AS Economics and BusinessChanges in supply and Demand

Unit 2b

By Mrs HiltonFor revisionstation

From the spec

Learning Objectives

• To be able to discuss the changes in demand and supply

• To be able to discuss the profit signalling mechanism

• To be able to discuss the allocation of resources

• To be able to answer some past paper questions

Starter

When the weather is hot what kinds of products do you tend to buy more of?

Recap types of goods

• Normal – if incomes rises demand stays the same

• Inferior – if income rise demand for these fall as consumers buy better products

• Substitute – a good that can be switched if the price goes too high, instead of cinema go bowling

• Complimentary – items where the demand for one will affect the demand for another like DVD for a DVD player, petrol for a car

Profit signalling mechanism

• Price of a good or service is a key piece of information for buyers and sellers.

• High profits act as a signal for existing producers to produce more or for new firms to enter the market.

CHANGES IN DEMAND

Changes in Demand due to PRICE

• Change in price will cause a MOVEMENT along the demand curve

a

b

If the price of a car goes up then then demand will move

from point a to point b on the demand

curve – as less goods are demanded at that

priceCosts more? Less

customers

Changes in demand due to NON-price

• tastes and preferences of consumers (trends)

• the number of consumers• the incomes of consumers (rising

real income) (wages)• the prices of complimentary

goods• consumers’ expectations

concerning future availability or prices of the goods.

• Cost of loans• Economic growth• New products entering the

market• Advertising• Population changes

If any of these factors change

then demand will change and will cause a SHIFT in

the demand curve up or down

Changes in demand curve due to NON-PRICE

• If consumer incomes rise then the demand curve (for a normal good) will SHIFT up and right

Changes in demand curve due to non-price determinants

• If tastes for a good fall and demand falls then the demand curve will drop to the left

Drawing demand Shifts with demand and supply lines

s

D

D1

P

Q

Changes in Supply

Changes in supply due to PRICE

• Changes in PRICE may cause movement along the supply curve

a

b

As the price rises the business wants

to supply more goods at this price, so quantity goes up

with price

Changes in supply due to NON-Price

• Weather e.g. Loss of crops• Technical progress• Change in price of productive factors

(not of cost of good to consumer)• Changes in price of raw materials• Changes in tax• Changes in subsidies

Changes in supply due to NON-PRICE

• If weather is good and crops flourish then supply curve will shift to the right

Changes in supply due to NON-PRICE

• If the cost of raw materials goes up the supply curve will shift to the left

Drawing supply Shifts with demand and supply lines

s

D

P

Q

s1

Summary

• Price? Causes movement along

• Non-price (like weather or incomes) causes a shift

• p = m• np = s• Playmates makes me happy,

no playmates makes me sad :0(

Walkthrough question

• Question• Draw a diagram to

illustrate the impact of rising costs such as staff wages on an estate agency business.

Walkthrough solved

p1

Q1

d

s

s1

P2

Q2

Sample question 1

• Explain why high profits can act as a signal to producers to enter the UK travel market. [4]

Answer question 1

Knowledge/understanding 2, Application 1, Analysis 1  Knowledge/understanding: up to 2 marks are available for explaining that

profit is the aim of most businesses (1 mark), is the difference between revenue and total costs (1 mark). Profit signalling mechanism may attract new entrants into the market. (1 mark)

 Application: up to 1 mark for contextual answers e.g. the UK travel market

is currently experiencing growth (1 mark) e.g. holidays, tours, weekend breaks and this may attract new entrants into the market (1 mark).

 Analysis: up to 1 mark for demonstrating that high profits could therefore

attract new entrants into the market (1 mark) or existing businesses to supply more (1 mark) e.g. holidays, tours, weekend breaks. More able candidates might refer to and develop the profit signalling mechanism (1 mark) e.g. may lead to higher business confidence which may encourage enterprise. (1 mark)

Sample question 2

• Which of the following is most likely to increase the demand for DVD players?

•  • A A fall in incomes • B A fall in the price of a substitute good • C A fall in the price of a complementary

good • D A fall in the population size

Answer question 2

• Answer - A fall in the price of a complementary good (C)• - Complementary goods are ones that are somehow

linked (1 mark)• - Purchasing one will lead to the purchase of its

complement (1 mark).• - If DVDs fall in price more will be bought thus

increasing the demand for the complementary good (DVD players) (1 mark).

• - The opposite will happen with substitute goods (1 mark).

• - The other choices will also result in reduced demand (1 mark if explained fully).

Sample question 3

• After a global shortage the two main truck tyre manufacturers are reporting that there will be a tyre shortage. This has meant a threefold increase in the price.

• Using a diagram, illustrate and explain why the global price of truck tyres has increased so much. [6 marks]

• Hint this is about a non-price factor (a shortage of product) which will raise the price. This is not about high prices so the curve will need to be a shift not a movement.

Answer question 3• Knowledge 2, Application 3, Analysis 1• Knowledge: up to 2 marks are available for

the diagram.• Market forces cause changes in price. In this

case the demand curve has shifted to the right.

• Application: up to 3 marks are available which is to be split: Diagram: 2 marks for the diagram showing a rightwards shift of the demand curve causing a movement along the supply curve (1 mark) showing an increase in price and to an extent quantity (1 mark). Written explanation set in context (1 mark).

• Analysis: 1 mark for explaining that there is an increased demand for truck tyres. The tyre companies cannot meet the demand from existing capacity and prices are forced up.

Sample question 4

• Using a suitable diagram, illustrate and explain the likely effects of rising costs on the sale of winter holidays. [6]

• Hint– the question is the impact of a non- price factor on those supplying winter holidays which is why it is a supply diagram. There is no mention of customers or price. As the costs increase so the supply decreases so it shifts up and left.

Answer question 4Knowledge: up to 2 marks are available for

the diagram: There should be a demand and supply

diagram with a leftward/inward shift of the supply curve.

NB No marks are available if the candidate

draws an incorrect diagram or shifts the demand curve.

Application: up to 3 marks are available: Diagram: 2 marks for the diagram showing

an inward shift of the supply curve causing a movement along the demand curve (1 mark) showing an increase in price and a decrease in quantity demanded (1 mark).

NB: A total of 4 marks are available for the correct diagram

Sample question 5

• If an increase in a consumer’s income causes the consumer to decrease the quantity demanded of baked beans, then baked beans might best be described as

•  • A a complementary good.• B an inferior good.• C a normal good.• D a substitute good.

Answer question 5

B Inferior good

• Inferior goods have a negative income elasticity of demand i.e. demand falls as income rises (1 mark).

• Sales of inferior goods such as baked beans are likely to decrease when incomes rise as consumers change to ‘better’ or more attractive alternatives (1 mark) e.g. organic vegetables (1 mark).

• A complementary good is one which is linked with the purchase of another good (1 mark) e.g. DVD and DVD players and baked beans are not linked to any other product (1 mark).

• A substitute good is an alternative to a product (1 mark). • A normal good is a good for which demand increases as incomes

rise (1 mark) therefore baked beans cannot be classed as a normal good if the quantity demanded decreases as incomes rise (1 mark)