TOPIC 6.

SUPPLY ,-u M D DEMAND.

In this topic , students are introduced to the factors determining the amount which will be offered for sale and the amount buyers will be willing to buy under a variety of conditions, and the effects these have on the nature of production within a free enterprise economy.

Supply - factors affecting supply - the state of technology, the resources available, production costs, the preferences of producers, etc. The supply schedule as a table setting out the quantities that will be offered at a ran9e prices in a given time period, with all other conditions remaining constant. The supply curve as a graph of the supply schedule - the characteristic shape of the supply curve, sloping up from left to right. Movements along the curve as a result of price changes only - the degree of responsiveness to price changes being the elasticity of supply. Measurement of elasticity of supply, determinants of elasticity of supply (excess capacity, producers' expectations about the permanence of the price change, the resources available, etc.). Movements of the curve itself - as a result of changes in supply conditions, e.g. changes in technology, prices of inputs, prices of alternate products, production incentives, etc. Demand - factors affecting demand - incomes, technology, tastes, etc. The Demand Schedule and the demand curve; movements along the curve as a result of price changes only; the elasticity of demand - measurement of elasticity, importance of elasticity to producers and governments , in making decisions to increase or decrease prices. Factors that affect price elasticity of demand substitutes, desirability, durability, etc. Cross elasticity for substitute and complementary goods . Shifts in the demand curve as a result of changes in conditions other than p)ice - income:,, advertising, fashions, etc. Income elasticity of demand - factors influencing. Increases in demand as a result of changes in conditions, and extensions in demand as a result of changes in price. The concept of utility - the law of diminishing marginal utility - the influence of this on the shape of the demand curve. Market Equilibrium as the intersection of the supply and demand curve, where the quantity demanded equals the quantity supplied at a price. Changes in the equilibrium as a result of movements in the supply or demand curve. The effects of sales tax, income tax, subsidies, etc., on the curves and thus, on the equilibrium. Examples of supply and demand not in equilibrium - agricultural price support schemes, price freezes, etc. The need for additional government controls to enforce these - rationing, production quotas, etc. Prices and the production process - the price consumers are willing to pay, indicating their preferences; prices determining the profits that can be made by producers, hence prices determining the goods that will be produced. The demand for resources as a derived demand - their price depending on supply and demand. Thus prices will determine the combination of resources used to produce a given* output of goods, since profits depend on keeping costs low.