Demand and Supply Curves

Individual Demand

The law of demand states that, ceteris paribus (all other things being equal), as the price of a good or service increases, the quantity demanded decreases. This inverse relationship is represented by the demand curve.

Key Determinants of Demand:

• Price of the good: The most direct determinant.
• Consumer Income: For normal goods, an increase in income leads to an increase in demand. For inferior goods, an increase in income leads to a decrease in demand.
• Prices of Related Goods:
  • Substitute Goods: Goods that can be used in place of each other (e.g., coffee and tea). An increase in the price of a substitute leads to an increase in the demand for the original good.
  • Complementary Goods: Goods that are often used together (e.g., cars and petrol). An increase in the price of a complementary good leads to a decrease in the demand for the original good.
• Consumer Tastes and Preferences: Changes in fashion, advertising, or consumer trends can affect demand.
• Expectations about Future Prices: If consumers expect prices to rise in the future, they may increase their current demand.
• Number of Consumers: A larger number of consumers generally leads to a higher overall demand.

The demand curve is typically downward sloping and convex to the origin, reflecting the law of demand and the income effect.

Market Demand

Market demand represents the total quantity of a good or service that consumers are willing and able to purchase at various prices in the market. It is the horizontal summation of individual demand curves.

The market demand curve also follows the law of demand and is typically downward sloping. The shape of the market demand curve depends on the aggregation of individual demand curves and the number of consumers in the market.

Price	Quantity Demanded (Individual)
£10	5
£12	4
£14	3
£16	2
£18	1

Individual Supply

The law of supply states that, ceteris paribus, as the price of a good or service increases, the quantity supplied increases. This direct relationship is represented by the supply curve.

Key Determinants of Supply:

• Price of the good: The primary determinant of supply.
• Cost of Production: An increase in the cost of production (e.g., wages, raw materials) leads to a decrease in supply.
• Technology: Improvements in technology typically lead to an increase in supply as production becomes more efficient.
• Expectations about Future Prices: If producers expect prices to rise in the future, they may decrease their current supply to sell later at a higher price.
• Number of Sellers: A larger number of sellers generally leads to a higher overall supply.

The supply curve is typically upward sloping and convex to the origin, reflecting the law of supply and the increasing marginal cost concept.

Market Supply

Market supply represents the total quantity of a good or service that producers are willing and able to offer for sale at various prices in the market. It is the horizontal summation of individual supply curves.

The market supply curve also follows the law of supply and is typically upward sloping. The shape of the market supply curve depends on the aggregation of individual supply curves and the number of sellers in the market.

Price	Quantity Supplied (Individual)
£10	5
£12	7
£14	9
£16	11
£18	13

The Interaction of Demand and Supply

The intersection of the demand and supply curves determines the market equilibrium. Equilibrium price is the price at which quantity demanded equals quantity supplied. Equilibrium quantity is the quantity traded at this equilibrium price.

Surpluses: If the price is above the equilibrium price, quantity supplied exceeds quantity demanded, resulting in a surplus. Producers will need to lower prices to sell off the excess supply.

Shortages: If the price is below the equilibrium price, quantity demanded exceeds quantity supplied, resulting in a shortage. Consumers will be willing to pay more to obtain the limited supply.

Changes in factors affecting demand or supply will shift the respective curves, leading to a new equilibrium price and quantity.