Demand and Supply

Graphing Market Demand

Market demand is the sum of the individual quantities demanded in a market.
Market demand helps businesses make plans by showing how many goods all consumers will buy at various prices.
The Law of Demand: As the price increases, the quantity demanded decreases, and vice versa.

Law of Diminishing Marginal Utility: The more of a good or service you consume, the less satisfaction you get from consuming additional units. People buy more when prices are lower.
Income Effect: When the price of a good or service increases, people may not be able to buy the same quantity as before because their incomes are limited.
Substitution Effect: When two goods can satisfy the same need (substitute goods), people may switch to the cheaper one if the price of the other increases.

Market demand can change due to various factors, such as changes in consumer income, the number of consumers, tastes, expectations, the price of substitute goods, and the price of complementary goods.
When demand shifts, the entire demand curve moves either to the right (increase in demand) or to the left (decrease in demand).

Supply schedule and graph show how much producers are willing and able to supply at various prices.
The Law of Supply: As the price increases, the quantity supplied increases, and vice versa.

Production Decisions: Producers aim to maximize profits. They increase production as prices rise to take advantage of potential profit.
Market Entries and Exits: When prices rise, new firms may enter the market, increasing supply. Conversely, when prices fall, some producers may exit, decreasing supply.

Changes in supply occur due to factors other than price. An increase in supply shifts the supply curve to the right, while a decrease shifts it to the left.

Price plays a critical role for producers in deciding what and how much to produce.
The law of supply states that, all else being equal, as the price increases, the quantity supplied increases.

Factors other than price, such as technological advancements, resource shortages, and the number of producers, can lead to changes in supply.
Shifts in the supply curve indicate changes in supply, with rightward shifts indicating an increase and leftward shifts indicating a decrease.

Price Elasticity of Demand measures how responsive consumers are to changes in the price of a product.
Elasticity is calculated using the formula:
- Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
If the result is greater than 1, demand is considered elastic; if less than 1, it's considered inelastic.

Availability of Substitutes: The more substitutes available for a product, the more elastic the demand. If consumers can easily switch to other products when the price increases, demand is elastic.
Price Relative to Income: When a product's price relative to consumers' incomes is high, demand tends to be more responsive to price changes. For necessities, demand is inelastic; for luxuries, demand is elastic.
Necessities vs. Luxuries: Necessities have inelastic demand because people will buy them even if prices increase. Luxuries have elastic demand because consumers can easily stop buying them if prices rise.
Time Needed to Adjust: Elasticity of demand can change over time. In some cases, consumers may take time to adjust to price changes, making demand more elastic over time.

Elasticity of Supply measures how responsive producers are to changes in the price of a product.
Elasticity of Supply is calculated using the formula:
- Elasticity of Supply = (% Change in Quantity Supplied) / (% Change in Price)
If the result is greater than 1, supply is considered elastic; if less than 1, it's considered inelastic.

Availability of Inputs: If the inputs needed for production are readily available, supply is likely to be elastic because producers can easily adjust the quantity supplied in response to price changes.
Mobility of Inputs: The ease with which inputs and products move through the supply chain affects elasticity. Improved mobility can make supply more responsive to price changes.
Storage Capacity: Storage capacity impacts supply elasticity. Products that can be easily stored are more likely to have elastic supply, while perishable goods may have inelastic supply.
Time Needed to Adjust: Like demand, elasticity of supply can change over time. Producers may need time to adjust their production levels in response to price changes.