Chapter 7

Demand and supply

curves
LEARNING INTENTIONS

In this chapter you will learn how to:

• define the meaning of effective demand
• explain the importance of individual and market demand and
supply
• explain the factors that affect demand
• explain the factors that affect supply
• analyse the causes of a shift in the demand curve (D)
• analyse the causes of a shift in the supply curve (S)
• distinguish between the shift in the demand or supply curve
and the movement along these curves.

ECONOMICS IN CONTEXT

Markets in action

Figure 7.1: Newspaper headlines from around the world

Discuss in a pair or a group:

For each of the headlines in Figure 7.1, identify the market which
each represents. Identify some of the demand and supply
conditions that are likely to underpin each market.
7.1 The price mechanism and markets
In market economies, the price mechanism is essential to the allocation
of resources. The price mechanism sends out a signal from consumers
to producers. If there is oversupply in a market, consumers are sending
a signal to producers that fewer resources should be allocated to a
product. In the case of a shortage, the signal from consumers is that
more resources need to be allocated to the product. The price
mechanism is self-regulating, which means that it does not require any
involvement from the government while the mechanism is working
efficiently.
To many people, a market is something that happens in a village, town
or city centre once or twice a week. The market is made up of a number
of trading stalls selling a range of products: food such as fruit,
vegetables, meat and fish; clothing; and a wide selection of other items.
Economists take a broader view of the word ‘market’. At the core of
any market is trade – somebody has something to sell and somebody
else has to want to buy the product that is offered. So, whenever people
come together for the purposes of exchange or trade, there is a market.
For example, economists talk about the housing market, where people
rent, buy and sell property. Look in the newspapers or in the windows
of property agents’ offices and you will see evidence of this market
(Figure 7.2). Economists also refer to the labour market, where
individuals’ services are ‘bought and sold’ – anyone who has a part-time
or full-time job is part of the labour market as a seller of labour.

Figure 7.2: Evidence of the housing market can be seen in a property

agents’ window display

There are global markets for a wide range of agricultural products such
as coffee, tea and cotton. The market for oil, for example, is closely
monitored by governments, transport companies and individuals. The
ups and downs of the oil market can have an important influence on our
lives and our economies.
Television newsreaders often refer to the stock market, where shares are
bought and sold, and the foreign exchange market, where currencies are
bought and sold. Another example of a market is the internet where a
huge range of products are traded by thousands of companies as well as
millions of individuals. The internet is a unique market; individual
buyers are in a strong position because they can compare goods and
search for the best price.
From these examples, you will understand that a market does not need a
physical presence in the way that a typical town or street market might
have. Economists simply use the term ‘market’ to describe the process
through which products that are similar are bought and sold.
An understanding of the term ‘market’ leads to demand and supply. In
simple terms, buyers affect or determine demand, sellers affect or
determine supply. Buyers and sellers interact in any form of market.
7.2 Demand
Demand refers to the quantity of a product that buyers are willing and
able to buy at different prices per period of time, ceteris paribusor other
things equal.
It is useful to look at each part of the definition to understand what
‘demand’ means.
• ‘Quantity’ is the numerical amount of the product that is being
demanded.
• ‘Product’ is a general term that is widely used throughout this
coursebook. Product refers to the item that is being traded. Product
can be used for goods or services. It can also include tradable items
like foreign currency or financial assets such as shares.
• ‘Buyers’ (also known as purchasers) of the product are often
referred to as ‘consumers’, although they may simply be a part of
the supply chain. For example, the food and drinks company
Nestlé may purchase large amounts of cocoa to be used in the
production of chocolate for sale to the final consumer. Economists
may consider an individual’s demand for a product or, more
usefully, aggregate or sum the demand curves of all individuals to
look at demand for the market as a whole.
• ‘Willing to buy’ – buyers must want a product if they are going to
enter into the market with the intention of buying it. This is called
notional demand.
• ‘Able to buy’ – the notional demand for a product, which arises
from wanting it, must be backed by purchasing power if demand is
to become effective demand. Sellers are only willing to sell a
product if the buyer has the money to pay for it. So, when
economists talk about demand, they are referring to effective
demand.
• ‘Different prices’ – prices are crucial to the functioning of a
market. Although many things influence demand for a product, it is
at the time of purchase, when money is handed over for the
product that the buyer really judges whether the product is
providing value for money – in other words, whether the consumer
is willing and able to buy it. As the price goes up, and provided no
other changes have occurred, more and more people will judge the
product to be less worthwhile.
• ‘Per period of time’ – demand must be time related. It is of no use
to say that the local McDonald’s sold 20 Big Macs to consumers
unless the time period over which the sales occurred is made clear.
If that was per minute then demand is high, but if that was per
week, then this would show there is little demand for Big Macs in
this particular market.
• ‘Ceteris paribusorother things equal’ – there are many potential
influences on the demand for a product. Understanding the
connections between the influences is very difficult if many of
these elements are changing at the same time. This is why it is
necessary to apply the ceteris paribusassumption referred to in
Section 2.4.

ACTIVITY 7.1

Discuss in a pair:
1 How you take part in these markets:
a local food stalls market
b branded fast-food market like McDonalds and KFC
c smartphone market
d transport market.
2 What affects (determines) your notional demand? How does
this differ from your effective demand? How important is
price in determining whether you will consume?
7.3 The demand curve
a line plotted on a
The definition of demand graph
above that
can represents
be represented by a demand curve
(D). The example of a demand curve shown
the relationship in Figure 7.3 is based on
the overall market demand for computers
between (PC’s). Let us assume that
the quantity
we can identify a typical PC, one with a set
demanded and the of standard specifications.
We must also assume that we have collected
price of a product statistical data about
consumers’ preferences and the quantity of PCs that people are willing
and able to buy at various prices per period of time, ceteris paribus or
other things equal. The information can be represented by the data in
Table 7.1. The data set in the table is known as a demand schedule.
Price of a ‘standard’ PC ($) Quantity demanded per week –
demand curve D
2000 1000
1800 2000
1600 3000
1400 4000
1200 5000
1000 6000
800 7000
Table 7.1: Market demand schedule for PCs

The market demand curve can now be plotted on a graph to show how
the quantity of PCs demanded varies with their price. Therefore, the
market demand curve represents the aggregation or sum of hundreds, or
possibly thousands, of individual demand curves. Figure 7.3 shows the
market demand curve (D) for the data in Table 7.1.

Figure 7.3: The market demand curve for PCs

TIP

It is important not to underestimate the possible problems when

trying to collect real-world data for a demand schedule, especially
where there is a wide range of prices to consider.

The market demand curve in Figure 7.3 shows that:

• there is an inverse or negative relationship between price and
quantity demanded. This means that:
• when price goes up, there is a decrease in quantity demanded
• when price goes down, there is an increase in quantity
demanded.
• changes in price cause a change in the quantity demanded. This is
shown by movements up and down the demand curve. It is
assumed that all other factors affecting demand remain unchanged.

TIP

Do not confuse ‘quantity demanded’ and ‘demand’. Demand refers to

the whole demand schedule and does not change when the price of
the product changes. A price change causes a change in the quantity
demanded.

The main features of the demand curve are:

• A linear relationship – the demand curve in Figure 7.3 is drawn as
a straight line. However, it is equally acceptable for price and
quantity demanded to be related in a non-linear manner in the form
of a curve.
• A continuous relationship – you could look at the diagram and find
out at what price consumers would be willing and able to buy 1259
PCs.
• A time-based relationship – the time period here is weekly.
• Other things equal, ceteris paribus.
Figure 7.3 allows you to estimate how much consumers may spend
when buying PCs or, conversely, how much revenue companies may
receive from selling PCs. For example, if the price of each PC is $1800
and the information provided is accurate, then consumers will buy 2000
units and their total spending will be equal to $3 600 000 – the revenue
that is received by firms from selling this quantity of the product.

TIP

Notice that the word ‘estimate’ is used to calculate what consumers

spend on PCs. This is deliberate due to the earlier comment about the
possible difficulties in obtaining data for the demand schedule.

ACTIVITY 7.2

1 Using Figure 7.3 and Table 7.1, answer the following

questions:
a How many PCs per week are people willing and able to
buy if the price is $1100?
b What price will persuade people to buy 1350 PCs per
week?
c What assumptions are you making when you answer
these questions?
2 Using Figure 7.3, explain how the area under the demand
curve can be used to show the total consumer
expenditure/total revenue of the firms selling PCs.
7.3 The factors that affect demand
The price of a good or service is not the only factor or determinant that
influences demand. There are other factors (determinants) to consider
including:
• income
• the price and availability of related products
• fashion, taste and attitudes.

Income
The ability to pay is vital when considering the importance of effective
demand. For any individual, the demand for goods and services depends
upon income. (Usually this is taken to mean what a person has left after
tax has been deducted.) In terms of market demand, income refers to the
income of all consumers and is closely related to the state of the
macroeconomy.
In general, there is a positive relationship between income and demand.
An increase in the ability to pay usually leads to an increase in demand.
Conversely, if the ability to pay falls, then less is demanded. Goods and
services that are characterised by this relationship are called normal
goods. Most products are normal goods and include things like cars,
housing, restaurant meals and quality clothing.
For some products, there is a negative relationship, with less being
purchased as income rises. These are called inferior goods. Typical
examples of inferior goods are poor quality foodstuffs (any substance
that is food or used to make food) such as packet noodles, low-grade
rice and vegetables and used clothing. As consumers become better-off,
they are more likely to buy less of these and, instead, purchase more
fish, meat and superior quality foods with their increased income. When
income falls, such as when there is a recession, consumers will purchase
more inferior goods to replace normal goods.

The price and availability of related products

The price and availability of related products may influence demand.
There are two types:
• Substitutes are alternative goods that satisfy the same want or
need. Typical examples are Coca-Cola and Pepsi, both well-known
brands of cola, or a Kit Kat and Hersheys chocolate bar. A change
in the price of one is likely to have an effect on the demand for the
other and on any other similar cola or chocolate products. The
extent of the change in demand depends on the degree of
substitutability (how close a substitute is to the product). Coca-
Cola and Pepsi are very close substitutes; Sprite, Fanta and Lipton
Iced Tea are also substitute soft drinks but not as close. Chocolate
bars are still substitutes but less so than cola drinks.
• Complements are goods that have a joint demand as they add to
the satisfaction that consumers get from another product. Typical
examples are cars and petrol, cricket bats and balls and PCs and
monitors. A change in the price or availability of either one of
these products will have an effect on the demand for a
complementary good. For example, a rise in the price of petrol
usually results in a fall in the use of cars for non-essential reasons.
Alternatively, a fall in the price of petrol is likely to result in the
increased use of cars.

Fashion, taste and attitudes

Fashion, taste and attitudes are more difficult factors to explain since
they are largely a matter of individual choice and behaviour. As a
consumer, you are unique and have your own particular likes and
dislikes. For some products, an individual’s attitude might have been
built up over time or it could have been influenced by what they have
read or what advertisers would like consumers to believe about their
product.

TIP

Think about who the good is intended for. For example, a good for
someone on a high income can be an inferior good while for
someone on a low income, it can be a normal good.

KEY CONCEPT LINKS

Scarcity and choice: Needs are scarce and command a price in

the market. An individual’s income is limited in relation to their
needs; choices have to be made. In other words, the need to make
choices is a typical example of the fundamental economic
problem.
7.4 Supply
Supply refers to the quantity of a product that suppliers are willing and
able to sell at different prices over a period of time, ceteris paribusor
other things equal.
It is useful to look at each part of the definition to understand what
‘supply’ means.
• ‘Quantity’ is the numerical amount of the product that is being
supplied.
• ‘Product’ refers to any item that is being traded. Product can apply
to goods or services. It can also include tradable items like foreign
currency or financial assets such as shares.
• ‘Suppliers’ are the sellers of the product. Suppliers are often
referred to as ‘producers’, although they may not always be
manufacturers of the product; they might simply be a part of the
supply chain or selling services such as IT and finance. There may
be just one supplier or many suppliers which when aggregated
make up the market supply.
• ‘Willing and able to sell at different prices’ – in a market economy,
companies must gain from selling their products. In many cases,
they are in the fortunate position to withhold supply if the price is
too low. When price rises in the markets, it is assumed companies
will be more willing and able to supply more to the market. This
gives a positive relationship.
• ‘Per period of time’ – supply must be time related. It is of no use to
say that Acer supplied 200 computers unless you specify the
relevant time period. Clearly, this needs to be consistent with the
time period being used for demand.
• ‘Ceteris paribusorother things equal’ – there are many potential
influences on the supply of a product. Analysing the connections
between the various elements is very difficult if lots of these
elements are changing at the same time. So, we assume these other
factors affecting supply remain unchanged, ceteris paribus.
7.5 The supply curve
The definition of supply above can be represented by a supply curve
(S). This can be done, say, for an individual firm selling PCs or, by
aggregating each company’s supply curves, to get the industry or
market supply curve for PCs. Assuming we have collected statistical
data about companies’ selling intentions – represented by Table 7.2 (a
market supply schedule) – we can plot this supply schedule to see how
the quantity of PCs depends upon variations in price. Figure 7.4 shows
the supply curve (S) for the data in this table.
Price of a ‘standard’ PC ($) Quantity supplied per week –
supply curve S
800 1000
1000 2000
1200 3000
1400 4000
1600 5000
1800 6000
2000 7000
Table 7.2: Market supply schedule for PCs

Figure 7.4: The market supply curve for PCs

The supply curve in Figure 7.4 shows:

• A positive or direct relationship between price and quantity
supplied. This means that:
• when price goes up, there is an increase in quantity supplied
• when price goes down, there is a decrease in quantity
supplied.
• Changes in price cause a change in the quantity supplied. This is
shown by movements up and down the supply curve. It is assumed
that all other factors affecting supply remain unchanged.
The main features of the supply curve are:
• A causal relationship – price changes cause the change in quantity
supplied.
• A linear relationship – the supply curve is drawn for simplicity as a
straight line. It would be acceptable for the supply curve to be
represented in a non-linear way, for example in the form of an
upward-sloping curve.
• A continuous relationship – you could look at the curve to find out
how many PCs firms would plan to supply at a price of $1150.
• A time-based relationship – the time period here is weekly.

TIP

When answering questions, remember that a change in the price of a

product is shown by a movement along the supply curve. The
assumption is that all other factors affecting supply are unchanged.

ACTIVITY 7.3

1 Using Figure 7.4, how many PCs per week are companies
planning to supply if the price is $1100? What price would
persuade companies to supply 1350 PCs?
2 What assumptions are you making when you answer these
questions?
3 What might be the advantages and disadvantages of using a
diagram like Figure 7.4 to represent supply?
7.6 The factors affecting supply
The price of a good or service is not the only factor (determinant)
influencing its supply in the market. There are other determinants to
consider, including:
• Costs: Supply decisions taken by firms are always driven by the
costs of producing and distributing their products to customers. For
many types of firm, labour costs are an important item. In other
firms, the cost of energy or transport may be more important, or the
productivity of workers can have a huge impact on costs.
Replacing labour by capital can also reduce costs in some types of
firm.
• The size and nature of the industry: If an industry is growing in
size, then more products will be supplied to the market. This
growth may well attract new entrants; the competition will increase
and prices may fall resulting in some firms leaving the industry
altogether. In some industries supply could be deliberately
restricted to keep up prices.
• The change in price of other products: Most firms need to be
continuously aware of competitors. So, if a competitor lowers its
price, it could mean that less products will be supplied by other
firms who keep their price unchanged. Alternatively, if a
competitor increases its price, other firms may gain and will be
able to supply more products provided they can keep their costs
under control.
• Government policy: Governments influence companies and their
supply of products in many ways. A new tax on a product may
result in a reduction in supply; subsidies will usually result in an
increase in supply.
• Other factors: In agricultural markets, supply is always affected by
uncertain weather conditions. Storms or frost may affect the supply
of coffee or grapes; drought affects cereal crop yields whereas
good weather can lead to bumper harvests of corn and wheat.

REFLECTION

Look again at the newspaper headlines in Figure 7.1. Do you now

feel more confident that you can explain how demand and supply
conditions underpin each headline? If you are still unsure, what
can you do to improve your understanding?
7.7 Causes of a shift in the demand curve
As explained in Section 7.3, the demand curve for a product is drawn on
the assumption that apart from the price of the product, all other factors
that might affect demand remain unchanged.
When this assumption is relaxed and the non-price factors that affect
demand change, the outcome is a shift (move) to the right or left of the
demand curve. A shift to the right indicates that demand increases; a
shift to the left means demand decreases. These two possibilities are
shown in Figure 7.5.

Figure 7.5: Shifts in the demand curve: a A shift to the right – demand
increases b A shift to the left – demand decreases

Table 7.3 summarises the possible causes for shifts in the demand
curve.

A shift to the right in A shift to the left in the

the demand curve may demand curve may
mean: mean:
• an increase in income • a decrease in income
• an increase in the price of • a decrease in the price of
substitutes substitutes
• a decrease in the price of • an increase in the price of
complements complements
• a favourable change in • an unfavourable change in
fashion, taste and attitudes. fashion, taste and attitudes.
Table 7.3: Causes of shifts in the demand curve
7.8 Causes of a shift in the supply curve
Like the demand curve, the supply curve is drawn on the assumption
that other than price, all other factors that might affect supply are
unchanged. When these non-price factors do change, there will be a
shift to the right or to the left of the supply curve. These shifts are
shown in Figure 7.6.
Shifts in the supply curve

Figure 7.6: Shifts in the supply curve: a A shift to the right – supply
increases b A shift to the left – supply decreases

Table 7.4 summarises the possible causes for shifts in the supply curve.

A shift to the right in A shift to the left in the

the supply curve may supply curve may
mean: mean:

• a decrease in costs of • an increase in costs of

production production
• growth in the size of the • decline in the size of the
industry industry
• a decrease in the price of • an increase in the price of
competitor’s goods competitor’s goods
• decrease in an indirect tax or • increase in an indirect tax or
increase in subsidy. fall in subsidy.
Table 7.4: Causes of shifts in the supply curve
7.9 How to distinguish between a shift in the
demand or supply curve and a movement
along the curves
The distinction between a shift in the demand or supply curve and a
movement along the curve is important. To summarise:
• A movement along a demand or supply curve shows how the
quantity demanded or the quantity supplied responds to a change in
the price of the product. An increase in the quantity demanded or
quantity supplied is referred to as an extension of demand or
supply; a decrease in the quantity demanded or quantity supplied
is called a contraction of demand or supply.
• A shift of a demand or supply curve is in response to a change in
any of the non-price determinants of demand or supply. Such shifts
are to the right or the left depending on the cause. A shift to the
right is an increase in demand or an increase in supply; a shift to
the left is a decrease in demand or a decrease in supply.

KEY CONCEPT LINKS

Time: A movement along a demand or supply curve or a shift in a

demand or supply curve takes place over two time periods. For
example, if there is an unexpected increase in the quantity
demanded leading to a rise in price, it will take time for suppliers
to produce more to meet this increase.

THINK LIKE AN ECONOMIST

Technology improves efficiency of coffee producers

The global price of coffee is at its lowest level in 13 years. The fall
in price is having a major impact on growers in Brazil, the world’s
largest producer, where an increasing number of growers are
unable to make any money yet alone a living from a crop they
have grown for generations.

Figure 7.7: A machine is used to harvest coffee beans

The way forward, as any economist knows, is to become more

efficient. This requires an increase in productivity coupled with a
decrease in costs. It can now be achieved through the use of
machines that harvest coffee. Such machines have recently
become available, but typically cost $150 000. They can cut
harvest costs by 40 to 60% as far fewer workers need to be hired
(even if they were available). To help farmers mechanise, some
suppliers of the machines are willing to take part payment in
coffee beans spread over a number of years.
For them, it looks like a case of ‘technology to the rescue’.
Source: Daily Telegraph, 26 August 2019 (adapted)
Consider the case for using machinery to improve the efficiency of
harvesting coffee beans.
1 Why might this not be an ethical solution?
2 Given that the global demand for coffee is increasing, why is
the price of coffee at its lowest level in 13 years? (Surely, the
price of coffee should be increasing.)
EXAM-STYLE QUESTIONS: MULTIPLE CHOICE

1 An individual demand curve tells us how much:

A a firm sells at various prices.
B an individual will buy at various prices.
C firms will sell at various prices.
D individuals will buy at various prices.
2 A market demand curve tells us how much:
A a firm will sell at various prices.
B an individual will buy at various prices.
C firms will sell at various prices.
D individuals will buy at various prices.
3 An individual supply curve tells us how much:
A a firm will sell at various prices.
B an individual will buy at various prices.
C firms sell at various prices.
D individuals will buy at various prices.
4 A market supply curve tells us how much:
A a firm will sell at various prices.
B an individual will buy at various prices.
C firms will sell at various prices.
D individuals will buy at various prices.
5 The diagram below shows a demand curve for a normal good.

Which of these statements correctly describes what the

demand curve shows?
A The quantity changes in proportion to a change in price.
B A fall in price leads to a fall in quantity demanded.
C As price changes, a greater or smaller quantity is
demanded.
D As demand increases, so does price.
6 Suppose there is a large increase in the price of a bottle of
iced tea. How is this likely to affect the demand curve for
bottles of cola?
A There will be an extension of demand along the demand
curve for cola.
B The demand curve for cola will remain unchanged.
C The demand curve for cola will shift to the left.
D The demand curve for cola will shift to the right.
7 Which of the following is likely to shift an individual’s
demand curve for a Range Rover Evoque luxury SUV to the
left?
A An increase in price of a substitute SUV.
B A decrease in price of the Range Rover Evoque SUV.
C A decrease in an individual’s income.
D A five-star review of the Range Rover Evoque in a
motoring magazine.
8 Which of these would cause a shift to the left of the market
supply curve for Range Rover Evoque vehicles?
A An increase in the price of the Range Rover Evoque.
B A reduction in the taxation on Range Rover Evoques.
C An increase in the wages of production workers.
D An improvement in output per worker.
9 The government provides funds for a subsidy on the price of
cooking oil. How will this affect the market supply curve of
cooking oil?
A There will be a contraction of supply along the market
supply curve.
B There will be an extension of supply along the market
supply curve.
C The market supply curve for cooking oil shifts to the
right.
D The market supply curve for cooking oil shifts to the left.
10 The government introduces a new indirect tax on imported
orange juice from the USA.
How will this affect the domestic market supply curve for
orange juice?
A There will be a contraction of supply along the domestic
market supply curve.
B There will be an expansion of supply along the domestic
market supply curve.
C The domestic market supply curve shifts to the left.
D The domestic market supply curve shifts to the right.
SELF-EVALUATION CHECKLIST

After studying this chapter, complete a table like this:

You should be able to: Needs Almost Ready
more there to move
work on
Describe the market mechanism
Understand that the buying side of
the market is demand
Construct a demand curve for an
individual firm or for an entire
market
Explain the factors that affect
demand
Understand that the selling side of
the market is supply
Construct a supply curve for an
individual firm or for an entire
market
Explain the factors that affect
supply
Explain that a movement along a
demand or supply curve takes place
when a change in price causes a
change in the quantity demanded or
supplied
Analyse how a shift of the demand
or supply curve occurs when there
is a change in any of the non-price
factors that determine demand or
supply