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Demand, supply and price

Economics · WAEC and JAMB · SS2 and SS3

The engine of the whole syllabus. Be precise about the difference between a movement along a curve and a shift of it — examiners test it every year.

What you need to know

  • The law of demand: as price rises, quantity demanded falls, other things being equal.
  • A PRICE change causes a movement along the curve: extension or contraction.
  • A NON-PRICE change shifts the whole curve: increase or decrease in demand.
  • Factors shifting demand: income, taste, population, price of substitutes and complements, expectations.
  • The law of supply: as price rises, quantity supplied rises.
  • Factors shifting supply: cost of production, technology, weather, taxes and subsidies, number of producers.
  • Equilibrium is where the curves cross; above it there is a surplus, below it a shortage.
  • Exceptional demand curves slope upward: Giffen goods, Veblen goods, and goods bought in expectation of further price rises.

Key terms

Effective demand
Desire for a good backed by the ability and willingness to pay.
Substitute goods
Goods that can replace each other. A rise in the price of one raises demand for the other.
Complementary goods
Goods used together. A rise in the price of one lowers demand for the other.
Price elasticity of demand
The responsiveness of quantity demanded to a change in price.

Formulae

  • PED = (% change in quantity demanded) / (% change in price)
  • PES = (% change in quantity supplied) / (% change in price)
  • Income elasticity = (% change in quantity) / (% change in income)

Worked example

When price falls from N200 to N180, quantity demanded rises from 100 to 130 units. Calculate the price elasticity of demand.

  1. % change in quantity = (30/100) x 100 = 30%
  2. % change in price = (-20/200) x 100 = -10%
  3. PED = 30 / -10 = -3, magnitude 3

The mistake to avoid

A change in price never shifts the demand curve. It moves you along the existing one. Describing a price fall as "an increase in demand" is marked wrong.

In the exam

Draw and label the diagram even when not explicitly asked. Diagram marks are awarded separately and are quick to earn.