Consumers and Producers

Quickonomics. com
Consumers
Consumers are all the economic units that are potentially willing to buy a certain
good or service.
Producers
Producers are the ones that are potentially willing to produce and sell a certain
good or service.
Supply and Demand
Intelligenteconomist. com
Supply
● Supply is the amount of a good or service that a firm is willing and able to
offer for sale per period of time.
● The Supply Curve (SC) is plotted to show the relationship between the price
of a product and a number of product businesses are willing to sell at that
price.
● In the labor market, the supply of labor is the amount of time per week,
month, or year that individuals are willing to spend working, as a function of
the wage rate.
Supply

● A movement along the curve occurs only if there is a change in quantity

supplied caused by a change in the good’s own price.
Supply

● For example,

if the price increases from

P to P1, then the quantity

supplied increases from Q to Q1.

Supply
The Law of Supply

● The Law of Supply is the direct relationship between price and quantity
supplied.
● If everything else remains the same, then an increase in price results in an
increase in quantity supplied.
● The positive relationship is the reason for the supply curve sloping upwards.
Supply
● A shift in the SC, referred to as a change in supply, occurs only if a non-
price determinant of supply changes.
● For example, if the price of an ingredient used to produce the good, a related
good, were to increase, then the SC would shift left.
Supply

Six Factors Affecting Supply

Supply

1. Input Prices
If the price of raw materials used in the production of a product goes down,
then S will increase, i.e., shift to the right. If the price of inputs then S will
decrease, shift to the left.
Supply
Supply

2. Improvements in technology
If there are any major advancements in technology, then the cost of production
will decrease, and S shifts to the right. For example, USB flash drives began with
a storage capacity of 8 MB and were fairly expensive, but now with steady
improvements, you can buy flash drives with hundreds of gigabits of capacity at a
lower price.
Supply

3. Government Policy
Government policies can have a significant impact on supply. For example: If the
government imposes a subsidy on the good, then S increases while a tax on the
goodwill has the opposite effect of decreasing S.
Supply

4. Size of the market

If the size of the market increases, then there will likely be an increase in the
number of firms in the market. This increase usually tends to increase S.
Supply

5. Time
Over time, firms can increase capacity and can increase S.
Supply

6. Expectations
The concern about future market conditions can directly affect S. If the seller
believes that the demand for his product will sharply increase in the foreseeable
future, then the firm owner may immediately increase production in anticipation of
future price increases. This increase in production would shift the SC outwards, i.
e., increase supply.
Demand
● Demand is defined as the amount of good or service a consumer is willing
and able to buy per period of time.
● Many people want to buy products that they cannot afford at prices they
cannot pay. However, because they are not able to purchase the product, we
cannot include them in the demand.
Demand
At Price P2 the QD is Q2.

When the price increases to P1,

then the QD falls to Q1.

Demand
The Law of Demand

● The Law of Demand states that the quantity demanded for a good or service
rises as the price falls, ceteris paribus (or with all other things being equal).
● The Law of Demand is an inverse relationship between price and quantity
demanded.
● There are two factors that support the Law of Demand.
Demand
1. The Substitution Effect
The Substitution Effect occurs when there is a change in the price of a product.
For example, we say that the price of olive oil has gone up. In comparison to olive
oil, other cooking oils such as canola oil or peanut oil suddenly seem less
expensive. Therefore, people will switch to a close substitute if the price goes up
and the demand will increase.
Demand
2. The Income Effect
The Income Effect also occurs when there is a change in the price of a product.
For example, let’s say you buy four loaves of bread a month and then one day the
price of a loaf of bread goes up. This increase in price will likely mean that you
cannot afford to buy four loaves. Instead, you buy two. You’ve lowered your
demand for bread because the price increase has reduced your disposable
income. You won’t necessarily stop buying bread or switch over to something
cheaper; you buy less.The Income Effect simply means that when a good
becomes more expensive then people can afford less of it.
Demand
The rise in D is shown by

the shift in the demand curve (from D to D₁).

This results in Price and QD increasing

from P1 to P2 and Q1 to Q2 respectively.

Demand
The below diagram holds true for normal goods only. Normal goods are products
that consumers buy more of if their disposable income (income after taxes)
increases. Inferior goods are those products which are consumed less when
someone’s disposable income increases. Cheap cars or highly discounted brands
are examples of inferior goods.
Demand

Six Factors Affecting Demand

Demand
1. Normal Goods
When there is an increase in the consumer’s income, there will be an increase in
demand for a good. If the consumer’s income falls then, there will be a fall in
demand.
Demand
2. Change in Preferences
If there is a change in preferences, then there will be a change in demand. For
example, nursing became mainstream a couple of years ago. This trend led to an
increase in demand for the nursing course.
Demand
3. Complimentary Goods
When there is a decrease in the price of compliments, then the demand for its
compliments will increase. Complementary goods are goods you usually buy
together, like bread and butter, tea and milk. If the price of one goes up, the
demand for the other good will fall. For example, if the price of yoga classes fell
then there would be an increase in demand for yoga mats.
Demand
4. Substitutes
An increase in the price of substitutes will affect the demand curve. Substitutes
are goods that can consumers buy in place of the other like how Coca-Cola &
Pepsi are very close substitutes. If the price of one goes up, the demand for the
other will rise.
Demand
5. Market Size
If the size of the market increases, like if a country’s population increases or there
is an increase in the number of people in a certain age group then the demand for
products would increase. Simply put, the higher the number of buyers, the higher
the quantity demanded.
Demand
6. Price Expectations
When there is an expectation of a price change, if people expect the price of a
good to increase shortly, then they are more likely to purchase sooner, which
would increase demand for the product.
Supply and Demand
Equilibrium

The point where both curves (D and S) intersect is called the market equilibrium
(E*). At this point (and price) the consumers are willing to buy exactly as much of
a good or service as the producers are willing to sell, and the market clears. This
is the best possible situation for all actors, thus they will always tend to get to this
outcome. This means the two curves will keep shifting (see also Factors that Shift
Demand Curve) until the equilibrium quantity and price are reached.
Equulibrium
The equilibrium price is the only price where the desires of consumers and the
desires of producers agree—that is, where the amount of the product that
consumers want to buy (quantity demanded) is equal to the amount producers
want to sell (quantity supplied). This mutually desired amount is called the
equilibrium quantity.
Sources
https://quickonomics.com/the-law-of-supply-and-demand/

https://www.intelligenteconomist.com/demand/

https://www.intelligenteconomist.com/supply/

https://www.intelligenteconomist.com/determinants-of-demand/

https://courses.lumenlearning.com/wm-introductiontobusiness/chapter/equilibrium-
price-and-quantity/
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