Demand, supply and related goods

Last time

Before we start: last time, in Scarcity, opportunity cost, factors of production and enterprise, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

The two curves

Demand and supply analysis is the core tool of AS microeconomics. You must distinguish movements from shifts precisely, and explain links between markets: joint, derived and alternative demand and supply. This lesson covers all of it.

Demand

Demand is the quantity of a good consumers are willing and able to buy at each price in a given time period: effective demand. The demand curve slopes down: as price falls, quantity demanded rises, because of the income and substitution effects. A change in the good's own price causes a movement along the curve: an extension or contraction.

Shifts in demand

Income: a rise shifts demand right for normal goods, left for inferior goods. Prices of substitutes and complements; tastes and preferences; advertising; population; and expectations of future prices. Government policy, such as income tax, also shifts demand.

A shift in demand

An increase in demand shifts the curve right, from D to D1: at every price, more is demanded. At a price of 6 dollars, quantity rises from 4 to 6. Label the curves and the axes.

Supply

Supply is the quantity producers are willing and able to sell at each price in a given time period. The supply curve slopes up: higher prices make production more profitable and cover higher marginal costs. A change in own price moves along the curve; other conditions shift it.

Shifts in supply

Costs of production: wages, raw materials and energy; a rise shifts supply left. Technology and productivity shift it right. Indirect taxes shift it left; subsidies right. Weather and natural disasters, the number of firms, and prices of other goods the firm could make.

Joint demand and derived demand

Joint demand: goods demanded together, complements, such as cars and petrol. A rise in the price of one reduces demand for the other. Derived demand: demand for a factor or input comes from demand for the final product, such as demand for steel from demand for cars. Competitive, or alternative, demand: substitutes, such as tea and coffee.

Joint and alternative supply

Joint supply: producing one good automatically produces another, such as beef and leather. More beef means more leather supplied. Alternative, or competitive, supply: resources used for one good cannot be used for another, such as land for wheat or for cotton. So a change in one market spills over into another.

Which determinant matters most?

An exam may ask which determinant best explains rising demand for a product. Consider the type of good: for luxuries, income may matter most; for fashion goods, tastes and advertising. And the time period: expectations matter in the short run, population in the long run.

Mistakes that lose marks

Mistake one: a fall in price causing demand to rise. It causes quantity demanded to rise. Mistake two: treating a tax as shifting demand. It shifts supply. Mistake three: mixing up joint demand and joint supply. The fix: precise language and the right curve.

The full-marks tip

The full-marks tip: use precise terms: quantity demanded changes with own price; demand shifts with other conditions. For related markets, trace the chain from one market to the other.

On one card

So, on one card: demand and supply. Keep it for revision.