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Year 12 Economics - Demand and supply

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Laura Ward

on 31 March 2013

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Transcript of Year 12 Economics - Demand and supply

Using Demand and Supply diagrams to
show the operation of the price system Demand and Supply
diagrams The effects of changes in market prices on economic decisions Illustrates the behaviour of buyers
and sellers of a particular good
or service in a market, and how
prices are determined Demand: the quantity of a good or service that consumers are willing to purchase at a given price The behaviour of buyers in a market -
The demand line Equilibrium: the price in a market where the quantity demanded and quantity supplied are exactly equal. Determining the market
or equilibrium price Market prices are always changing
Consumers suddenly alter their demand or
producers vary their supply Changes in the equilibrium price Law of Demand Law of demand: the quantity of a good or service demanded varies inversely to price, that is when the price of a good decreases, the quantity demanded of that good will increase. As prices rise there is a contraction in demand.
As prices fall there is an expansion in demand.

This can be expected for any good in a competitive market. Price elasticity of demand Elasticity measures the responsiveness of the demand for, or supply of a product that is relatively ‘responsive’ to changes in its price (i.e. does the change in price cause a large or small change in the quantity demanded) Three types of demand elasticity Elasticity is greater than 1.0
Quantity demanded changes more than proportionally with change in price Elasticity is 1.0
Quantity demanded changes by the same proportion of the change in price Elasticity is less than 1.0
Quantity demanded changes less than proportionally to the change in price Determinations of elasticity of demand Type of Item Necessities will be
relatively inelastic

Luxury items will be
relatively elastic Substitutability Demand for substitutes is
usually fairly elastic.

Demand for unique products
is quite inelastic. Time Period Demand tends to be more elastic for products in the long term than in the short term.

Time gives buyers the opportunity to find alternatives or substitutes. Cost and
relative importance Expensive items tend to have a more elastic demand.

Cheaper items a tend to have more inelastic demand. Minor
complementary
items Demand for cheap complementary items to be used together with a dearer product will have an inelastic demand The behaviour of sellers in a market -
the supply line Supply: the quantity of a good or service that sellers are willing to make available at a given price Law of Supply quantity of a good or service supplied varies directly with price, that is as the price of a good increases so does the quantity supplied As price rises there is an expansion in supply.
As price falls there is a contraction of supply.

This behaviour would be true of the supply of
almost all goods or services in a competitive market. measures the responsiveness of the demand for, or supply of a product that is relatively ‘responsive’ to changes in its price (i.e. does the change in price cause a large or small change in the quantity demanded) Elasticity Price Elasticity of Supply Three types of supply elasticity Elasticity is greater than 1.0
quantity supplied changes by a larger proportion than the change in price Elasticity is 1.0
Quantity supplied changes by the same proportion as the change in price Elasticity is less than 1.0
Quantity supplied changes by a smaller proportion than the change in price Determinations of elasticity of supply Storability Items that can be stored without deterioration face a more elastic supply line. Rise in price means sellers can quickly and simply access the extra supplies. Services face a more inelastic supply as they cannot be stored. Resource mobility and unused industry capacity Supply will be more elastic if production levels can be inexpensively changes by moving resources between industries or if there is unused productive capacity in a firm or industry Time Period It is difficult for firms to expand in the short term so supply is relatively inelastic.
In the long term supply will become more responsive to price changes. Increases and decreases in the whole demand line caused by new conditions of demand Conditions of demand affect consumer choices in different markets Changes in demand-side conditions -wage and income levels
-tax rates on particular items and on personal incomes
-advertising
-population size and age distribution
-interest rates on borrowed credit used for expensive purchases
-anticipated changes in the future prices of items
-price of a substitute item
-price of a complementary product
-government regulations affecting consumers of a particular product
-consumer or business confidence and optimism about the future Weakening of demand-conditions Strengthening of demand-conditions Increases and decreases in the whole demand line caused by new conditions of demand Conditions of supply affect production choices in different markets Changes in supply-side conditions -profitability affected by a firm’s production costs
-wages and on-costs of labour in the industry and firms
-the level of interest rates paid by businesses on money borrowed
-the charges applicable for the provision of utilities and services to the firm
-rates of company and indirect taxes on producers or the introduction of a carbon tax or trading scheme
-cost of local and imported materials and equipment needed for production
-the availability and cost of new technology in the industry
-the climatic conditions applicable to tourist and rural industries
-industry bankruptcy levels (alter number of suppliers)
-level of government assistance, such as tax concessions and investment allowances for the industry Weakening of supply conditions Strengthening of supply-conditions Price changes alter what and how much is produced Rising prices are a signal to suppliers that there is a shortage. Better prices, higher incomes and increased profits encourages owners of resources to direct more factors of production towards this area.

Falling prices signal overproduction meaning lower profits and incomes. Efficiency, profits and income will only be maximised if some resources are reallocated to other uses. Price changes alter how goods and services are produced Changes in cost or market price of each resource alter how firms produce goods and services.

Firms make their production decisions to try to maximise profits and efficiency by minimising production costs. Price changes alter the distribution of income between individuals When market prices change, the distribution of incomes between individuals is affected. E.g. Individuals selling labour and other scarce resources or firms selling finished products that are increasingly high in demand, will enjoy even higher incomes and profits.

Extra labour and other inputs will be lured into this area.
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