Supply and Demand

The terms supply and demand refer to the behaviour of people as they interact with one another in markets. A market is defined as an institution or mechanism which brings together buyers – “demanders’ and sellers – “suppliers”.

Demand is the amount of the good that buyers are willing and able to purchase. What factors determine the demand for any good? They are as following:

Price. The quantity demanded falls as the price rises and rises as the price falls, so the quantity is negatively related to the price. The relationship between price and quantity demanded is true for most goods in the economy and, in fact, is so pervasive that economists call it the law of demand: other things equal (ceteris paribus in Latin), when the price of a good rises, the quantity demanded of the good falls.

Income. A lower income means that you have less to spend in total so you would have to spend less on some – and probably most – goods. If the demand for a good falls when income falls, the good is called a normal good. Not all goods are normal goods. If the demand for a good rises when income falls, the good is called an inferior good. An example of an inferior good might be bus rides. As your income falls, you are less likely to buy a car or take a cab, and more likely to ride the bus.

Prices of Related Goods. Suppose that the price of frozen yogurt falls. The law of demand says that you will buy more frozen yogurt. At the same time you will probably buy less ice-cream. Ice-cream and frozen yogurt are substitutes, that is pairs of goods that are used in place of each other.

When a fall in one price of one good raises the demand for another good, the two goods are called complements. Complements are often pairs of goods that are used together, such as gasoline and automobiles, computers and software.

Tastes. The most important determinant of your demand is your tastes. If you like ice-cream, you buy more of it.

Expectations. Your expectations about the future may affect your demand for a good or service today too.

We now turn to supply that is the amount that sellers are willing and able to sell. What determines the quantity an individual supplies? These are:

Price. Because the quantity supplied rises as the price rises and falls as the price falls, we say that the quantity supplied is positively related to the price of the good. This relationship between price and quantity supplied is called the law of supply: Other things equal, when the price of a good rises, the quantity supplied of the good also rises.

Input prices. The supply of a good is negatively related to the price of the inputs used to make the good.

Technology. By reducing firms’ costs, the advance in technology raises the supply of a good.

Expectations. The amount of goods you supply today may depend on your expectations of the future. For example, if you expect the price of goods to rise in the future, you will put some of your current production into storage and supply less to the market today.

Taxes and subsidies. By reducing taxes and increasing subsidies the government provides for the increase of the supply of goods and vice versa.

Vocabulary Focus

Ex. 1. Study the meaning of the following words.

1. To affect means ‘to influence’: The tax increases have affected us all.

2. An effect is a result or consequence of an event: The political crisis has already had an effect on the Stock Market.

3. The word ‘effect’ can have two other meanings: We tried exporting tea to China but with little effect (impact). In effect (in fact) the two systems are identical.

4. There is also a verb ‘to effect’, which is fairly formal: Production was stopped until repairs were effected (made).

Choose the right word in italics:

1. Do you think a rise in interest rates will affect/ effect consumer spending?

2. Cultural attitudes can affect/effect the success or failure of a merger with an overseas firm.

3. The bad publicity has had an adverse affect/effect on our reputation.

Ex. 2. Complete the table by inserting the missing forms.

Ex. 3. Match the Russian word combinations with their English equivalents:

A.

Ex. 4. Express in one word:

1. something that is sold for money;

2. the desire of customers for goods or services which they wish to buy or use;

3. pairs of goods that are used together;

4. pairs of goods that are used in place of each other;

5. to interact (with sth);

6. the price to be paid or amount of money needed for sth;

7. that which is put in;

8. the amount of sth that a person or thing produces;

9. to give sb that is needed or useful/ to provide sb with sth;

10. to establish a connection between, e.g. ideas, events or situations; to think or associate sth with sth else.

Words for reference: complements, demand, goods, substitutes, to act or have an effect on each other, to relate, output, input, to supply, costs.

Ex. 5. Choose the words with similar meaning from two columns and arrange them in pairs.

Ex. 6. Complete the sentences using the words given below.

1. The government increased prices on several basic ….

2. Computers and software, gasoline and automobiles are ….

3. … for these services is outgoing supply.

4. The new model comes in an exciting … of colours.

5. We made a small charge for parking to cover the … of hiring the hall.

6. Supply, the quantity of a product that suppliers will provide, is the seller's side of a …transaction.

7. Manufacturing … has increased by 8% for the last two years.

8. They discussed the … of additional resources into the scheme.

Words for reference: input, range, output, demand, goods/commodities, market, compliments, cost.

Ex. 7. Insert the necessary prepositions if necessary.

1. There are some factors which determine demand … a good.

2. They bought the goods … a low price.

3. What is the price … a coffee maker you bought last week?

4. How much money do you usually spend … textbooks during a school year?

5. What affects … your demand … goods and services most of all?

6. They had to put their current production … storage because … the fall … demand.

7. The company has increased supply … imports.

8. A surplus of goods … the market makes the prices adjust.

9. How do consumers respond … a rise of prices … goods and services?

10. The competing motivations of consumers and producers interact to arrive … a price and quantity … a product that is determined … impersonal market forces.

11. The price of any good adjusts to bring the supply and demand …that good …balance.

Comprehension

Ex. 1. Complete the sentences.

1. A market is defined as an institution or mechanism which ….

2. Demand is the amount of the good that buyers….

3. The law of demand says that ….

4. Ceteris paribus is ….

5. The good is called an inferior good if ….

6. The good is called a normal good if ….

7. Substitutes are ….

8. Complements are ….

9. The factors which affect the amount of the good that buyers are willing and able to purchase are ….

10. The factors which affect the amount of the good that sellers are willing and able to sell are ….

11. The law of supply says ….

Text 2

Equilibrium: Mr. Demand, Meet Mr. Supply

The beauty of the market is that the competing motivations of consumers and producers interact to arrive at a price and quantity for a product that is determined by impersonal market forces. Having analyzed supply and demand separately, we now combine them to see how they determine the quantity of a good sold in a market and its price. To focus our thinking, let’s keep in mind a particular good – ice cream.