GCSE Economics: Demand and Supply

Understanding Demand and Supply

The concepts of demand and supply are fundamental to the study of economics, particularly in the context of market equilibrium. This topic delves into how these two forces interact to determine the price and quantity of goods and services in a market.

The Law of Demand

The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded by consumers increases, and vice versa. This inverse relationship can be illustrated with a demand curve, which typically slopes downwards from left to right.

Factors Affecting Demand

Several factors can cause shifts in the demand curve:

• Consumer Income: An increase in consumer income generally leads to an increase in demand for normal goods.
• Consumer Preferences: Changes in tastes and preferences can increase or decrease demand.
• Prices of Related Goods: The demand for a good can be affected by the price changes of substitutes or complements.
• Expectations: If consumers expect prices to rise in the future, current demand may increase.

The Law of Supply

The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied also increases, and vice versa. This direct relationship is represented by an upward-sloping supply curve.

Factors Affecting Supply

Similar to demand, various factors can shift the supply curve:

• Production Costs: An increase in production costs can decrease supply.
• Technology: Advances in technology can increase supply by making production more efficient.
• Number of Suppliers: An increase in the number of suppliers in the market typically increases supply.
• Expectations: If suppliers expect future prices to rise, they may withhold current supply to sell at higher prices later.

Market Equilibrium

The interaction of demand and supply determines the market equilibrium, where the quantity demanded equals the quantity supplied. At this point, the market is said to be in balance, and there is no tendency for price to change unless an external factor shifts either the demand or supply curve.

Worked Example

Problem: If the price of apples decreases from $2 to $1, and the quantity demanded increases from 100 to 150 units, what does this illustrate?

Solution:

• This scenario illustrates the law of demand, showing that a decrease in price leads to an increase in quantity demanded.

Understanding the dynamics of demand and supply is crucial for analyzing market behavior and making informed economic decisions.