How Businesses manage Demand and Supply

• Production Possibility Curve

 How Businesses manage Demand and Supply
• Demand curves
• Demand is the amount of a product (good or service)
consumers are willing and able to purchase at a given price.

• Effective Demand: The term ‘effective demand’ indicates

that there is not just a desire to purchase,
but desire supported by the means of purchase.
How Businesses manage Demand and Supply
 How Businesses manage Demand and Supply
• Determinants or conditions of demand: The
‘conditions of demand’ include
• The price of other products (Po),
• The real income of households (Y),
• The tastes of households (T),
• Advertising expenditure on product X and so on.
How Businesses manage Demand and Supply
 How Businesses manage Demand and Supply
• Determinants

• Real income refers to the actual purchasing power of the consumers. If money
income doubles but average prices also double, then the consumer will only be able
to purchase the same as before, so that real income will be unchanged. However, if
money income rises by a larger percentage than average prices, then the consumer
can actually purchase more than before, so real income has risen.

• Normal products refer to goods or services for which demand tends to consistently
increase (shift to the right) as the real income of the consumer rises, and decrease
(shift to the left) as the real income of the consumer falls. Most
products come under this heading, with some products tending to be
more responsive to changes in real income than others. For example,
as real incomes increase, the demand for education, for health
services, for travel and for tourism all tend to increase quite sharply.
• 
 How Businesses manage Demand and Supply
• Inferior products refer to goods or services which are cheaper but poorer quality
substitutes for other goods or services. As a result, consumer demand for the
inferior product may at first increase as real income rises, as this is all that can be
afforded, but as real income continues to rise then the more expensive but better
quality substitute may eventually come within the purchasing power of the
consumer. The consumer may now switch away from the inferior product with
further rises in real income, so that demand for the inferior product decreases (shifts
to the left). Cheaper but poorer quality butter, margarine and coffee products are
possible examples of inferior products.
 How Businesses manage Demand and Supply
• Supply curves

• The supply curve in Figure 1.4(a) is a visual representation of how much of the
product sellers are willing and able to supply at different prices. The supply curve
slopes upwards from left to right, suggesting that at a higher price more will be
supplied, and at a lower price less will be supplied.

• For example, suppose product X is CDs, if the price of CDs rises from P1 to P2, the
supply of CDs will expand from Q1 to Q2 (other things equal) because producers of
CDs will now be making higher profits and so will have both the incentive and the
ability to buy in the extra resources to raise output.
How Businesses manage Demand and Supply
 How Businesses manage Demand and Supply
• Conditions of supply
– Variables within the ‘conditions of supply’ include the price of other products (Po), the
costs of production (C), tax rates (Tx), tastes of producers (Tp) and so on.
How Businesses manage Demand and Supply
How Businesses manage Demand and Supply

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