Demand & Supply

Economics 9708
AS Level
Chapter 7

Law of Demand
• The law of demand is a fundamental principle of
economics that states that at a higher price,
consumers will demand a lower quantity of a
good.
• Demand is derived from the law of diminishing
marginal utility, the fact that consumers use
economic goods to satisfy their most urgent needs
first.
The law of demand states that if all other factors remain
constant, then the price and the demanded quantity of
any good and service are inversely related to one
another. This implies that if the price of an article
increases then its corresponding demand decreases.

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 • Demand curves can be constructed from Demand
Schedules: a table that shows the amount of
demand for a product at different prices.

Features of a demand curve

1.Direction of slope depends on the nature of
the market.
2.Imperfectly competitive markets have
downward sloping.
3.Perfectly competitive markets have
horizontal demand curves.
4.Both Giffen and Veblen goods have
positively sloped demand curves.
5.Usually downward sloping from left to right.

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Different slopes of demand curves

Movements ALONG the demand curve and

SHIFTS of the demand curve.
Movements along the demand curve are
caused by changes in price – the price effect.
Movement along the demand curve depicts
the change in both the factors i.e. the price
and quantity demanded, from one point to
another. Other things remain unchanged
when there is a change in the quantity
demanded due to the change in the price of
the product or service, results in the
movement of the demand curve.

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Demand curves can shift.
Changes in factors like average income and preferences can
cause an entire demand curve to shift right or left. This
causes a higher or lower quantity to be demanded at a given
price. A Non-price effect.

Factors affecting demand

Incomes
Price & availability of related products
Changes in fashions and tastes

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The law of supply
The law of supply is the law that states that,
all other factors being equal, as the price of a
good or service increases, the quantity of
goods or services that suppliers offer will
increase, and vice versa.
The law of supply says that as the price of an
item goes up, suppliers will attempt to
maximize their profits by increasing the
number of items for sale.
The law of supply says that a higher price
will induce producers to supply a higher
quantity to the market.
Because businesses seek to increase revenue,
when they expect to receive a higher price for
something, they will produce more of it.
Meanwhile, if prices fall, suppliers are
disincentivized from producing as much.

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Supply in a market can be depicted as an
upward-sloping supply curve that shows how
the quantity supplied will respond to various
prices over a period of time.

Factors affecting supply

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• Costs
• Size and nature of the industry
• Changes in the prices of substitutes and
compliments
• Government policy
• Other factors