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Remember the shifts in demand and supply:::

Decrease in Demand
Price of complementary goods: If the price of complementary goods rises, it is assumed that demand will decrease. For example, if the price of petrol increases greatly, then the demand for cars will likely drop. Price of substitute goods: If the price in a substitute good lowers, then demand will likely decrease. For example: If the price of making wind power becomes lower, the demand for coal will decrease, so everyone will buy wind power instead.

Decrease in Demand
Price of complementary goods: If the price of complementary goods rises, it is assumed that demand will decrease. For example, if the price of petrol increases greatly, then the demand for cars will likely drop. Price of substitute goods: If the price in a substitute good lowers, then demand will likely decrease. For example: If the price of making wind power becomes lower, the demand for coal will decrease, so everyone will buy wind power instead.

The Supply Curve


Factors influencing supply:
S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp)
Where: Pn = Price Pn..Pn-1 = Profitability of other goods in production and prices of goods in joint supply H = Technology N = Natural shocks F1..Fm = Costs of production E = Expectations of producers Sp = Social factors

Effect of a shift in the demand curve


P

i
Pe2

g
Pe1

D2
D1
O Q e1
fig

Q e2

Effect of a shift in the supply curve


P

S1

g
Pe1

D
O
fig

Q e1

How can demand be decreased?


Tastes: Everyone in society changes tastes. For example, in the 1980s headbands were very popular, so now the demand for them has decreased because people have changes fashion tastes. Income: If income decreases then the assumption is that demand will decrease because people dont have the spending power any more.

PRICE AND OUTPUT DETERMINATION


Effects of shifts in the demand curve
movement along the supply curve and the new demand curve

Effects of shifts in the supply curve


movement along demand curve and new supply curve

Identifying the position of demand and supply curves

Problems in identifying the position and shape of the demand curve: shift in supply curve
P

S2 S1

30p

20p

D O
fig 800 1000

Inter-Relationships Between Markets


Joint Demand: Where two or more complements are brought together. E.g. tennis racquets, tennis balls, washing machines and washing powder. Competitive Demand: Where two or more goods are substitutes for each other. E.g. Coca-Cola and Pepsi Cola, gas and oil.

Inter-Relationships Between Markets


Derived demand: When the demand for one good is the result of or derived from the demand for another good. E.g. steel is used for ships and cars. Composite demand: When a good is demanded for two or more distinct uses. E.g. milk, land etc. Joint supply: When two or more goods are produced together, so that a change in supply of one good will necessarily change the supply of the other goods which it is in joint supply. E.g. cows for beef and leather, oil well can have both oil and gas etc.

Learning Objectives
Students should be able to explain equilibrium (market) price and the concepts of producer and consumer sovereignty. They should be familiar with the situations of shortage and surplus (excess demand and supply) and the role of market forces. Explain consumer and producer surplus. Students should be able to understand and explain (with P/Q diagrams and text) how the interaction of shifts in demand and supply can result in fluctuations in price. Students should be familiar with the concepts of joint demand, competitive demand, derived demand, composite demand and joint supply.