Demand and Income
Income also affects the level of demand for a good. Demand for a good rises when income rises and falls as income falls.
Diagram Explanation of Diagram
As income rises so does the demand for goods and
services. This is represented by a shift in the
demand curve from D D1. As the price remains
constant in the short run the quantity demanded
increases from Q Q1.
Substitute Goods
Goods which satisfy the same need, e.g. TEA/COFFEE.
Demand and the price of other goods
Another important factor which influences the demand for a good or service is the price of other goods.
For example: If two goods A and B are substitutes, theory states that if the price of one good rises then this will increase the demand for the other. Therefore, if the price of Good A rises then there will be an increase in demand for good B. This will shift the demand curve from D D1.
If on the other hand the price of good A falls then this will decrease the demand for the other. Therefore, if the price of good A falls then there will be a decrease in the demand of good B. This will shift the demand curve to the left from D D1.
Equilibrium
Equilibrium refers to a situation where there is no tendency towards change. At a point of equilibrium, producers are selling all of their output so there is no need for them to reduce their selling price. Similarly, all those people who are willing to buy the product can be accommodated by the supply available.
1. The signal sent back to the producer is that
the price is too low.
2. The signal sent back to the producer is that
the price is too high.
3. Equilibrium point. Demand = Supply.
The factors that could cause the equilibrium price to change are:
- Change in the cost of production.
- New firms entering or existing firms leaving the industry.
- Consumers in general becoming better off.
- A change in the price of a complimentary or substitute good.
- The good in question becoming more or less fashionable.
Supply
Supply refers to the quantity of a commodity which will be made available at a particular price or range of prices during a period of time.
The Law of Supply states the higher the selling price the greater the quantity of the good which will be supplied, and the lower the selling price the less the quantity of the good which will be supplied.
Elasticity
Elasticity is a measure of just how the quantity demanded or supplied will be affected by a change in the price or income.
Elasticity of Demand
This measures the responsiveness of demand to a change in variables which affect demand, for example price, income and price of other goods.
Price Elasticity of Demand
It is abbreviated by: PED
PED measures the responsiveness of changes in the quantity demanded as a result of a change in price.
Formula to measure PED:
% Change in quantity demanded
% Change in price
EXAMPLE
There is a relatively large response in the quantity demanded to a change in price.
There is a relatively small response in the quantity demanded to a change in price.
-
Demand is unitary elastic
There is an equal percentage response in quantity demanded to a change in price.
…Later on it would be interesting to apply these economic theories to my coursework on Coca Cola and it will be interesting to see what I find out, for example seeing whether Coca Cola is elastic or inelastic e.t.c.
My definitions and theories came from specific worksheets and a text book which I got out of my local library.