Demand AS Economics

Demand Definition: The amount that consumers are willing and able to buy at each given price level Although people demand many things, they do not always have the money to pay for these. Therefore effective demand is demand supported by the ability to pay

Quantity Demanded Price P2P2 Q1Q1 Q2Q2 P1P1 O In most cases, when prices rise the amount of demand falls, therefore the demand curve is a downward sloping curve. Demand Curve D

Drawing demand Q = 20 – ½ P Draw the demand curve given by this equation between prices £1 and £20 You might find it easier to construct a table to show the quantity demanded at each price

Individual and market demand Individual demand curves show what an individual would buy, which could be a consumer, a firm or government The calculate market demand, all individual demand in the market needs to be added together; total demand in a market for a good, the sum of all individuals’ demand at each given price level

Quantity Price O Individual and market demand D 2 50p Quantity Price O D 3 50p Quantity Price O D 5 50p Individual 1Individual 2Market + =

Calculating market demand Price (£)Quantity demanded of good Y (000 units) Firm AFirm BFirm C a)Draw the individual demand curves for each firm b)Draw the market demand curve for good Y c)A new firm, D, enters the market and will buy 500 at any price between £100 and £500. Show the effect of this by drawing a new market demand curve for good Y

Movements along the curve Price changes (a rise or fall), causes a movement along the curve It is important to note that price changes do not shift the demand curve Quantity Price O D Q1Q1 P1P1 Q2Q2 P2P2 P3P3 Extension in demand Contraction in demand

Shifts of the curve There are a number of factors which would cause the demand curve to shift; this would either move to the right (increase demand) or left (decrease demand).

Shift right – more demand Quantity Price O D1D1 Q1Q1 P1P1 Q2Q2 D2D2

Shift left – less demand Quantity Price O D1D1 Q1Q1 P1P1 Q2Q2 D2D2

What causes a shift? NOT PRICE – THIS CAUSES A MOVEMENT ALONG THE CURVE

What causes a shift? Incomes (but only for normal goods) Advertising/publicity Price of substitutes Price of complementary products Fashion Changes in quality Weather conditions Legal changes Future uncertainty

Movement along or shift of the curve? Decide whether the following would cause a movement along a demand curve or a shift of the curve for Ford cars a)a fall in the price of petrol b)a fall in the price of Saab cars c)a fall in the price of Ford cars d)a rise in real disposable incomes e)an advertising campaign for Ford cars f)an increase in the punctuality and comfort of rail travel

Supply AS Economics

Definition The willingness and ability to sell a product at any given price over some period of time For example, in housing the supply is not the number of houses in a town it is the total number available for rent or to buy

Question In his lifetime, a sixteenth century Italian painted approximately 200 pictures. Since his death they have increase in popularity. In 1987 the high price of £20m was paid at auction for his mother with child picture; in 1988, 12 of his paintings were auctioned What was the supply of the painter’s pictures in 1988: 12 or 200?

Price and supply In most cases, higher prices causes higher supply; higher prices lead to higher profits and provides and incentive for suppliers to increase production or for new suppliers to enter the market If the price falls, the willingness to supply falls as there is less incentive and opportunity to make profits

Individual and market supply Individual supply is that of a single firm, business unit, factory, office or shop Market supply is the total supply of the product; this is calculated by adding all the individual supplied together

Supply curve Plot the following data on a diagram What do you notice about the supply curve? Can you calculate producers’ revenue if 70 products are sold? Price (£)QS (per week)

Supply Curve

Movements along the supply curve

Activity In 2001, the price of pet food rose and the price of air travel fell. Explain, using diagrams, the effect on the supply of both these goods

Shifts of the supply curve

WHAT CAUSES MOVEMENT ALONG THE SUPPLY CURVE?

What causes a movement along the supply curve?

Shifts in supply If price causes a movement (YES, a movement) then WHAT could possibly cause a shift of the curve?

Shifts in supply Cost of production (wages, raw materials, fuel, power, interest rates, rent…….) Productivity of workers – if productivity rises then costs of production fall and so supply will increase Technology – advances will allow more to be produced with fewer resources thus causing supply to increase Indirect taxes – like VAT; more tax means less supply Subsidies – these reduce the cost of production and increase supply New entrants to the market

Shifts in supply Changes in the price of other goods; for substitutes, the price of good A rises and so does supply; supply of good B (the substitute) then falls Joint supply – cows have a number of by-products’ an increase in the price of beef will increase supply of beef but also leather Weather and disease – can affect crops and reduce supply Unexpected events – Concorde crash in 2000 Regulation can increase costs (and deregulation decreases costs)

Movement or shift Decide whether the following events would cause a movement or shift for Ford cars, and which way the shift or movement would be? a)The use of advanced technology in Ford car plants b)A fall in the cost of car components c)A strike by Ford car workers d)A rise in the productivity of Ford car workers e)A rise in the indirect tax imposed on cars f)A rise in the price of Ford cars