Chapter 35 Demand Supply Learning Outcomes Upon completion

Chapter 35

Demand Supply

Learning Outcomes Upon completion of this chapter you should be able to: • Explain what a market is and illustrate examples of markets commonly found in Ireland • Explain what is meant by ‘demand’ and ‘supply’ • Outline the relationship between the level of demand for a good or service and its price and list factors other than price, which impact on demand for goods and services • Distinguish between normal and inferior goods • Outline the relationship between the level of supply for a good or service and its price and list factors other than price, which impact on supply of goods and services • Understand the concept of ‘market equilibrium’ and outline how supply and demand interact to restore markets to an equilibrium position • Evaluate how changes in the supply and demand of goods and services in different markets can affect prices.

What is a Market? • A market is a place where buyers and sellers interact in order to trade or exchange goods and services. • Most markets are actual locations where buyers and sellers meet and exchange goods and services, e. g. supermarkets and farmers’ markets. • These are known as final markets as they are where finished goods and services are bought and sold. • Other markets include: o Factor markets: where factors of production are bought and sold o Commodities markets: where raw materials are bought and sold

Assumptions about Consumer Behaviour • Consumers are rational. • Consumers have to make choices to get the best use out of their limited resources. • Consumers will try to get as much benefit (utility) as possible from their limited resources. • The benefit a consumer receives from consuming a good or service diminishes over time (the law of diminishing marginal utility).

Demand • Demand refers to the quantity of a product that consumers are willing to buy at a given price. • Effective demand is a willingness to buy, backed up by an ability to pay. • Demand for a product is rarely fixed and will change over time.

Relationship between Demand Price • In general, lower prices will increase demand for a product. This is because a lower price makes the product more attractive for buyers. • The opposite is also true and higher prices will tend to reduce demand for a product. • When the price increases, buyers may choose to stop buying a product entirely, or they may switch to buying an alternative product instead. • For most goods and services: o Demand will increase when price is reduced o Demand will fall when price is increased

Real World Examples • Elite professional sports stars are in high demand have high transfer prices and wage levels • Increased demand for family homes in the Dublin area led to prices rising • Flight and hotel prices increase during the school holidays • Can you think of any other examples?

Demand Schedule A demand schedule shows the number of goods demanded by customers at different price levels. Price Quantity Demanded € 50 200 € 100 160 € 150 120 € 200 80

Demand Curve A demand curve is a graph that illustrates the expected demand for a product at various price levels. Note: When the price is high, the demand is low. When the price is low, the demand is high. Demand Curve 250 Price € 200 150 100 50 0 80 120 160 Quantity Demanded 200

Other Factors Affecting Demand • • Price of substitute products Price of complementary goods Fads and fashions Advertising Changes in population or market size Seasonal factors Price expectations of buyers Income levels

Normal and Inferior Goods • Demand for normal goods rises when income rises. • With inferior goods, demand falls when income rises. • Cheaper cuts of meat and own-brand products are examples of inferior goods as consumers will tend to demand less of them when their income increases. For many consumers, buying generic or own-brand goods is a sensible choice when income levels decline and is in keeping with the guidelines for effective household budgeting. • The term inferior does not refer to the quality of the goods but simply reflects the affordability of the goods. • It is an economic term that indicates that these goods will experience a drop in demand when income increases.

Supply refers to the quantity of a product that producers are willing to make available for sale at a given price Relationship between Supply and Price Most suppliers are willing to supply more of a good when its price increases. For most goods and services: • Supply will increase when price is increased • Supply will reduce when the selling price drops

Real World Examples • Following bad weather, there may be a shortage of wheat available. The price of wheat will increase dramatically. • If a large number of new workers arrive in a city the supply of labour may be greater than the number of jobs available. This excess supply may drive wages down. • Can you think of any other examples?

Supply Schedule A supply schedule shows how much a firm will be willing to supply at particular prices. Price Quantity Supplied € 50 80 € 100 € 150 120 € 200 140

Supply Curve A supply curve is a graph that illustrates the quantity of a product that a seller is willing and able to supply at a series of price points. Note: At a low price, a low quantity is supplied. At a high price, a high quantity is supplied. Supply Curve 250 Price € 200 150 100 50 0 80 100 120 Quantity Supplied 140

Other Factors Affecting Supply • • Environmental conditions The price of related goods Production and development costs Technology The number of suppliers Expectations of sellers Government intervention

Market Equilibrium • In the marketplace, supply and demand interact until a balanced or equilibrium position is reached. • At this price-point, the quantity supplied will equal the quantity demanded. • This should mean that sellers can sell all that they produce and buyers can buy all that they want.

Market Equilibrium

Disequilibrium • When there is either excess supply or excess demand, the market will not be in an equilibrium position. • The market is said to be in disequilibrium. • When this happens the interaction of supply and demand will tend to create market pressures that will eventually force the market back into equilibrium.

Disequilibirum

Law of Supply and Demand • The law of supply and demand explains how the interaction of supply and demand affects the price of goods and services. • High levels of demand for a good will cause the price of that good to rise. • If there is a large supply of a good but not enough demand, the price of that good will fall.

Recap and Review Can you do the following? • Explain what a market is and illustrate examples of markets commonly found in Ireland • Explain what is meant by ‘demand’ and ‘supply’ • Outline the relationship between the level of demand for a good or service and its price and list factors other than price, which impact on demand for goods and services • Distinguish between normal and inferior goods • Outline the relationship between the level of supply for a good or service and its price and list factors other than price, which impact on supply of goods and services • Understand the concept of ‘market equilibrium’ and outline how supply and demand interact to restore markets to an equilibrium position • Evaluate how changes in the supply and demand of goods and services in different markets can affect prices.