Demand and Supply

Factors that affect Demand

Price IncomePopulationAdvertisingInterest RatesPrice of complementsPrice of substitutesFashion

Consumer Surplus

The difference between how much buyers are prepared to pay for a good and what they actually pay.

Producer Surplus

The difference between the market price which firms receive and the price at which they are prepared to supply.

Factors that affect Supply

Price Costs of Production Indirect TaxesNatural FactorsPrice of other goodsChanges in Technology Subsidies

Excess Demand and Supply

Excess demand where demand is greater than supply and there are shortages in the market

Excess supply is where supply is greater than demand and there are unsold

Complements and Substitues

Complements or Joint Demand : This means that if in demanding one good a consumer is likely to demand another good. E.g. Tennis rackets and tennis balls.

Substitutes or Competitive Demand: these are goods that can be replaced by another good. E.g. coke and pepsi

Derived Demand, Composite Demand

Derived Demand: It is the demand derived that creates a demand for goods needed in the production of another good.eg an increase in the demand for cars will lead to an increase in the demand for steel.

Composite Demand: is when a good a demanded for 2 or more distinct purposes.eg milk is used for cheese and yogurt. So an increase in demand for one composite good will lead to fall in supply of another good. E.g. An increase in demand for oil from the chemical industry will lead to a fall in supply of oil for petrol.

Joint Supply

Joint supply is when a good is supplied for different purposes. E.g. cows are supplied for both beef and leather.

An increase in demand for one good in joint supply will lead to an increase in its price. This leads to an increase in quantity supplied. The supply of the other good will increase leading to a fall in its price.

Total Revenue

Price x quantity sold

Government and PED

Governments want to raise revenue by imposing indirect taxes and VAT and excise duties on products.

Governments select products which have inelastic demand.

They target necessities or have few substitutes but they do not target food and water.

Factors affecting the PED

The availability of substitutesDegree of necessityProportion of income spent on the productTime Period

Price Inelastic <1Price Elastic > 1Unitary Elastic = 1

Factors affecting the PES

TimeStock levels Production speed Spare CapacityEase of entry in Market

Price Inelastic <1Price Elastic > 1Unitary Elastic = 1

Factors affecting the YED

NecessitiesLuxuries

YED asks the question of whether the good is normal, inferior or luxury?

Inferior = <0Normal = Between 0 and 1 Luxury = >1

Income elastic >1 or <-1Income inelastic between +1 and -1

Cross Elasticity of Demand

Inelastic between + 1 and -1Elastic >1 and less than -1

Complement is <0

Substitute is >0

Normal ,inferior and Giffen

Normal good is when the demand for a good increases as income increases

Inferior good is where demand decreases as income increases

Giffen good is a special type of good where demand increases as price increases eg the demand for bread would increase on very low income families. Therefore the income effect outweighs the substitution affect .

Upward sloping demand curves