Supply and Demand

Ethan Hsu

• 3 min read
Supply and Demand

1.Demand

1. Definition

The quantity of a good or service an individual is willing and able to purchase

2. Demand Curve

The demand curve slopes downward from left to right, indicating an inverse relationship between price and quantity demanded.

3. Non-Price Factors Affecting Demand

1.Consumer income

  • Normal Good -> Good whose demand rises as income rises, and falls as income falls; most goods and services
  • Inferior Good -> Good whose demand falls as income rises, and rises as income falls
  • Reason -> Consumers usually opt for cheaper alternatives when their income is reduced
    • Eg. McDonald’s -> The least “well-off” opt for fast food over real meals due to them being cheaper

2.Substitute goods -> Goods that are alternative to one another ; they can replace each other

  • Example -> Coffee v/s Tea
  • If Price of Tea Rises -> Tea’s demand is reduced, since individuals opt for coffee ; Coffee’s demand rises

3.Complementary goods

  • Example -> Gas Fuel and Car
  • If Price of Cars Rises -> Car’s demand will fall
  • Fuel’s Demand Falls Too -> Since fuel’d demand is likely inversely related to the price of cars

4.Tastes and preferences

  • Individuals -> Unlikely to consume products they do not like
  • The More Attractive a Good Is -> The greater the demand is likely to be

Advertising -> Can influence individual’s tastes and preferences, hence influence the demand of a product

5.Expectations of future price changes

  • Individuals may buy products hoping their price will rise, thus can profit when reselling it
  • High Speculation of Rising Prices -> Demand is likely to rise
4. Movement Along vs. Shift of Demand Curve

• A change in price causes movement along the curve.

• A change in non-price factors causes the entire demand curve to shift.

2.Supply

1. Definition

The quantity of a good a producer is willing and able to offer for sale

2. Supply Curve

The supply curve slopes upward from left to right, indicating a direct relationship between price and quantity supplied.

3. Non-Price Factors Affecting Supply

1.Costs of Production

  • Rise in Costs -> Supply curve should fall
  • Reason : Producers can offer less for sale at each price
  • Examples : Cost of chips for making phones, salaries of office workers

2.Availability of Resources

  • More Resources -> Supply curve should rise
  • Example: More Copper Deposits are Discovered -> Tech industries can produce more electronic chips

3) Climate

  • Bad Weather Conditions -> Supply curve should fall
  • Reason : It reduces the ability to produce more crops
  • Example -> Agriculture, Construction, tourism, etc.

4) Technology

  • Improvements in Technology -> Supply curve should rise
  • Reduction in Costs of Production -> Lets firms produce more at each given price
  • Eg. New Machinery -> Might significantly increase tech industries’ ability to produce electronic chips

5) Government Regulation

  • Government’s Purpose/Aim -> Health and safety, consumer welfare, legislation, etc.
  • Main Goal -> Protect employees from being exploited; equal pay and minimum wage
  • High Regulation -> Supply curve should fall
  • Reason -> Usually rises the costs of production or reduces efficiency of FOPS

6) Taxes & Subsidies

  • Indirect Taxes -> Supply curve should fall
  • Reason -> Increases the costs of production for producers
  • Subsidies -> Supply curve should rise
  • Reason -> Reduces the costs of production for producers; producers can supply more output at lower prices
4. Movement Along vs. Shift of Supply Curve

• A change in price causes movement along the curve.

• A change in non-price factors causes the entire supply curve to shift.

3.Market Equilibrium

1. Definition

Market equilibrium occurs when the quantity demanded equals the quantity supplied at a specific price.

2. Price Adjustment

• Surplus: When supply exceeds demand, prices fall to restore equilibrium.

• Shortage: When demand exceeds supply, prices rise to restore equilibrium.

Example Problems

Shifts in Demand and Supply Curves

If consumer preferences for a product increase while production costs also rise, how will price and quantity change?

• Demand increases → demand curve shifts right → price and quantity increase.

• Supply decreases → supply curve shifts left → price increases, quantity decreases.

• Conclusion: Price will definitely rise, but the quantity depends on the relative shifts of the curves.