Economic Analysis: Demand and Supply

Parts of Concept

Introduction (Aaron) Demand (Sherman) Supply (Hang and Fiona)

Market Equilibrium (Nelson)

What is Supply and Demand

An economic model used in consumer theory One of the most fundamental concepts of economics Backbone of a market economy

Supply and Demand

Demand refers to how much of a product or service is desired by buyers Supply represents how much the market can offer

Relationship between Demand and Supply

The quantity demanded is the amount of a product people are willing to buy at a certain price

The relationship between price and quantity demanded is known as the demand relationship

Relationship between Demand and Supply

The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship

Relationship

Price is a reflection of supply and demand The relationship between demand and supply underlie the forces behind the allocation of resources

DEMAND
The quantity of goods and services that consumers are willing and able to purchase during a specified period under a given set of economic conditions

Demand referred here is effective demand Money backed desire Not the demand of a person wanting and grabbing at everything it sees Real, genuine demand backed by the ability to make a purchase

Factors affecting the demand

Price of the building/infrastructure Current level of income Consumers expectations

Government policy

A standard market demand curve

Price of good X

Demand Curve

Quantity of good X
The demand curve for most goods and services slopes downward from left to right, as the higher the price, the lower the level of demand (other things being equal)

Law of Demand

There is an inverse relationship between the price and the quantity demanded, other things being equal
The higher the price, the less will be demanded The lower the price, the more will be demanded

Income

For most goods, an increased income will lead to an increased in demand The phrase increase in demand correctly implies that more is being demanded at each and every price
For most goods, an increase in income will lead to a rightward shift in the position of the demand curve

Changes in Consumer Income

Goods can be classified into two broad categories:

Normal goods: The demand increases when income increases Inferior goods: The demand decreases when income increases

For example, the demand of private rented accommodation falls as more people are able to buy their own homes

Expectations

Consumers views on the future trends of incomes, interest rates and product availability may affect demand This will prompt them to buy more or less of a particular good even if its current price does not change

This is particular evident when we consider the demand of construction based activities

Example

For example, potential house purchasers who believe that mortgage rates are likely to rise may buy less property at current prices

The

demand curve for houses will shift to the left

reflects the fact that the quantity of properties demanded for purchase at each and every price has reduced due to consumer expectations that mortgage rates will rise

This

Government Policy

Legislation can affect the demand for a commodity in several ways For example, changes in building regulations have placed a greater focus on the standards expected for water and energy usage in turn, will influence the design of, and demand for, the standard fittings and appliances used in kitchen, bathrooms and general heating

This,

 The

demand for these products has increased, regardless of their present price to put it another way , the demand curve for all code compliant products has shifted to the right reflects the fact that greater quantities of these units are bring demanded at each and every price The government can also influence the level of demand by changing taxes or creating a subsidy

Or

This

Supply

Supply indicates how much of a good producer are willing and able to offer per period at each possible price, other things are constant Law of supply states that the quantity supplied is usually directly related to the price
The lower the price, the smaller the quantity supplied The higher the price, the greater the quantity supplied

Law of Supply
As price increases, a producer is more willing to supply the goods and services 1. Higher prices attract resources from lower-value uses 2. Higher prices increases the producers ability to supply the goods and services 3. Marginal cost of production increases as output increases 4. Producers must receive a higher return in order to maintain or raise the quantity supplied

Exhibit: Supply Schedule and Curve for pizzas

The supply curve and the supply schedule both show quantities of pizza supplied per week at various prices by all the pizza makers in the market.

Price and quantity supplied are directly, or positively related. Producers offer more for sale at higher prices: supple curve slopes upwards.

Supply and Quantity Supplied

Supply refers to the relation between the price and quantity supplied as reflected by the supply curve or supply schedule Quantity supplied refers to a particular amount offered for sale at a particular price at a particular point on the supply curve

Individual Supply and Market Supply

Individual supply refers to the supply of an individual producer Market supply is the sum of individual supplies of all producers in the market Unless otherwise noted, we will be referring to market supply

Shifts of the Supply Curve

Determinants of supply other than the price of goods and services
State of technology Prices of relevant resources Prices of alternate goods and services Producer expectations Number of producers in the market

Exhibit: Change in Technology in Relation to the Increase in Supply New technology is more
efficient eg. High-tech oven

Production costs fall leads to suppliers providing an increase in production for goods and services More is supplied at various prices

Changes in Prices of Relevant Resources

Resources that are employed in the production of the goods and services in question

For example, if the price of mozzarella cheese falls, costs of pizza production declines In reverse, if the price of a resource increases then the supply will decrease

Prices of Alternative Goods

Alternative goods are those that use some of the same resources employed to produce the goods and services under consideration For example, as the price of bread increases, so does the opportunity cost of producing pizza then the supply of pizza declines A fall in an alternative good will make pizza production more profitable so the supply increases

Changes in Producer Expectations

When a good or service can be easily stored, future prices may be higher to reduce the supply amount

Any change will result in a change of future profitability and the supply curve will shift

Number of Producers
As market supply sums the amount supplied at each price by the producers, market supply will depend on the number of producers on the market Higher amount of producers, higher supply Low amount of producers, lower supply

Construction Industry

Residential Building
Houses, unit/townhouses, large alterations and small alterations

Non-residential Building
Retail, offices, other commercial etc

Engineering Construction
Bridges, rails, sewerage etc

Construction Industry Supply Issue

Construction industry employs 9.1% of the total workforce in Australia Uncertain supply of suitably skilled labour Residential sector is the most vulnerable
Ageing employment base Unmet demands for housing

Background

Boom in construction industry during 1986-2001 Construction activity increased by 4% Pressure on labour market Small commitment to investment in training, mainly apprenticeship training

Solutions

Government
Group training arrangements New Apprenticeship System Kirby Committee of Inquiry into Labour Market Programs Australian Traineeship Program

Other
Companies are supplying training programs for apprentices

Case Study

UKs construction and building services sector is experiencing severe skill crisis

40-50% retention rate

Decline rate of entrant trainees Focus on increasing the number of labourers instead of harnessing

Causes

Demographic decline in number of entrant trainees Introduction of new technologies Changing nature of the construction markets and demand for new skills Funding for construction qualifications

Example Location

Black Country a sub region in West Midlands is affected by the supply of skill shortages

Continue declining for next four years

Solutions

Quality and quantity of trainees in construction skill supply chain is directly affected by education performance
Higher quality primary and secondary schooling education

Skill supply data management system for funding decisions

Solutions continued

New Trades training for constantly changing construction activities multiskilling

Black Country Construction and Building Services Forum established to eliminate current and future skills mismatch

MARKET EQUILIBRIUM
A situation in which the plans of buyers and the plans of seller exactly mesh

Supply and Demand graph

Price Supply

PE

Equilibrium -Determines Market price

Demand QE Quantity demanded and supplied per unit time

Supply and Demand graph

Price

Increased Supply

P1 PE

Equilibrium -Lower Price -Lower Quantity Demand Q1 QE Q2 Quantity demanded and supplied per unit time

Supply and Demand graph

Price

Decreased Supply

PE P1

Equilibrium

-Greater Price -Greater Quantity

Demand Q 2 QE Q 1 Quantity demanded and supplied per unit time

Supply and Demand graph

Price Supply

PE P1

Equilibrium -Higher Price -Greater Quantity

Increased Demand Q1 QE Q2 Quantity demanded and supplied per unit time

Supply and Demand graph

Price Supply

P1 PE

Equilibrium

-Lower Price -Lower Quantity

Decreased Demand Q2 QE Q1 Quantity demanded and supplied per unit time

Disequilibrium
Due to excess supply or demand
Price Excess Supply Supply Price Excess Demand Supply

Demand Quantity demanded and supplied per unit time Quantity demanded and supplied per unit time

Demand

Conclusion
This principle of demand and supply analysis is applicable for all the transactions that take place, throughout the world Demand and supply theory will allocate resources in the most efficient way possible Knowing the supply and demand analysis is an absolutely necessity

Questions?