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Demand
AS Economics
Demand
• Definition: The amount that consumers are
willing and able to buy at each given price
level
• Although people demand many things, they
do not always have the money to pay for
these. Therefore effective demand is
demand supported by the ability to pay
Price
Demand Curve
• In most cases, when
prices rise the amount
of demand falls,
therefore the demand
curve is a downward
sloping curve.
P2
P1
D
O
Q2
Q1
Quantity Demanded
Drawing demand
• Q = 20 – ½ P
• Draw the demand curve given by this
equation between prices £1 and £20
• You might find it easier to construct a table to
show the quantity demanded at each price
Individual and market demand
• Individual demand curves show what an
individual would buy, which could be a
consumer, a firm or government
• The calculate market demand, all individual
demand in the market needs to be added
together; total demand in a market for a
good, the sum of all individuals’ demand at
each given price level
Individual and market demand
Price
+
50p
=
50p
D
O
Market
Price
Individual 2
Price
Individual 1
2
Quantity
50p
D
D
O
O
3
Quantity
5
Quantity
Calculating market demand
Price (£)
Quantity demanded of good
Y (000 units)
Firm A
Firm B
Firm C
100
500
250
750
200
400
230
700
300
300
210
650
400
200
190
600
500
100
170
550
a) Draw the individual
demand curves for each
firm
b) Draw the market demand
curve for good Y
c) A new firm, D, enters the
market and will buy 500 at
any price between £100
and £500. Show the
effect of this by drawing a
new market demand
curve for good Y
• Price changes (a
rise or fall),
causes a
movement along
the curve
• It is important to
note that price
changes do not
shift the demand
curve
Price
Movements along the curve
P3
Contraction in
demand
P1
Extension
in
demand
P2
D
O
Q1
Q2
Quantity
Shifts of the curve
• There are a number of factors which would
cause the demand curve to shift; this would
either move to the right (increase demand) or
left (decrease demand).
Price
Shift right – more demand
P1
D1
O
Q1
Q2
Quantity
D2
Price
Shift left – less demand
P1
D1
D2
O
Q2
Q1
Quantity
What causes a shift?
NOT PRICE – THIS
CAUSES A
MOVEMENT ALONG
THE CURVE
What causes a shift?
•
•
•
•
•
•
•
•
•
Incomes (but only for normal goods)
Advertising/publicity
Price of substitutes
Price of complementary products
Fashion
Changes in quality
Weather conditions
Legal changes
Future uncertainty
Movement along or shift of the curve?
• Decide whether the following would cause a
movement along a demand curve or a shift of the
curve for Ford cars
a) a fall in the price of petrol
b)a fall in the price of Saab cars
c) a fall in the price of Ford cars
d)a rise in real disposable incomes
e) an advertising campaign for Ford cars
f) an increase in the punctuality and comfort of rail
travel
Supply
AS Economics
Definition
• The willingness and ability to sell a product at
any given price over some period of time
• For example, in housing the supply is not the
number of houses in a town it is the total
number available for rent or to buy
Question
• In his lifetime, a sixteenth century Italian
painted approximately 200 pictures. Since his
death they have increase in popularity. In
1987 the high price of £20m was paid at
auction for his mother with child picture; in
1988, 12 of his paintings were auctioned
• What was the supply of the painter’s pictures
in 1988: 12 or 200?
Price and supply
• In most cases, higher prices causes higher
supply; higher prices lead to higher profits and
provides and incentive for suppliers to
increase production or for new suppliers to
enter the market
• If the price falls, the willingness to supply falls
as there is less incentive and opportunity to
make profits
Individual and market supply
• Individual supply is that of a single firm,
business unit, factory, office or shop
• Market supply is the total supply of the
product; this is calculated by adding all the
individual supplied together
Supply curve
• Plot the following data on a diagram
• What do you notice about the supply curve?
• Can you calculate producers’ revenue if 70
products are sold?
Price (£)
QS (per week)
10
80
9
70
8
60
7
50
6
40
5
30
Supply Curve
Price
Supply Curve
S
P
Q
Quan2ty Supplied
Movements along the supply curve
Like demand,
movements
along the
curve can
ONLY be
caused by a
change in
PRICE
Activity
• In 2001, the price of pet food rose and the
price of air travel fell.
• Explain, using diagrams, the effect on the
supply of both these goods
Shifts of the supply curve
•
•
•
le7 is less
WHAT CAUSES
MOVEMENT ALONG THE
SUPPLY CURVE?
What
causes
a
movement
along
What causes a movement along the
the supply
supplycurve?
curve?
• Price and price only!
Price
Price
Price
Price
Shifts in supply
• If price causes a movement (YES, a movement)
then WHAT could possibly cause a shift of the
curve?
Shifts in supply
• Cost of production (wages, raw materials, fuel,
power, interest rates, rent…….)
• Productivity of workers – if productivity rises then
costs of production fall and so supply will increase
• Technology – advances will allow more to be
produced with fewer resources thus causing supply
to increase
• Indirect taxes – like VAT; more tax means less supply
• Subsidies – these reduce the cost of production and
increase supply
• New entrants to the market
Shifts in supply
• Changes in the price of other goods; for substitutes,
the price of good A rises and so does supply; supply
of good B (the substitute) then falls
• Joint supply – cows have a number of by-products’
an increase in the price of beef will increase supply
of beef but also leather
• Weather and disease – can affect crops and reduce
supply
• Unexpected events – Concorde crash in 2000
• Regulation can increase costs (and deregulation
decreases costs)
Movement or shift
• Decide whether the following events would cause a
movement or shift for Ford cars, and which way the
shift or movement would be?
a) The use of advanced technology in Ford car plants
b) A fall in the cost of car components
c) A strike by Ford car workers
d) A rise in the productivity of Ford car workers
e) A rise in the indirect tax imposed on cars
f) A rise in the price of Ford cars