Demand Curves
Individual demand is how much of a product a consumer will buy at a given price.
Market demand is the sum of all the individual demand for a product at a given price.
Demand is based on the actual ability of consumers to purchase the product, not just what they would like but can’t afford (sports car, jewellery etc). This is called effective demand.
Demand curves slope down from left to right - this is because the higher the price the more of a consumer’s income must be spent on it & the more satisfaction they must get from it to justify the opportunity cost.
Movement along the Demand Curve (Price)
A change in price causes a movement along the curve
The higher the price of a product, there will be less demand for it.
If the price rises then demand will fall, this is known as a contraction in demand.
The lower the pice of a product the more it will be demanded.
If the price falls then demand will rise, this is known as an extension in demand.
Shift of the Demand Curve
A shift of the demand curve represents an increase or decrease of demand at a given price level. This may be because of:
a change in consumers incomes
a change in price of competing products
changes in tastes/fashion
seasonal factors such as weather
Movement along the Supply Curve (Price)
A change in price causes a movement along the curve the higher the price of a product, the more suppliers will produce. If the price rises then supply will rise, this is known as an extension in supply. The lower the price of a product the less will be supplied. If the price falls then supply will fall, this is known as a contraction in supply.
Shift of the Supply Curve
A shift of the supply curve represents an increase or decrease in the quantitiy supplied at each & every price. Causes of shifts in supply:
Improvements in technology (increase efficiency & reduce costs).
Weather, climate and disease (especially agricultural products).
Taxes and subsidies can make the costs of production more/less expensive and therefor increase or decrease supply.
Natural disasters & wars can severely disrupt supply.
Resources: discoveries of new resources or depleting reserves of resources can affect the supply of products.
Equilibrium
The equilibrium price is the point at which demand and supply are equal (where they cross on the diagram). It is also called the market clearing price since it is the point at which all the items supplied are demanded - therefor clearing the market of all the stock.
Consumers want low prices & suppliers want higher prices, this leads to adjustments in the price of products until the equilibrium point is reached.
Excess Supply
This situation occurs when the price level is too high which results in a larger quantity supplied than quantity demanded.
Suppliers want to sell the extra stock that they have before it goes bad or out of season so they will lower the price. This leads to an expansion in the quantity demanded and a contraction in the quantity supplied bringing the market back into equilibrium.
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Excess Demand
This occurs when the price is set too low which result in a larger quantity being demanded than there is available from the suppliers.
Suppliers realise that they can charge a higher price and still sell more products so the price level rises which leads to a contraction in demand (some people won’t buy at the higher price) and an extension in supply, bringing the market back into equilibrium.
Social Costs
When considering the cost of production or offering a service we need to take into account more than just the cost to the company. There are wider costs that affect society such as air pollution that are not accounted for on the price.
Private costs: these are the costs to individuals of consuming a product, often the monetary value, but sometimes a health cost such as smoking. They are also the costs to a firm (fixed and variable costs) of production.
Private benefits: the benefit to an individual from consuming a product, often satisfaction, more knowledge etc. In the case of a firm these are likely to be the profits that are made.
External costs: the costs of production or consumption of an item to a third party - litter, air pollution, water pollution are examples, these are often called externalities.
External benefits: the benefits of production or consumption to a third party - other firms & society may benefit from the skills that workers learn through their jobs such as first aid, it skills etc.
To establish the total cost or benefit to society the total value of the private costs and eternal costs needs to be calculated. The sum of the private and external benefits needs to be calculated. If the social cost is greater than the social benefit then the resources & factors of production should be used to produce something else that is more socially beneficial.
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