Demand and Quantity Demanded
We know from the earlier topic that people tend to buy more of a particular item as the price goes down. In other words, Quantity Demanded goes up as price falls.
However, some students mistakenly say that “demand goes up as price falls”. In fact, the changes in price of an item does not change demand. It merely changes the quantity demanded of that particular item.
Now, Let’s see the difference between Demand and Quantity Demanded
Demand is the range of quantities that buyers are willing and able to buy at a range of demand prices. It is ALL the points that make up a demand curve. In fact, the whole demand curve itself is known as Demand.
Quantity demanded is a specific quantity that buyers are willing and able to buy at a specific demand price. It is but ONE point on a demand curve.
Change in Demand
A change in demand is a change in the ENTIRE demand relation. This means changing, moving, and shifting the entire demand curve. The entire set of prices and quantities is changing. In other words, this is a shift of the demand curve. A change in demand is caused by a change in the demand determinants. In other words, a change in demand is caused by any factor affecting demand EXCEPT price. The determinants which shift the demand curve include the following:
Income, or more precisely the buyer’s income affects the ability of the buyers to buy goods and services. An increase in the income increases the demand and shifts the demand curve to the right.
- Taste and Fashion(Preferences)
Demand will increase if a particular good or service becomes more popular. Likewise, outdated or out-of-fashion products will have a reduced demand in the market
- Substitutes and complementary goods
Substitutes are those goods or services which can be used instead of a particular good or service. Eg:- Margarine and butter. Petroleum and Natural gas.
The demand for a particular good will increase if the price of its substitutes increases and vice versa.
Complements are those goods which are usually consumed together. For example, tea and sugar are complements. If people in general develop a taste for more tea, they will naturally buy more sugar.
- Change in the quality
If the quality of a particular good or services improves, people will be willing to buy more of it even if the price doesn’t fall. Likewise, a fall in the quality will reduce the demand for the particular good.
A successful advertising can increase demand for the advertised product.
- Expected future price
If consumers expect higher prices in the future, their current demand will increase. If they expect lower prices in the future, their current demand will decrease.
Changes in Supply
A change in demand is a change in the ENTIRE supply relation. This means changing, moving, and shifting the entire supply curve. In other words, this is a shift of the supply curve. A change in supply is caused by a change in the supply determinants. In other words, a change in supply is caused by any factor affecting supply EXCEPT price. The determinants which shift the supply curve include the following:
- Prices of other commodities
The supply of one good may decrease if the price of another good increases, causing producers to re-allocate resources to produce larger quantities of the more profitable good.
- Number of suppliers/producers
More suppliers/producers result in more supply, shifting the supply curve to the right.
- Changes in the cost of production
If the cost of resources used to produce a good increases, sellers will be less inclined to supply the same quantity at a given price, and the supply curve will shift to the left.
- Technology and Technical Progress
Technological advances means improvements in the performances of machines. Technical progress includes the improvements in the skill of the workers, production methods, management and control. These improvements will reduce the cost of production and therefore producers will be able to supply more even if the price doesn’t go up.
If sellers expect prices to increase, they may decrease the quantity currently supplied at a given price in order to be able to supply more when the price increases, resulting in a supply curve shift to the left.
- Other factors
There are other factors which will affect the supply. For example, weather has a big impact on the supply of agricultural products. Government taxes and subsidies too have their respective affect on the supply. Therefore, any non-price factor which affects supply is a supply determinant and will shift the supply curve either to the left or to the right.
Next Topic: Elasticity