal shift
of the supply curve to the left
3. Subsidies(form of financial assistance from the government to help encourage output by
reducing the cost of production) Hence, the supply curve will shift to the right.
Governments often subsidize education, training and health care.
4. Technological Progress - such as automation, computers and wireless internet result in a
greater level of output at every price level and this increases the supply.
5. Price of other products - if the price of lamb increases, the farmers will reduce the supply
of wool and slaughter his sheep to supply more lamb
6. Time - the less time suppliers have to increase their outputs, the lower the supply tends
to be.
7. Weather - favourable weather conditions will especially increase the supply of
agricultural goods
Why can't the price cannot be above or below the equilibrium price?
● Why price cannot be ABOVE the equilibrium price, at OP1:
At price OP1,
The quantity demanded → OQ2
The quantity supplied → OQ1
Therefore Demanded < Supplied
“Surplus/glut”
To clear the market, price must fall
Quantity demanded → expands
Quantity supplied → contracts
Quantity demanded = Quantity supplied
The process continues until demand = supply at the equilibrium price of OP with OQ
being the quantity traded.
● Why can’t price be BELOW the equilibrium price at OP.
At price OP1,
The quantity demanded → OQ1
The quantity supplied → OQ2
Demanded > Supplied
“Shortage”
To clear the market, price must rise
Quantity demanded → contracts
Quantity supplied → expands
Quantity demanded = Quantity supplied
The process continues until demand = supply at equilibrium price of OP with OQ being the
quantity traded.
EXAM PRACTICE:
Using an appropriate supply diagram, explain the impact on the supply for Hello smartphones in
the following cases:
1. An increase in the price of Hello Smartphones
2. An increase in government subsidy to mobile phone industries
3. A decrease in the price of raw materials that are needed to make smartphones
4. What is meant by supply?
5. Briefly outline 2 factors affecting the supply of rice.
6. What is the difference between the shift and movement when referring to demand
curves?
