factors affecting Demand and Supply

Topics: Supply and demand, Consumer theory, Goods Pages: 4 (1497 words) Published: October 12, 2014
Discuss the factors causing a shift in the demand and supply of a specific commodity.

In economics, Demand refers to the quantity of a goods or services that consumers are willing and able to buy at a given price in a given time period. The law of demand stipulates that there is an inverse relationship between the price of a good and the quantity demanded, that is to say, if the price of, say, good X rises, it will decrease the quantity demanded of good X and the price of the good falls, this will bring an expansion of the quantity demanded. The diagram below clearly explains the above statement:

A movement along a demand curve only occurs when there is a change in the price of the good in question. Some textbooks call these movements’ extensions and contractions. In the diagram below (Fig 1.1), when the price of CDs falls (from P1 to P2) there is a rise in demand (from Q1 to Q2), ceteris paribus. The movement along the curve is from point A to point B. When the price rises (from P1 to P3) there is a fall in demand (from Q1 to Q3), ceteris paribus.

The movement along the curve is from point A to point C.
Note that we must say 'ceteris paribus'. If one of the other determinants of demand changes as well, then the curve would shift.

A shift in the demand curve occurs if one of the 'other' (i.e. non-price) determinants of demand change. This means that for a given price level the quantity demanded will change. This is illustrated in the diagram below:

Fig 1.2

Note that the price has not changed (P1) and yet demand has increased (in the case of the shift to D2) to Q2. This could be due to a rise in real incomes (assuming the good is normal - see the required section in the 'Elasticities' topic), a rise in the price of a substitute good, a fall in the price of a complement, etc. (see 'determinants of demand' above). In the case of the shift to D3, demand has fallen even though the price has remained constant.

It is fairly obvious so far...
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