Professional Documents
Culture Documents
Lesson 3 Main Lecture:: O Level, Igcse and Gcse Revision Notes
Lesson 3 Main Lecture:: O Level, Igcse and Gcse Revision Notes
Lesson 3 Main Lecture:: O Level, Igcse and Gcse Revision Notes
com
O level, Igcse and Gcse revision notes
LESSON 3
Main Lecture:
1. What is Demand?
The amount of a good or service consumers are willing and able to buy is
known as the quantity demanded of that product.
The most important factor in affecting the demand of a certain product is the
Price of that product. Other factors include income ,fashion , taste, brand,
price of substitute*, price of complement*, advertisement etc. There are also
some specific factors affecting demand of a certain product ; For e.g a car's
resale value is also taken into account when buying it, hence its resale value
affects its demand.
(* substitute goods are those goods which can replace a certain good. For e.g
car and motorbikes are substitutes to each other)
(* complement goods are those goods which are used alongside a certain
good. For e.g car and petrol are complement goods)
Price and Demand have a negative relationship. Which means that if the
price of commodity X goes up the demand for commodity X will fall
(considering other things remain constant: also called). Similarly if the price
for commodity X goes down, the demand for commodity X will rise. Please
bear in mind that this relation doesn't work in both ways. It is just a one way
relationship. That is, I can say that when price increases demand fall, but I
can't say that when demand falls price increase. The changes in price and
www.gcebuddy.wordpress.com
www.gcebuddy.wordpress.com
O level, Igcse and Gcse revision notes
demand, along with their respective effects will be better understood once
we have done the graphs.
Below is the diagram for a demand curve. As you can see, the gradient is
negative because of the negative relationship between the two quantities.
However when there is a change in the demand of the product (lets say
because of a change in
income) , then there is a
shift in the demand curve.
This has been illustrated
below
www.gcebuddy.wordpress.com
www.gcebuddy.wordpress.com
O level, Igcse and Gcse revision notes
As you can see the leftward shift in demand curve from D1 to D2 shows a
decrease in the quantity demanded of the product. Hence for the same price
now, the quantity demanded has fallen from q2 to q1.
4. What is Supply?
Supply and price have a positive relationship. In general, the supply curve
will slope upwards, showing that as price rises, quantity supplied rises or
extends.
www.gcebuddy.wordpress.com
www.gcebuddy.wordpress.com
O level, Igcse and Gcse revision notes
As you can see when the price rises from P1 to P2 quantity demanded also
rises from Q1 to Q2.
www.gcebuddy.wordpress.com
www.gcebuddy.wordpress.com
O level, Igcse and Gcse revision notes
Market Equilibrium:
So far, we've looked at supply, we've looked at demand, and the main
question that now arises is, "How do these two opposing forces of supply
and demand shape the market?" Buyers want to buy as many goods as
possible, as cheaply as possible. Sellers want to sell as many goods as
possible, at the highest price possible. Obviously, they can't both have their
way. How can we figure out what the price will be, and how many goods
will be sold? In most cases, supply and demand reach some sort of
compromise on the price and quantity of goods sold: the market price is the
price at which buyers are willing to buy the same number of goods that
sellers are willing to sell. This point is called market equilibrium.
The equilibrium price is PA, the point where both the curves intersect each
other.
www.gcebuddy.wordpress.com
www.gcebuddy.wordpress.com
O level, Igcse and Gcse revision notes
Q1. Michelle is shopping for shirts. She chooses one, then notices that the
shirts are on sale, and gets another two shirts. How can you explain this with
a graph?
This is an example of moving along a demand curve. Nothing except for the
price has changed, so when Michelle notices the price change, she buys
more shirts.
What is the minimum amount you would have to pay her if you wanted her
to babysit for 2 hours? 5 hours? (Remember that wage is the hourly rate of
pay).
www.gcebuddy.wordpress.com
www.gcebuddy.wordpress.com
O level, Igcse and Gcse revision notes
ANS: If we look for Jean's minimum wage at 2 hours on the graph, we find
that it is $4. Since $4 is only the hourly pay, you have to multiply it by the
number of hours worked to see how much you actually have to pay Jean. For
2 hours of babysitting, you will have to pay Jean at least
(2 hours) x ($4/hour) = $8
Similarly, to get Jean to work for 5 hours, you have to pay her at least $8 an
hour, giving a total pay of
www.gcebuddy.wordpress.com