Supply and Demand

Demand:  Demand: the quantity of a good or service that consumers will buy at a certain price.  Consumers will buy more of the same product at a cheaper price.  The relationship between demand and price can be illustrated in a demand curve.  Factors that influence demand: Affordability Competition & availability of substitutes Level of income (GDP) Needs & aspirations of consumers

Supply:  Supply: The quantity a supplier is willing to provide at different prices. Suppliers will supply more at higher than at lower prices  Supply can be shown on a supply curve  Increased demand = increased supply  Increased supply may require: Availability of raw materials & labour Logistics Ability to produce profitably Competition for raw materials Government support

Changes in Supply & Demand:  Forces of demand and supply interact to create a market price  Market provides a mechanism for automatically bringing decisions of consumers and producers into line  Demand and supply schedules show quantities supplied & demanded at different prices  Equilibrium – position at which supply = demand

Supply & Demand Curves:  Change position regularly  Demand curve shifts to the right when more of a product is demanded  Supply curve shifts to the right (increased supply at each price)  Supply curve shifts to the left (decreased supply at each price)

Increased Supply:  Examples:  For most goods – improvements in technology, e.g. using computers to design and make products leads to lower levels of waste material.  For agricultural crops – good weather leading to better harvests, higher milk yields, etc

Elasticity of Demand:  Measures how much the quantity of a demanded product responds to a change in price.  Very responsive – small change in price = large change in quantity demanded  Unresponsive – little or no change as a result of change in price = inelastic demand

Price Sensitivity:  Price elasticity indicates how sensitive demand is to changes in price.  Pricing is one of the most important decisions a business makes  Overcharging or undercharging can lose valuable revenue

Price Sensitivity (cont)…  Goods with more sensitive prices: Lots of substitutes (competing products) Luxuries not necessities Obsolete goods (been around a long time and being replaced with more up- to-date products)

Influence of Branding:  One main purpose of branding is to create relatively inelastic demand for products  The more unique qualities a product has – the less sensitive demand is to price changes, e.g. Coca-Cola