## Supply and Demand

Demand:

Demand is the total quantity customers are willing and able to purchase at any given price and time.

Individual demand:

The demand of just one customer for a certain product

Market demand:

The market demand for a product is the total demand for that product from all its consumers.

Direct demand:

For consumption goods and services that satisfy consumer desires.

Derived demand:

these are sometimes called intermediate goods. For example, demand for steel (an intermediate good) is derived from the demand for final goods (e.g, automobiles).

Quantity of demand:

amount of goods that the consumer is willing to buy and able to buy at a given price over a period of time.

Law of demand:

Ceteris Paribus all other things remaining unchanged, the quantity demanded for goods increase when its price decreases and vice versa.

• Price on the y-axis
• Quantity demand on the x-axis

Contraction in demand:

Ceteris paribus, when price increases quantity decreases. There is an upward movement along the demand curve.

When prices increase from P to P1 there will be a contraction in quantity demanded from Q to Q1  this contraction and quantity demanded is indicated on the diagram via upward movement along the demand curve from point A to point B

Extension in demand:

Ceteris Paribus, when price decreases quantity demanded increases. There is a downward movement along the demand curve.

When the price decreases from P to P1, there will be an extension in quantity demanded from Q to Q1. This extension in quantity demanded is indicated on the diagram via downward movement along the demand curve from point A to point B.

Increase in demand:

The increase in demand means that consumers now demand more of a product at each and every price than they did before and the demand curve will shift to the right.

Factors of Increase in demands:

1. Changes in consumer taste and preferences will lead to an increase in demand as tastes have shifted to a good with greater popularity, this will cause the demand curve to shift to the right from D to D1.
2. An increase in population will lead to an increase in demand and therefore it will shift to the right from D to D1.
3. An increase in income – when consumer income increases demand normal goods will be increased and the demand curve will shift to the right from D to D1.
4. A decrease in income tax when the government reduces income taxes or direct taxes real disposable income increases which enables consumers to purchase more goods at each and every price, this causes the demand curve to shift to the right from D to D1.
5. When the price of substitutes increases, the demand curve for other substitutes will shift to the right. For example, if the price of tea increases, demand for coffee will increase and demand will curve shift to the right from D to D1. Substitute goods – which can be used in place of each other and fulfill the same purpose.
6. When prices of complements fall, demand for other complements increase. e.g. Fall in the price of printers will lead to an increase in demand for cartridges and shift the demand curve to the right from D to D1.
7. Future expectations of an increase in prices may encourage current buying which will shift the demand curve to the right from D to D1
8. Positive advertising will lead to an increase in the demand curve which will shift the demand curve to the right from D to D1.
9. Seasonal variation will also have an impact on demand as the increased suitability of the product may lead to an increased demand leading to the demand curve shifting outwards from D to D1.

Decrease in demand:

A Decrease in demand means that consumers now demand less of a product at each and every price than they did before and the demand curve will shift to the left.

Factors Causing Decrease in demand:

1. Decrease in income
2. Increase in and income tax
3. Price of substitute decreases
4. Increase in price of complements
6. Decrease in the population
7. Changes in taste and preferences of the consumers
8. Future expectations of decreases in prices
9. Seasonal variations (not that big)

Supply:

The number of goods and services producers are willing and able to sell to consumers at any given price is known as quantity supplied.

Law of supply:

states that ceteris paribus, a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied. There is a direct relationship between price and quantity supplied.

Extension in supply:

Ceteris Paribus, increase in quantity supplied due to the increase in prices which leads to an upward movement along the supply curve.

Contraction in supply:

Ceteris Paribus, a decrease in quantity supplied due to decreases in prices, leads to a downward movement along the supply curve.

Shifts in supply curve:

A supply curve shifts whenever a non-price factor influencing supply changes.

Factors causing shifts in supply curve:

• Changes in the cost of factors of production: Increase in costs of factors of production will increase the overall cost of production and hence supply curve will shift to the left from S to S1
• Changes in the price and profitability of other goods and services: Increase in the price and profitability of other goods and services will decrease the supply of this good and the supply curve will shift to the left.
• Technological advance: This will reduce the cost of production and will cause the supply curve will shift to right from S to S1
• Business optimism and expectations: Business optimism and high expectations in the future will cause the supply curve to shift to the right
• Global Factors: for example, an increase in prices of oil will lead to increase in the cost of production and hence a decrease in supply. Therefore the supply curve will shift to the left
• Availability of resources: Increase in the availability of resources might lead to an increase in supply and will cause the demand curve to shift to the right
• Productivity of factors of production: Increase in productivity of factors of production will reduce overall costs of production and hence supply curve will shift to the right
• Government actions: Government actions like loans and subsidies might reduce the cost of production thus supply will increase and the supply curve will shift to the right.

Equilibrium Price:

The equilibrium price is when the quantity demanded is equal to the quantity supplied. There is no surplus or shortage.

Equilibrium:

An equilibrium is when the quantity supplied and quantity demand are equal

Surplus:

of excess supplied when the quantity supplied exceeds the quantity demanded at a given price,  When this happened, the price tends to falls until equilibrium is restored.

Shortage:

of excess demand is when the quantity demanded exceeds the quantity supplied at a given price. When this happened, the price tends to rise until equilibrium is restored.

Changes in equilibrium price due to increase in demand:

An increase in demand will lead to a shift in the demand curve to the right from D to D1 and create a temporary shortage which will cause prices to increase from P to P1 and quantity increases from Q to Q1.

Changes in equilibrium price due to decrease in demand:
A decrease in demand will lead to a shift in the demand curve to the left from D to D1 and will create a temporary surplus. Prices will go down from P to P1 and quantity will reduce from Q to Q1.

Changes in equilibrium price due to increase in supply:
An increase in supply will lead to a shift in the supply curve to the right from S to S1 and create a temporary surplus which will cause prices to decrease from P to P1 and quantity increases from Q to Q1.

Changes in equilibrium price and quantity due to decrease in supply:
A decrease in supply will lead to a shift in the supply curve to the left from S1 to S2 and create a temporary shortage which will cause prices to increase from P1 to P2 and quantity increases from Q1 to Q2.

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