Demand & Supply
In this video, top economics tutor Mr Eugene Toh teaches the concept of demand.
In this video, top economics tutor Mr Eugene Toh teaches the concept of supply.
Demand represents the whole range of quantities that consumers are willing and able to buy at all possible prices, depicted by the entire demand curve. A change in demand implies a shift in the entire demand curve due to changes in non-price determinants of demand.
The non-price factors of demand include:
Tastes and Preferences: Consumer tastes can shift due to trends, societal changes, or successful advertising. For instance, a successful marketing campaign could increase demand for a newly launched product.
Income: Higher income often leads to increased demand for normal goods, while lower income decreases demand. For inferior goods, this relationship is reversed. For example, as income rises, demand for luxury cars (a normal good) might increase, while demand for second-hand cars (an inferior good) might decrease.
Prices of Related Goods: The price of substitute goods or complementary goods can affect demand. For instance, a price increase in beef might increase demand for chicken (a substitute), and a price decrease in printers could increase demand for ink cartridges (a complement).
Size of Market: Factors such as population growth, demographic changes, or expansions into new markets can lead to changes in demand. For instance, an aging population might increase demand for healthcare services.
Expectations: Future expectations about prices or income can affect present demand. For example, if people expect the price of gold to rise in the future, they might increase their demand now.
Be careful not to mix up the non-price factors of demand with the determinants of price elasticity of demand. To help remember these determinants, you might find it useful to use the acronym TIPSE - Tastes, Income, Prices of related goods, Size of market, and Expectations. Think of it as "TIPSY" with a spelling mistake due to being tipsy!
Supply represents the entire range of quantities that producers are willing and able to sell at all possible prices. It is represented by the entire supply curve. A change in supply indicates a shift in the entire supply curve, resulting from changes in non-price determinants of supply.
The non-price factors of supply include:
Prices of Factor Inputs: The cost of factor inputs, such as raw materials, labour, and capital, significantly influences the cost of production, and hence, the supply. If these costs increase, the cost of production goes up, leading to a decrease in supply. For instance, a rise in wages would increase the production cost and result in a decrease in supply.
Technology: Advancements in technology can enhance the efficiency of production methods. This can lead to a higher productive capacity and lower costs, thus increasing supply. An example is the impact of automation and AI in manufacturing, where increased efficiency often leads to an increased supply.
Expectations of Future Prices: If firms anticipate a rise in future prices, they may decrease their current supply, choosing to sell later when prices are higher. This strategic decision directly affects current supply levels.
Number of Firms: The number of firms operating in a particular market or industry can directly impact the supply of a good or service. More firms typically result in an increase in total market supply.
Taxes & Subsidies: Government interventions, such as taxes and subsidies, can alter the cost of production. An increase in subsidies reduces production costs, leading to an increase in supply, while an increase in taxes has the opposite effect.
Supply Shocks: Events such as natural disasters or wars can disrupt the availability of factor inputs like land, labour, and capital. These events increase the cost of production, thus decreasing supply.
Be careful not to mix up the non-price factors of supply with the determinants of price elasticity of supply. To help you remember these factors, we've crafted a mnemonic: P-TENTS - standing for Prices of factor inputs, Technology, Expectations of future prices, Number of firms, Taxes & Subsidies, and Supply shocks. Remember, these P-TENTS can shift the supply curve!
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