Economics 11B

Topic: Demand and Supply

A market is any mechanism that facilitates the interaction of buyers and sellers with a view to
the purchase and sale of a good or a service. A market can be an actual physical location.
However, with the development of e-commerce, a market does not have to be a physical location.
A buyer on his computer in Jamaica, using his credit card to purchase skincare products from the
sellers in the USA, is operating in a market.
Demand is the desire and willingness to buy a product, backed by the ability to pay for the good
or service.
Supply is the provision of a good or service for sale in the market at a particular price at a
particular time.
Market forces are the conditions of demand and supply that affect demand and supply in the
market.
Ceteris paribus is the Latin phrase meaning ‘other things remaining constant’ – or ‘if nothing
else changes’.
When a consumer demands a good, it means that the consumer desires the good and is willing
and able to buy the good. Economists call this demand ‘effective demand’.
Individual demand is the demand by one consumer for a good or service.
The individual demand schedule is a table showing the price of a good and the quantity
demanded at each price by an individual consumer.
The individual demand curve is a graphical representation of the quantities demanded of a
good by a consumer at each price.
Example
In Hinterland there are only three inhabitants who buy bananas. The three inhabitants are Abe,
Betty and Cara.
The demand curve is downward sloping from left to right. It is labelled dd. This is an individual
demand curve. The downward slope of the curve shows that there is an inverse relationship
between price and quantity demanded.

The diagram above shows the market demand curve as derived from the market demand
schedule. Note that the curve is also downward sloping from left to right. It is labelled DD. It is
downward sloping because all consumers buy more at lower prices and less at higher prices.
The demand curve is labelled DD in the diagram above. When the price of a good increases,
there is a fall in quantity demanded of the good. The price increase causes a contraction of
demand, resulting in a movement along the demand curve from point B to point A. When the
price of a good decreases, there is a rise in the quantity demanded of the good. This is called an
extension of demand. This also causes a movement along the demand curve. In the diagram, this
movement along the demand curve is from point B to point C. Therefore, movements along the
demand curve are always due to changes in the price of the good, because the demand curve
connects only demand and price.

Determinants of Demand
 The price of the good itself. The price of the good is considered to be the first condition
of demand. As we have seen above, as price increases, quantity demanded falls; and as
price decreases, quantity demanded rises.
 Changes in population. Increases in population cause demand to increase. Decreases in
population cause demand to decrease.
 Changes in income. Increasing income causes demand to rise and decreasing income
causes demand to fall.
 Tastes and fashions. A change in tastes or fashions in favour of a good will cause demand
for that good to increase. When tastes and fashions move away from a product, demand
for it will fall.
 Seasonal factors. Seasons and times of the year will cause demand to change. In the rainy
season, the demand for umbrellas increases. At Christmas time, there is an increase in
demand for toys, paint and curtain fabric.
 The prices of other goods. • If there is an increase in the price of butter, the demand for
margarine will rise, even though all conditions in the margarine market remain
unchanged. Margarine and butter are considered substitute goods. Products B and M are
considered substitutes for each other if as the price of B changes, the quantity demanded
of M moves in the same direction; complement.
 Also, if there is an increase in the price of ackee, consumers will demand less ackee.
They might also demand less saltfish to cook with the ackee. It is exactly the same if we
speak about crab and callaloo. These goods are complementary goods. Good A is
considered a complement to good B if, as the price of good A changes, the demand for
good B moves in the opposite direction.
 Advertising. An increase in advertising causes an increase in demand and a decrease in
advertising causes a fall in demand, ceteris paribus.
 Rates of interest on consumer credit. When interest rates on loans to buy consumer goods
are low, demand increases. If interest rates rise, demand decreases.
 Expectations of future price changes. If consumers expect that the price of a product will
increase in the near future, demand increases in the present. Similarly, if they expect
prices to fall soon, consumers might choose not to buy now (demand falls) and wait for
the price fall.
Supply - the amount of goods or services a seller is willing and able to make available for sale at
each price during a given period.

An industry is made up of a number of firms. A single firm’s supply is simply the quantity that a
particular firm is willing to make available for sale at each price for a given period. An
industry’s supply is the sum total of the output of all firms in the industry that they are willing
to make available for sale at each price per period.
The industry’s supply schedule shows the quantity supplied by all the firms in the industry at
each price.
The industry supply curve is a graphic representation of the various quantities supplied by all
the firms in the industry at each price. It is upward sloping from left to right, showing a direct
relationship between price and quantity supplied. As price decreases, quantity supplied
decreases. As price increases, quantity supplied increases. This relationship is called the Second
Law of Demand and Supply. It can be seen from the supply schedule or the supply curve. Some
economists simply call this the Law of Supply.
A firm’s supply schedule is a table showing the quantity of the good (or service) that the firm is
willing to supply at various prices. From the supply schedule of the firm, we can construct a
firm’s supply curve. The supply curve is a graphic presentation of the quantity supplied at each
price.
Determinants of Supply
 The price of the good itself. Price affects supply. As price increases, ceteris paribus,
quantity supplied increases. The greater the price, the higher the quantity the producer
will wish to supply, ceteris paribus (to capitalise on potential profits). The lower the price,
the lesser the quantity the producer will wish to supply, ceteris paribus (to retain
resources for more profitable use later on). Note that changes in the price of the good
cause a movement along the supply curve. Changes in any other determinant of supply
cause a shift in the supply curve.
 The price of factors of production. Higher factor prices raise production costs. This
causes profits to decline. Firms move out of these less profitable business activities and
so supply falls. In contrast, lower factor prices reduce production costs and increase
profits. This is an incentive for firms to increase supply.
 Technology. Improvements in technology make it possible for firms to produce more
goods using fewer resources (and so lowering costs). This increases supply.
 Taxes and subsidies. Businesses treat most taxes as costs. The imposition of a tax has a
similar effect to an increase in costs. Taxes, therefore, lead to a fall in supply. Subsidies
reduce costs and so lead to an increase in supply.
 Number of sellers. Other things being equal, the larger the number of suppliers, the
greater the industry’s supply. As firms leave the industry, the total industry supply will
fall, ceteris paribus.
 Prices of other goods. As prices of other goods increase, these suppliers earn more
profits, ceteris paribus. This will induce firms involved in activities that not as profitable
to switch production to the more profitable goods. Production and supply of the less
profitable goods will fall.
 Weather. For agricultural commodities, a decrease in supply can be caused by drought or
unseasonal weather which adversely affects crop yields. Good weather can cause a
bumper harvest and an increase in supply.
Shifts in Supply curve