Definition.
Supply is defined as quantity of a commodity that the sellers are willing to put or let in the market at a given price and at a given time.
Demand is the amount of a commodity that people are willing and able to pay.
As the price changes producers are willing to produce more or less.
Supply
What causes supply to change?
- Nature-it plays a big part in determining supply of agricultural products. For example, rains, sunshine, temperature and diseases.
- Input or resources -they have a direct influence on the producers’ supply decisions as the supply decreases as the cost rise and increases when the cost of production falls.
- Availability of more or less competition cause an increase or a decrease in the supply-as the popularity of a product increases more producers enter the market hence the supply increases.
- Expectation of a future change in the prices -when the producers of a certain commodity is expected to fall then the supply will be high as the producers fear in making losses but on the other hand when the producers expect the price to rise the supply will decresase as the producers will be waiting to supply their products when the prices are high.
- Government policies-the government can either tax, subsidize, or regulate production- if the government want to reduce the supply it will tax the producers or the suppliers.
- Technology-due to the technological innovations this allowed more producers in many industries to increase hence this causes more supplies in the market as there will be more producers.
- Increase in the amount of physical capital available relative to the labor also helps the firms to increase the output and when the output is high then the supply in the market will also increase.
Capital- it is the tools, factories and the equipment that are used in the production process at large.
What causes change in demand?
- Price of the commodity-when the price of a product falls, the demand of the commodity increases as many consumers will be able to buy the product at that price as compared to when the product increases this leads to a decrease in the demand.
- Level of income of the consumer- an increase in the incomes of the consumer will increase their purchasing powers hence demand increases but low-income levels of the consumer will cause the demand to increase as there will be less incomes to buy the goods and services.
- Population- a high population causes an increase in the demand of a product as many people will buy the goods compared to when the population is low whereby les people will be purchasing the goods.
- Prices of other related goods- when the price of substitutes falls then consumers will for the substitute goods leading to a decrease in demand of the good.
Substitutes-goods that can be used in lieu of each other.
Compliments- goods used in conjunction with other goods.
- Advertisement- as the product is been advertised awareness is created and this causes consumers to purchase more.
Cross-price elasticity.
It is used to determine whether goods are close substitutes by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of the other good. If the cross-price elasticity is zero then the goods are compliments but when it is greater than zero then this implies that they are substitutes.
Revision.
Supply
the willingness and ability to bring to market (produce/sell) specific quantities of a good or service at different prices in a specific time period, all things remaining the same
Demand
the willingness and ability to buy specific quantities of a good or service at different prices in a specific time period, all things remaining the same
What does the law of supply state?
The law of supply states that producers will increase the quantity supplied at higher prices and decrease the quantity supplied at lower prices, if everything else remains the same.
When graphing supply and demand, this is known as a change in quantity supplied
What does the law of demand state?
The law of demand states that people will buy more of a good or service at lower prices and less at higher prices, if everything else remains the same
When graphing, this is known as a change in quantity demanded
What is the effect of supply? How is represented graphically?
a change in the quantity supplied
What is the effect of demand? How is represented graphically?
a change in the quantity demanded
Determinants
factors (other than the price of the good or service) which can influence demand or supply
What are the determinants of supply? How does an increase/decrease in the determinant affect supply?
- changes in the prices of productive resources used to make the good or the service
- changes in the technology used to make the good or the service
- changes in the profit opportunities available to producers by selling other goods or services
- changes in the number of sellers in a market
- changes in the expectations of producers
When graphing, this is known as a change in supply
Complimentary Goods
goods that are related to each other: if the price of one increases the demand for the other falls and vice versa, for example petrol and cars
Substitute Good
products or services that can be used in place of each other. When the price of one fall, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises
What are the determinants of demand? How does an increase/decrease in the determinant affect demand?
- a change in consumers’ incomes
- a change in consumers’ preferences
- a change in the prices of related goods or services (complements or substitutes)
- a change in a number of consumers in a market
- a change in the expectation
When graphing, this known as change in a demand
What direction do supply and demand curves shift as a result of increases and decreases?
- Increase in supply = right
- Decrease in supply = left
- Increase in demand = right
- Decrease in demand = left
Equilibrium Price
the one price at which quantity supplied equals quantity demanded
What are the effects of supply/demand shifts on equilibrium price and quantity?
- Increase in supply = Decrease in price/Increase in quantity
- Decrease in supply = Increase in price/Decrease in quantity
- Increase in demand = Increase in price/Increase in quantity
- Decrease in demand = Decrease in price/Decrease in quantity
Surplus
when the price is set above the equilibrium price
What is the result of a surplus?
results in a price decrease
How do you calculate a surplus?
sq.- qd = surplus
Shortage
when the price is set below the equilibrium price
What is the result of a shortage?
results in a price increase
How do you calculate a shortage?
qd – sq. = shortage
What are the two most common forms of price control?
Price ceilings and price floors
What do the two forms of price control result in?
Price Ceilings – shortages
Price Floors – surplus
Elasticity
the degree to which buyers and sellers respond to price changes
How do you calculate elasticity?
(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P1+P2)/2]
What do the calculations of elasticity mean?
= 0, Perfectly Inelastic
0 and < 1, Relatively Inelastic
= 1, Unit Elasticity
1 and < ∞, Relatively Elastic
= ∞, Perfectly Elastic
What are the determinants of supply elasticity?
- Availability of raw materials
- Available production capacity
- Time period required to produce more of the good or service
What are the determinants of demand elasticity?
- Necessity vs. luxury
- Proportion of income
- Number of substitutes
