Demand and Supply Basics

Study Notes

Goods and services are marketed effectively if they satisfy consumer wants or assist firms in producing desirable products.

Demand refers to the quantity of a good or service consumers are willing and able to purchase during a specific time period under certain economic conditions.
Factors influencing demand include the price of the product, prices of related goods, expectations of price changes, consumer income, tastes and preferences, and advertising expenditures.

The law of demand states that as the price of a good decreases, the quantity demanded by consumers increases, assuming all other factors remain constant.

Direct Demand
- Applies to goods and services that directly fulfill consumer needs.
- Determined primarily by the utility or satisfaction gained from the goods and services.
- Influenced by product characteristics, individual preferences, and consumers' ability to pay.
Derived Demand
- Refers to the demand for products based on the demand for other goods they help produce.
- Focuses on the marginal benefits and costs of using a production input, and relates to the profitability of utilization.
- Examples include the demand for steel and labor, which arise from their role in production rather than direct consumer value.

Utility maximization drives direct demand for final consumption products.
Profit maximization underpins derived demand for inputs in the production process.
Both models share common principles based on optimization concepts.

The willingness and ability of producers to sell a good or service during a specified period is driven by the profit motive.

Supply in the market consists of the total amount provided by individual firms.
The willingness to supply products increases when marginal benefits exceed marginal costs, while it decreases when marginal costs outweigh marginal benefits.

Price of the Product
- Higher prices generally encourage more output from producers as they can meet increased production costs.
- Lower prices can result in reduced supply as they may render previous production levels unprofitable.
Prices of Related Goods and Services
- Substituting one product for another creates an inverse relationship in supply; higher prices of substitutes decrease supply of the original product.
- Positive relationships exist in complementary products where an increase in the price of one leads to an increase in the supply of another.
Technology
- The state of technology significantly impacts how inputs are transformed into outputs.
- Technological advancements can decrease production costs and improve the quantity and quality of products available for sale at given prices.