AS Business Studies

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AS Business Studies

• Quick intro to Demand Supply

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DEMAND ISSUES
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What is Demand???
Quick Ec test whats this called?

• Buyers demand goods.
• Demand is the amount of a product that consumers
  are willing and able to purchase at a given
  price.
• The lower the price, then there should be more
  customers willing to buy it!
• (not always think of cheap cheese, tinned pork
  meat, sandwich paste spread!)

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Quick Task.

• Other than price what else would influence
  demand?

• Think about some products
• Flights to New York,
• Organic food,
• petrol,
• DVDs,
• Guardian newspaper,
• cycling helmets!

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Answers to Other than pricewhat else would
influence demand?

• Income
• Price of other goods
• Substitute products
• Complementary products
• Change in tastes and fashion
• Wants Luxuries vs Needs essentials
• Advertising Promotion
• Legislation

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Explaining the downward sloping demand curve

• For normal goods, more is demanded as price falls
• Firstly at lower prices, consumers can afford to
  purchase more with their income
• Secondly, a fall in price makes one good
  relatively cheaper than a substitute encouraging
  consumers to switch their demand in favour of the
  lower priced product
• Thirdly, a fall in price means that the consumer
  derives more benefit (satisfaction or utility)
  per pound spent on the product than they did
  before

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The Law of Demand and the Demand Curve
Price
The demand curve shows how quantity demanded
responds to a change in the goods own
price There is an inverse relationship between
price and quantity demanded
P1
Demand (D)
Quantity Demanded (Qd)
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The Law of Demand and the Demand Curve
Price
A contraction of demand
P2
P1
Demand (D)
Quantity Demanded (Qd)
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The Law of Demand and the Demand Curve
Price
P2
P1
An expansion of demand
P3
Demand (D)
Quantity Demanded (Qd)
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Go to your worksheet

• Draw a Demand curve in the box and write down
  your own explanation of what a Demand curve
  shows.
• more is demanded as price falls
• There is an INVERSE RELATIONSHIP between price
  demand..
• consumers can afford to purchase more with their
  income
• a fall in price makes one good relatively cheaper
  than a substitute encouraging consumers to switch
  their demand in favour of the lower priced
  product
• a fall in price means that the consumer derives
  more benefit (satisfaction or utility) per pound
  spent on the product than they did before

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Shifts in Demand
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An Outward Shift of Demand
Price
An outward shift of the demand curve shows that
more of the product is being demanded at each
price. It also shows that the seller (supplier)
could sell the same quantity at a higher price
P1
Demand (D)
D2
Quantity Demanded (Qd)
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An Inward Shift of Demand
Price
An inward shift of demand means that less is
bought at each price level. There has been a
reduction in the quantity that consumers are
willing and able to see at each and every price
P1
D3
Demand (D)
Quantity Demanded (Qd)
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So what could cause an increase in demand for
This sounds familiarhows your short term memory?

• Flights to New York,
• Organic food,
• petrol,
• DVDs,
• Guardian newspaper,
• Childrens car seats!

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Causes of an outward shift in demandi.e. more is
bought!

• A rise in the real incomes of consumers
• An increase in the price of a substitute good
  (i.e. a competing product)
• A fall in the price of a complementary good
• A change in consumers preferences towards the
  good
• An increase in the size of the total population
• A fall in interest rates (e.g. if the product is
  often bought using loan finance)
• A rise in consumer confidence (important for big
  ticket items of spending)
• Social changes which affect total demand for a
  product

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Go back to your worksheet

• Go back to the demand curve drawn earlier.. Fill
  in your own shift in demand.
• Use 2 different colours if possibleone demand
  curve as an inward shift (less is demanded) and
  another colour demand curve to show an outward
  shift (more is demanded)

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Something more challenging.
Use the mini white boards

• Draw your own Demand diagrams to explain what
  would happen to the demand of B.A. flights to New
  York in the following situations.
• More money spent by BA on advertising
• A terrorist attack using planes in USA
• Virgin Atlantic cut their prices of flights to NY
• Customer income rises
• BA cuts their price of flights to NY

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SUPPLY ISSUES
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The Law of Supply

• Supply is the quantity of a good or service that
  a producer is willing and able to supply onto the
  market at a given price in a given time period
• The basic law of supply is that as the market
  price of a commodity rises, so producers expand
  their supply onto the market
• A supply curve shows a relationship between price
  and quantity a firm is willing and able to sell

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The Supply Curve
Supply
An increase in price will cause an EXPANSION in
Supply.
Price
P2
P1
P3
Draw your own supply curve onto your notes
A fall in price will cause an CONTRACTION in
Supply.
Q2
Q1
Q3
Quantity
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Explaining the supply decision

• The quantity supplied is the amount sellers are
  willing and able to offer for sale at a single
  price
• The change in the price of the good itself does
  not shift supply--it causes a movement ALONG the
  supply curve
• Supply curves normally slope upward. Why?
• Rising prices act as an incentive for producers
  to expand output potential for higher profits
• Increased output may lead to higher costs of
  production
• Increased output might lead to lower costs per
  unit (known as economies of scale)

Add these to your notes
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Shifts in the supply curve
Decrease in Supply
Increase in Supply
Price
S3
S1
S2
P1
Quantity
Q1
Q3
Q2
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Causes of shifts in market supply

• Changes in production costs
• Wages,raw materials and components, energy,
  rents, interest rates
• Government taxes and subsidies
• Changes in technology ICT can reduce long term
  costs but are expensive in SR
• Climatic conditions (important for agricultural
  supply)
• Changes in the number of producers in the market
• Changes in the objectives of suppliers in the
  market
• Changes in the prices of substitutes in
  production
• The profitability of alternative products
  (substitutes) or those with joint supply (crude
  oil petrol and paraffin and diesel)
• Expectation of future price changes

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The Supply Curve
Price
The supply curve shows the quantity of a product
that a supplier is willing and able to sell at a
given price in a given time period There is
usually a positive relationship between price and
quantity supplied
Supply (S)
P1
Quantity Supplied (Qs)
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The Supply Curve
Price
An increase in market price causes an expansion
of quantity supplied as producers respond to the
incentive of higher prices and higher potential
profits.
An expansion of supply
S1
P2
P1
Quantity Supplied (Qs)
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The Supply Curve
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An Outward Shift in the Supply Curve
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An Inward Shift in the Supply Curve
Price
A fall in supply means that less is supplied onto
the market at each price
S3
S1
P1
Quantity Supplied (Qs)
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Now its your turn
Use the mini white boards

• Draw your own Supply diagrams to explain what
  would happen to the supply of B.A. flights to New
  York in the following situations.

• Cheaper aviation fuel costs
• The EU legislates to reduce the number of flights
  into EU airports
• A tax of 100 is introduced on non nationals
  entering USA.

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Bringing Demand Supply together

• Equilibrium.

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The Market Equilibrium
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Demand and Supply Schedules for petrol
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The equilibrium in a market
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Homework

• Read Unit 11 Pricing in textbook
• P 80 answer Section A Revision Questions 2 to 6
• (16 marks) should take no more than 30 minutes

Next lesson elasticities need a calculator