Supply and Demand

Supply and Demand are the two factors that drive any free market; who's selling and who's buying?


Demand: Intention to buy, i.e. willingness and ability to buy a G/S at the offered price. (Is not desire).

Demand Curve: Graphical representation of a relationship between the amount of a good or service that buyers want to purchase in and at a given time and price.

Supply Curve: Graphical representation of the relationship between the amount of goods and services that a seller wants to supply in and at a given time frame and price.

Factors that shift the Demand curve

  • Decrease in Price of Compliments
    • Example: Effect of court rental fees on demand for tennis balls.
    • Increase in demand = the curve shifts to the right. (i.e. you'll pay x for less than before).
  • Increase in Price of Substitutes
  • Increase in Income, effect on normal goods
  • Decrease in Income, effect on inferior goods
  • Increased Preference by Buyers
  • Increase in Population of potential Buyers
  • Expectation of higher prices in future

Factors that Shift Supply Curve (to right)

  • Decrease in costs of materials
  • Improved technology that reduces production cost
  • Improvement in conditions (to produce G/S)
  • Increase in number of suppliers (?)
  • Expectation of Lower Prices in Future

Income increase

  • Demand of luxury goods increases as income increases.
  • Demand of inferior goods decreases as income increases.
  • Demand of staple goods stays flat as income increases.