Demand and supply analysis and its applications
The concepts of demand and supply form the backbone of economics, shaping how goods and services are allocated in markets. While changes in price directly affect the quantity demanded or supplied, non-price factors play an equally important role in causing shifts in demand and supply curves. These shifts impact market outcomes significantly, often requiring a more in-depth analysis to understand the forces at play. This chapter focuses on the non-price determinants of demand and supply, explains their effects on markets, and highlights their practical applications using real-world examples. By mastering these concepts, students can gain a clearer understanding of economic dynamics, helping them excel in economics tuition Singapore and other academic settings.
1. Demand Analysis
1.1 Definition and the Law of Demand
Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period. The Law of Demand states that there is an inverse relationship between price and quantity demanded, assuming all other factors remain constant (ceteris paribus).
Example:
When the price of smartphones decreases, more people are likely to purchase them, increasing the quantity demanded.
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1.2 Non-Price Determinants of Demand
The TIPSE framework outlines five key non-price factors that influence demand:
Taste and Preferences:
Changes in consumer preferences can increase or decrease demand for specific goods or services.Example: The growing popularity of plant-based diets has led to a surge in demand for meat alternatives like Beyond Meat and Impossible Foods.
Income Levels of Consumers:
Normal Goods: Demand increases as consumer incomes rise.
Inferior Goods: Demand decreases when incomes rise, as consumers shift to higher-quality alternatives.
Example: During a recession, households may purchase more generic-brand groceries, which are considered inferior goods.
Prices of Related Goods:
Substitutes: Demand for a good rises when the price of its substitute increases.
Complements: Demand for a good decreases when the price of its complement rises.
Example: Rising petrol prices reduce demand for petrol cars (a complement) while increasing demand for electric vehicles (a substitute).
Size of the Market:
A larger market or population typically increases overall demand.Example: The rapid population growth in India has fueled demand for affordable smartphones.
Expectations of Future Prices:
If consumers expect prices to rise in the future, they may increase current demand.Example: Anticipation of a GST hike in Singapore often leads to a short-term increase in demand for big-ticket items like furniture and electronics.
1.3 Effects on the Demand Curve
Shifts in the Demand Curve:
A rightward shift indicates an increase in demand due to positive changes in non-price factors.
A leftward shift reflects a decrease in demand caused by unfavorable changes in non-price factors.
1.4 Changes in Demand vs. Changes in Quantity Demanded
Change in Quantity Demanded: A movement along the demand curve due to a change in price.
Example: A discount on laptops increases the quantity demanded.Increase in quantity demanded causes a downward movement along the demand curve
Decrease in quantity demanded causes an upwards movement along the demand curve
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Change in Demand: A shift of the entire demand curve caused by non-price factors.
Example: A growing interest in fitness increases demand for gym memberships, shifting the demand curve rightward.Increase in demand causes a rightward shift in demand curve (graph 3)
Decrease in demand causes a leftward shift in supply curve (graph 4)
2. Supply Analysis
2.1 Definition and the Law of Supply
Supply refers to the quantity of a good or service that producers are willing and able to sell at various prices during a specific period. The Law of Supply states that there is a direct relationship between price and quantity supplied, assuming all other factors remain constant.
Example:
When the price of gold increases, mining companies are motivated to extract and sell more gold.
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2.2 Non-Price Determinants of Supply
The P-TENTS framework highlights six key non-price factors influencing supply:
Prices of Factor Inputs:
Rising input costs, such as raw materials or wages, reduce supply by increasing production costs.Example: Higher steel prices reduce the supply of automobiles as production becomes less profitable.
Technology:
Technological advancements enhance production efficiency, increasing supply.Example: Advances in agricultural technology, such as precision farming, have significantly increased crop yields.
Expectations of Future Prices:
Producers may adjust current supply based on expected future prices.Example: Oil-producing nations often cut production when anticipating a rise in global oil prices.
Number of Sellers:
An increase in the number of sellers in a market raises overall supply.Example: Deregulation in the telecommunications sector allows more firms to enter, increasing the supply of internet services.
Taxes and Subsidies:
Taxes: Increase production costs, reducing supply.
Subsidies: Lower costs, increasing supply.
Example: Subsidies for electric vehicle manufacturers in the US have boosted supply in the EV market.
Supply Shocks:
Unexpected events disrupt supply chains, often reducing supply.Example: The COVID-19 pandemic disrupted global semiconductor supply, affecting electronics and automobile production.
2.3 Changes in Supply vs. Changes in Quantity Supplied
Change in Quantity Supplied: A movement along the supply curve due to a price change.
Example: An increase in fuel prices leads to more production of fuel.An increase in quantity supplied causes a movement upwards along the supply curve
A decrease in quantity supplied causes a move
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Change in Supply: A shift of the entire supply curve caused by non-price factors.
Example: New technology in renewable energy production increases supply.An increase in supply causes a rightward shift in supply curve(graph 1)
A decrease in supply causes a leftward shift in supply curve(graph 2)
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2.4 Effects on the Supply Curve
Shifts in the Supply Curve:
A rightward shift signifies an increase in supply due to favorable changes in non-price factors.
A leftward shift represents a decrease in supply caused by unfavorable changes.
3. Market Demand and Market Supply
3.1 Market Demand as a Summation of Individual Demand
Market demand represents the total demand of all consumers in a market at each price level.
Example: The total demand for laptops includes the combined demand from students, businesses, and individual consumers.
3.2 Market Supply as a Summation of Individual Supply
Market supply aggregates the supply of all producers at each price level.
Example: The total supply of wheat in a country combines the production from small-scale and large-scale farmers.
4. Movement Along vs. Shifts of the Demand/Supply Curve
4.1 Movement Along the Curve
Caused by changes in the price of the good/service itself.
Example: A price increase in coffee reduces the quantity demanded, resulting in movement along the demand curve.
4.2 Shifts of the Curve
Caused by changes in non-price factors.
Example:
A government campaign promoting healthy eating increases demand for fruits, shifting the demand curve to the right.
Technological advancements reduce production costs, increasing the supply of solar panels and shifting the supply curve to the right.
5. Real-World Applications of Non-Price Factors
5.1 Example of Non-Price Factors in Demand
Electric Vehicles (EVs):
Rising fuel prices (related goods) and government subsidies have significantly increased demand for EVs worldwide.
5.2 Example of Non-Price Factors in Supply
Renewable Energy:
Technological advancements and subsidies for green energy have driven an increase in the supply of solar panels and wind turbines.
6. Summary
Non-price factors play a crucial role in determining demand and supply in markets. The TIPSE framework explains how factors like taste, income, and expectations affect demand, while the P-TENTS framework highlights how input costs, technology, and government policies influence supply. Understanding these factors and their impact on market behavior is essential for analyzing real-world economic scenarios and excelling in economics tuition Singapore or A Level examinations.
This chapter provides a comprehensive explanation of non-price factors, making it accessible and practical for students aiming to deepen their understanding of economics concepts.