Demand And Supply by dfsiopmhy6

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									    NGFL WALES BUSINESS STUDIES A LEVEL                 2008 Spec. Issue 1 Sept. 2007     Page 1
                RESOURCES.


                                 Demand And Supply
Within any market, price is determined by the inter-
action of demand and supply. How much consumers
are willing to buy, combined with how many goods
suppliers are willing to produce, will set the market
price.




                                                                         Demand
                                                                         Demand is defined as the
                                                                         quantity of goods consumers
                                                                         are willing and able to pur-
                                                                         chase at each price level. We
                                                                         can represent demand by
                                                                         drawing a demand curve. The
                                                                         demand curve tells us that the
                                                                         higher the price of a good or
                                                                         service, the lower the quan-
                                                                         tity demanded, and the lower
                                                                         the price the higher the quan-
                                                                         tity demanded.




                                                                          Supply
                                                                          Supply is defined as the
                                                                          quantity of goods that firms
                                                                          are willing to supply to the
                                                                          market at a given price level.
                                                                          By looking at the supply
                                                                          curve , we see that the lower
                                                                          the price the lower the
                                                                          amount supplied, and the
                                                                          higher the price the higher
                                                                          the quantity supplied.


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Title Demand and Supply                                                                    Page 2

The Market Mechanism                                     demand curve. They can do this by using the market-
The market mechanism works by the interaction of         ing mix to affect consumer demand for their products.
supply and demand. If there is effective demand (a       We see how this can work below
want backed by ability and willingness to pay), pro-
ducers will attempt to profitably provide goods to       The market for the new Mini
meet that demand.
                                                         Originally the market is at equilibrium, at price P and
Within any market, price is determined by the inter-     quantity Q. The demand curve shifts to the right be-
action of supply and demand. How much consumers          cause of an increase in advertising by BMW, increas-
are willing to buy, combined with how many goods         ing demand. This moves the market equilibrium to
suppliers are willing to produce, will set the market    price P1 and quantity Q1. The firm is able to sell more
price.                                                   Minis at a higher price.

We see below a demand curve and a supply curve.
The demand curve tells us that the higher the price of
a good or service, the lower the quantity demanded,
and the lower the price the higher the quantity de-
manded. By looking at the supply curve, we see that
the lower the price the lower the amount supplied,
and the higher the price the higher the potential sup-
ply                                       …………...




                                                                          Sometimes factors outside a firms
                                                                          control alters the demand curve for
                                                                          their goods. These factors include;
                                                                                fall in peoples disposable in-
                                                                          comes—this can arise from an in-
                                                                          crease in interest rates. In this case for
                                                                          most goods the demand curve will
                                                                          shifty to the right, reducing price and
                                                                          quantity sold.
                                                                                increase in competition—if con-
                                                                          sumers have an new alternative (or
                                                              substitute good) that they can purchase instead,
The price in any market, for any good, is determined          then the effect is often a shift to the left of the
by the interaction of supply and demand. The equi-            demand curve of the original good.
librium point is where Supply = Demand. At this              change in fashion.—goods come into and go out
point all goods produced are sold.                            of fashion, goods becoming more fashionable
                                                              have shift to the right of the demand curve, in-
All firms must be aware of this interaction of supply         creasing quantity demanded and pushing up
and demand. In many cases firms must accept the               prices. If goods become less fashionable then the
market (equilibrium price) for the goods or services          reverse occurs, a fall in quantity demanded and a
that they produce and sell, - these firms are known as        fall in price.
price takers. Some firms are large enough or have
strong enough brands to influence the position of the
Title Demand and Supply                                                                 Page 3

Supply.                                                      Increase in productivity
                                                             Fall in tax on the goods produced.
Supply is defined as the amount that producers are
willing to offer for sale at a given price in a given
time period. The basic law of supply states that ‘the     Notes
higher the price the greater the quantity supplied, and
the lower the price the lower the quantity supplied.

Supply in the short run, generally tends towards the
inelastic—an increase in price does not quickly in-
crease the quantity supplied by producers. This oc-
curs because resources of production are often not
easily transferred from one form of output to an-
other. For example if demand for British beef was
suddenly to increase, until farmers could rear more
beef cows there is little they can do to increase sup-
ply levels.
There are of course exceptions to this trend of inelas-
tic supply, these include;
     Situations where large stocks are held ready
      for release- using the above example if there
      were warehouses full of frozen beef, then price
      elasticity of supply will be more elastic.
     Where spare capacity exists – if demand for
      any daily newspaper were to increase, then
      print runs could be easily extended to meet this
      demand.
     Where resources are easily transferred – a pro-
      duction line producing one good, might instead
      be used to produce a good for which demand is
      increasing, or workers can be switched to pro-
      ducing a good that is in demand.

Shifts in the Supply Curve.

An increase in costs of production or supply will
lead to the supply curve shifting to the left. This
means that at each and every price, less is supplied to
the market. Factors that can cause a shift to the left
include;
     An increase in the cost of raw materials
     An increase in real labour costs
     An increase in tax on goods produced

A fall in the costs of production will cause a shift to
the right of the supply curve. This means that at each
and every price a greater quantity will be supplied to
the market. Factors which cause this shift to the right
include
      Introduction of new technology
      Fall in the price of raw materials

								
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