Supply and demand are the basis of economics and it is important to identify their patterns and graphs. There are three main reasons for demand:
1. The income effect: Customers will buy more products when prices fall and the opposite if prices rise
2. The substitution effect: If the price of a substitute is lower than other similar products, then more of it will be purchased.
3. Diminishing marginal utility: The more a good one consumes, the less utility and happiness one will get from it.
A change in quantity demanded is when a price and demand change to any place along the existing demand curve.
A change in demand is when the entire demand curve shifts as shown in this figure. This is often due to the determinants of demand which are:
S - Substitutes are goods that share a similar market
P - Preference is a change in the consumer's preferences and the population is the number of customers in a market
I - Income When the income increases the demand goes up
C - Complementary goods are goods that must be used together
E - Expectations that prices may increase or decrease
The supply curve increases when prices increase as sellers are more potential consumers. The determinants of supply are as follows:
R - Resource costs are when the price of producing a product changes
O - Other goods' prices determine what types of goods a firm will produce
T - Technology can increase efficiency and lower costs
T - Taxes are mandatory payments to the government
E - Expectations of price increase will encourage suppliers to produce
N - Number of sellers changes the amount of competition a market will face
Market equilibrium is where there is no surplus or shortage in product. This is the ideal situation for a market so any market in disequilibrium will alter its prices to meet the demand better. For example, in this graph, the demand for eggs goes down. Thus, the new equilibrium price has a lower price and a lower quantity.
Vocabulary/Summary:
Substitutes: Similar products
Complementary: Goods used together
Utility: A measurement of happiness and pleasure
Equilibrium: The point where supply meets demand
Change in quantity demanded: A change in the price and demand along the demand curve
Change in demand: A change in the entire demand curve