1. Demand:
Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period. The law of demand states that, all else being equal, as the price of a product decreases, the quantity demanded for that product increases, and conversely, as the price increases, the quantity demanded decreases.
- In words: As price falls, quantity demanded rises; as price rises, quantity demanded falls.
- In symbols:
- Graph: The demand curve slopes downward from left to right.
2. Supply:
Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period. The law of supply states that, all else being equal, as the price of a product increases, the quantity supplied of that product also increases, and vice versa.
- In words: As price rises, quantity supplied rises; as price falls, quantity supplied falls.
- In symbols:
- Graph: The supply curve slopes upward from left to right.
3. Factors Shifting Demand Curves:
a) Income: When consumer income increases, the demand for normal goods rises (e.g., luxury items). For inferior goods, demand decreases (e.g., generic brands).
b) Price of related goods: Substitutes' price increase leads to increased demand (e.g., if tea price rises, coffee demand increases). Complements' price increase leads to decreased demand (e.g., hot dog buns and sausages).
c) Tastes and preferences: Favorable changes increase demand (e.g., health consciousness increases demand for organic foods).
d) Consumer expectations: Positive expectations about future prices or income increase demand.
e) Number of consumers: An increase in the population or market size raises demand for goods.
4. Factors Shifting Supply Curve:
a) Production costs: If input prices rise, supply decreases (left shift); if costs fall, supply increases (right shift).
b) Technological advancements: Improved technology reduces production costs, leading to increased supply.
c) Taxes and subsidies: Higher taxes reduce supply, while subsidies increase it.
d) Changes in producer expectations: Favorable expectations of higher prices decrease current supply.
e) Number of suppliers: More suppliers entering the market increase supply, while exit decreases it. Movement along the supply curve occurs due to price changes.
5. Shift to the Left vs. Shift to the Right:
A leftward shift of the supply curve indicates a decrease in supply due to factors like increased production costs. A rightward shift suggests an increase in supply due to factors like reduced production costs or improved technology.
Comparing a shift to a movement along the curve: A shift indicates a change in supply/demand due to external factors, while a movement along the curve is a response to a price change while other factors remain constant.
6. Elasticity of Demand:
Elasticity of demand measures how responsive the quantity demanded of a good is to changes in price. It's calculated as the percentage change in quantity demanded divided by the percentage change in price.
Examples:
- Elastic goods: Luxury cars, vacations, where consumers are responsive to price changes.
- Inelastic goods: Basic necessities like salt, medications, where consumers tolerate price changes without significantly altering their demand.
7. Equilibrium:
Equilibrium is the point where the quantity demanded equals the quantity supplied in the market, leading to no tendency for prices to change further.
- In words: Quantity demanded = Quantity supplied
- In symbols: (Q_d = Q_s)
- Graph: On a supply-demand graph, equilibrium is where the two curves intersect.
8. Price as a Signal:
In the marketplace, prices act as signals that convey information to both buyers and sellers. When prices rise, it signals scarcity, encouraging suppliers to produce more and consumers to buy less. When prices fall, it indicates abundance, encouraging consumers to buy more and suppliers to produce less. This interplay helps balance supply and demand, leading to market equilibrium.