UNIT 2

DEMAND:
-Demand is the quantity of a good or supply that consumers are willing
and able to purchase at a given price in a given time period
-LAW OF DEMAD: relationship between price and quantity
-As the price falls, the quantity demanded of the product will usually increase,
ceteris paribus (other things remain equal)
-SUBSTITUITION EFFECT: As the price of a product falls it will be more attrac-
tive that the other products whose prices remain unchanged
-INCOME EFECT: As prices fall there is an increase in real income
-DETERMINANTS OF DEMAND: Income, price of other products (substitutes and
complements), tastes, others such as taxes, income distribution, seasonal changes,
age structure, size of population.

SUPPLY:
-Supply is the willingness and ability of producers to produce a quantity of a good at a
giver price in a given period of time
-LAW OF SUPPLY: RR between price and quantity, as the price of a product rises
the quantity supplied of the product will usually increase, ceteris paribus
-There is movement along the curve when prime changes leading to a change in
the quantity supplied
-DETERMINANTS OF SUPPLY (cause shift): costs of production, the price of
other products, state of technology and government intervention (taxes and subsi-
dies)

INTERACTION OF DEMAND AND SUPPLY:

-EQUILIBRIUM: Situation of balance where there is no tendency for change to occur.
Equilibrium will exist when the plans of consumers match the plans of suppli- ers. Equi-
librium includes an equilibrium price and quantity that determine the total con- sumer
expenditure
-DISEQUILIBRIUM: It is an imbalance whiter demand and sup-
ply are not equal, disequilibrium can occur due to excess of sup-
ply or demand
-When some of the curves shift, we have a new equilibrium
price. An increase in demand increases both the equilibrium P
and Q demanded and supplied. A decrease in demand decreases
both equilibrium P and Q demanded and supplied.

EXCESS OF SUPPLY AND DEMAND:

-To fix excess of supply or demand, a process of market adjust-
ment should be done. In the case of supply, prices could de-
crease so that more people are keen on buying the product,
which could fix the disequilibrium. In the case of demand,
prices could rise, so that not mas many people buy the product.
When equilibrium position is reached, it is said that the market clears.
 -CHANGE IN DEMAND: Based on
the graph, there is an increase in de-
mand, so at the original pice there is a
disequilibrium where there is excess of
demand. So, suppliers will then rise
the price and increase the quantity
supplied, which will reduce demand.
Now the equilibrium is located at a
higher price with larger quantity traded than in the original situation

-CHANGE IN SUPPLY: Based on the graph, there is an increase in supply, so at the original price there is disequilibrium due
to excess supply. This would be eliminated as price falls towards its new equilibrium level and the quantity rises, so the plans
of consumers and companies coincide.

-CHANGE IN SUPPLY AND DEMAND: Based on the graph, if both supply and de-
mand change simultaneously. The increase in demand for the product puts pressure
on price. But, the simultaneous increase in supply puts downward pressure on
price. So, the equilibrium price remains unchanged, but, there is a significant in- crease on the
quantity.

SHIFTS IN THE DEMAND CURVE:

-A rightward shift of the demand curve means an increase in demand and a leftward shift means a decrease in demand
-A change in the demand is when there is a shift in the demand curve due to a change in factors other than the price of the par-
ticular product
-CAUSES OF SHIFTS: -Income/the ability to pay: An increase in the purchaser’s income generally leads to an
increase in demand→ rightward shift.
-Price and availability of related products: when substitute products (alternative goods
that can satisfy the same want or need) change their price it will have an impact in all
substitute gods. If the price rises the demand will increase bc your product is cheaper
→rightward shift. In the case of complements (goods that have a joint demand since they
enhance the satisfaction that consumers derive from another product) rise in the price of
one product reduces the quantity demanded for both products→ shift to the left
-Fashion, taste and attitudes: We buy products because of our likings and because of
the trends. If a product becomes trendy then the demand will therefore increase, which
causes a rightward shift
-CAUSES OF MOVEMENTS: A change in the price of a product is shown by a movement along the curve. All other products
remain unchanged

SHIFTS IN THE MARKET SUPPLY CURVE:

-It is said that prices is the only reason the supply curve is influenced. But, the companies’ supply intentions are influenced by
factors other than the price of the product, which sometimes causes a shift in the supply curve
-CAUSES OF SHIFTS: -Costs: Companies will make supply decisions on the basis of the price they can get for
selling the product in relation to the cost of supplying it. If costs go up, there is likely to be
a leftward shift in the supply curve. If costs al lowered, there will be an increase in supply.
-Size and nature of the industry (technology): If the size of the industry that produces
increases, then the supply of the industry will increase. And, if firms in the industry start to
compete more intensively on price, t is likely that the supply curve will shift to the right.
-Government Policy: Governments may sometimes impose a specific tax (indirect tax
that is fixed per unit purchased) or an ad valorem tax (a tax that is charged as a given
percentage of the price), which like a cost increases bc companies may seek to pass the
tax on to the consumer in the form of higher prices. So, indirect taxes result in a decrease
in supply. On the other hand, a relaxation of the government or subsidies can increase
supply

TAXES:
-Taxes are charges that are imposed by government on people and businesses. Their main purpose id to raise finance for gov-
ernment spending
-DIRECT TAXES: These are taxes paid directly to the government by taxpayers, from their incomes. In other words, it taxes
the income of people and firms and cannot be avoided
-INDIRECT TAXES: These are taxes that are levied on goods and services. In indirect taxes we can find two main types: Ad
valorem taxes are a proportion or percentage of the price charged by the retailer. Specific taxes are a fixed amount per unit
purchased. The final price incorporates this tax

THE IMPACT AND INCIDENCE OF TAXES:

-On indirect taxes:
IMPACT: Ir refers to the individual or group who bears the initial burden of any tax. (Initially, the company is the one who
supports the taxes)
INCIDENCE: It refers to who ultimately bears the burden of paying the tax (the last person to pay for the taxes is the con-
sumer because the company increases the price)
-The extent to which the producer is able to pass on the tax by rising the price depends on the price elasticity of demand for
the product. The more inelastic, the easier to pass the tax to the consumer
-On direct taxes:
-The impact and incidence relies completely on the company, because it is directly taken out from the salary
-Here, the government imposed a specific tax on the product that shifts the supply curve upwards to the right, increasing
price. The amount of the tax per unit is given by the vertical distance between the two supply curves
-The proportion of the incidence which is borne by the consumers is given by the increase in price (P-P1). The proportion
borne by the producer is the remainder of the tax (P2-P)
-Where demand is elastic the majority of the incidence of the tax is borne by the producer because ir is not possible to raise the
price without much greater proportionate change in demand
-Where demand is relatively inelastic, the producer can increase the price of the product and the consumer bears the inci-
dence of the tax

MAXIMUM AND MINIMUM PRICE CONTROLS:

-Price controls is when governments intervene in the market to achieve a different out-
come for producers, consumers or society in general
-MINIMUM PRICE CONTROLS: It is a price that is fixed, and the market price must not
go below this price. This acts as a price floor. They are not as common as where a maxi-
mum price is imposed. This price is above the equilibrium price. It is used in the labour
market and is strategic in industries such as agriculture. Minimum prices are always
above the equilibrium price
-MAXIMUM PRICE CONTROLS: These are set to protect consumers and are im-
posed in markets where the product is a necessity. There is a problem with these, which

is the black market because they tend to sell the product illegally at a higher price. This reduces shortages and shifts the D
curve to the left and the S curve to the right. Maximum prices are always below the equilibrium price.
CONSUMER AND PRODUCER SURPLUS:
-CONSUMER SURPLUS: The difference between the price an individual is prepared to pay for the product and the price ac-
tually paid. Consumer surplus arises because some consumers are willing to pay more that the given price for all nut the last
until they buy.

-PRODUCER SURPLUS: The difference between the price a producer is willing to accept and what is actually paidd. The
producer would have been prepared to accept a lower price for the first three units than is actually received.