IGCSE ECONOMICS

DEMAND AND SUPPLY

WORKBOOK

Name

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CONTENTS

TOPIC PAGE NUMBER COMPLETED?

Introduction 3

What is demand? 3

Demand curves 4

Utility 6

Shifts in demand curves 8

What causes a shift in demand? 9

What is supply? 11

Supply curves 11

Shifts in supply 13

What causes shifts in supply? 14

Market price 15

Changes in the market price – a shift in demand 16

Changes in the market price – a shift in supply 17

Drawing your own demand and supply curves 18

Final question 20

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Introduction

As you know, the study of economics is all about making the best use of scarce resources.
People in general have an unlimited amount of wants but only a limited amount of resources
with which to fulfil those wants. So how do we decide who gets what? How do we decide how
to use those scarce resources? Well, one important factor in deciding is to use the theory of
demand and supply.

What is demand?

Examine the graph below

1) Who makes up the market for records?

2) Describe how consumers’ wants are changing in the record industry.

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3) How will the change in consumers’ wants affect the allocation of resources in the
record industry?

4) Why do you think more consumers now want and are able to buy compact discs?

So, from the above exercise we can see that consumer demand (what people want to buy)
plays a large part in deciding how scarce resources are used. In the example, resources would
be moved away from the production of LP records and tapes and towards the production of
CD’s (and now possibly DVD’s as well).

However, when we talk about demand we have to be sure we all mean the same thing. Just
wanting to buy something is not enough – you have to have the money to back up your want in
order to be able to make a purchase. This is called effective demand. Define it below.

Effective demand is …..

The amount of a good or service which consumers are willing (and able) to buy is known as the
quantity demanded. Economists measure the quantity demanded of a particular good over a
certain period of time – a week, a month, a year etc.

Individual demand is the effective demand of just one consumer. What do you think market
demand is? Write your definition below.

Market demand is …..

Demand curves

When economists want to study the effective demand for a particular good or service they use
two main weapons
a) a demand schedule and
b) a demand curve.
A demand schedule is a table showing how much of a good or service people will be willing to
buy at various prices (listed in order). An example is shown below.

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This information about how many bars of chocolate consumers are willing to purchase at each
and every price, is then plotted on a graph like the one below. The graph has to be drawn in
just the right way, carefully labelled, so that any economist would understand it. Plot the graph
correctly on a piece of graph paper. Label the page demand curve 1.

£2

.
Price of a chocolate bar

£1.50

£1

50p
D

0 50 100 150 200 250

Quantity demanded per month

From the graph you have plotted you can see that demand curves have the general
characteristic that they slope downwards from left to right – this is because as the price of a
good drops – most people will buy more of that good.

The graph on the next page shows us what happens when the price of a product changes.

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£2

Price of a chocolate bar

£1.50

P1
£1

As price
falls

50p
P2 D
Quantity extends

Q1 Q2
0 50 100 150 200 250
Quantity demanded per month

Look what happens when price falls from £1 (P1) to 40p (P2). Demand has changed from 80
bars per month (Q1) to 250 bars per month (Q2). Consumers demand extends as the price
falls but will contract as the price rises. Complete the definitions below

An extension of
demand is …..

A contraction of
demand is …..

Utility

We know that consumers buy goods and services to satisfy their wants. This satisfaction is
called utility. Economists assume that consumers want to get as much utility as they can from
buying goods and services.
As a person buys more of a good, the total utility they get from it rises. But it does not rise by
the same amount each time. In fact, it rises by a smaller amount with each good consumed.
The extra utility gained from consuming one more unit is called marginal utility.

Question

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A demand schedule for the consumption of orange light bulbs is shown below:

Price of orange light bulbs Market demand per month

50p 100 000

40p 150 000

30p 200 000

20p 260 000

10p 330 000

5p 400 000

1) Plot the demand curve on a piece of graph paper, labelling it correctly. Label the page
demand curve 2

2) Use the graph to work out how many orange light bulbs would be demanded at a price
of:

Price Number of bulbs demanded

45p

35p

15p

3) Explain the difference between individual demand and market demand.

Shifts in demand curves

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We have just seen that an increase in the price of a commodity will cause the price to contract.
However, this assumes that no other factor that affects the level of consumers demand has
changed. This is called the “ceteris paribus” assumption. Define it below

The ceteris paribus

assumption is …..

However, we need to know what happens to demand for goods and services when things other
than the price do change. What would happen if people suddenly had more money to spend?
Or if they saw a good advertisement for a product? These things and more do not cause the
demand curve to extend and contract . They cause what is called a shift in demand.

Look again at the market demand schedule for chocolate bars we saw earlier.

Price of a bar of chocolate Original demand per month Increased demand per month
£2 10 60
£1.50 40 90
£1 80 130
80p 150 200
40p 250 300

This shows that, for some reason, consumers are willing to buy more chocolate bars at each
and every price. Plot both the old and new figures on a new graph, labelling it correctly. Call
your new demand curve D1. Label the page demand curve 3. To show that the curve has
shifted from D to D1, draw an arrow between the two lines showing the direction of the shift. In
this case it will be pointing outwards.

Question
Here is a demand schedule for video cassettes

Price of video cassettes Original demand per week Decreased demand per week
£10 10 000 5 000
£8 15 000 10 000
£6 20 000 15 000
£4 25 000 20 000
£2 30 000 25 000

1) Plot both the original (D) and the new demand curve (D1) on a piece of graph paper.
Label the diagram correctly. Label the page demand curve 4.

2) Show the direction of the shift in demand by using an arrow.

To conclude we can say that a shift is caused by a change in some factor other than the price
of a good or service.
What causes a shift in demand?

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Below is a table containing some of the reasons why demand curves shift. Using your
textbook, make notes to complete the table.

Factor which
causes the shift Explanation

Changes in
peoples incomes

Changes in income
taxes

Changes in the
population

Changes in the
prices of other
goods

Changes in tastes
and fashion

Advertising

Other factors

Question

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1) How does the quantity demanded of a product change as the price changes?

2) Make a list of the factors that can cause an outward shift in the demand curve.

3) What is the difference between a substitute and a complementary good?

4) Below is a list of goods and service, complete the table by giving a substitute or
compliment as required.

Good/service Possible substitute Good or service Possible compliment

Electric cooker DVD player

Woollen jumper Fountain pen

Train journey Guitar

Music cassette Toothbrush

Butter Washing machine

What is supply?

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Supply refers to the amount of a good or service firms or producers are willing to make and sell
at a number of possible prices. The amount of a good or service producers are willing and able
to supply is known as the quantity supplied of that product, measured per period of time e.g.
each week or month etc.
Obviously, a firm who wants to make a profit will only make and sell a product if it can do so at
a price above what it cost the firm to make. The higher the price of the product, the more the
firm will supply, as it will make more profit at the higher price.

Market supply is …..

Supply curves

Examine the following market supply schedule for fountain pens. Plot this information on a
correctly labelled graph. The supply curve should be labelled S and the page labelled supply
curve 1.

Price of fountain pens Market supply per month

£20 1600
£16 1100
£12 700
£8 300
£4 100

What features does the supply curve have?

From the graph you have plotted you can see that supply curves have the general
characteristic that they slope upwards from left to right – this is because as the price of a good
rises – most producers will want to supply more of that good.

Use your graph to answer the following questions

The number of fountain pens supplied at the price of £6 is

The number of fountain pens supplied at the price of £10 is

The price consumers would have to pay if producers

wished to sell 700 fountain pens is

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The following table displays the costs and revenues involved in the production and sale of
fountain pens by all the producers in the market. Using the market supply schedule for fountain
pens above, complete the table.

Output of fountain Total cost (£) Total revenue (£) Profit (£)
pens per month (price x output) (Total revenue – Total cost)

100 100 £4 x 100 = £400 £400 - £100 = £300

300 280

700 420

1100 580

1600 760

This proves that, as the price of a good rises, producer will want to supply more because (if
they could sell all of the products they made) they would make more profit. Therefore the
supply curve extends.

As the price falls, quantity supplied contracts. This is because as the price falls, firms will
expect to earn less profits.

In the space below, draw a supply curve and show that as price rises, quantity supplied
extends (like the example of p. 6 of the workbook)

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Shifts in supply curves

As we have seen, a change in the price of a product will cause its supply curve to extend or
contract. Changes in things other than the price will cause its whole supply curve to move (or
shift). A movement of the whole supply curve for a good is called either an increase or
decrease in supply.

Examine the market supply schedule for disposable razors below.

Possible price of razors (p) Original supply per month Increased supply per month
50 10 000 12 000
40 8 000 10 000
30 6 000 8 000
20 4 000 6 000
10 2 000 4 000

Plot both the original supply curve (S) and the new supply curve (S1) on a piece of graph
paper. Label this paper supply curve 2. Draw an arrow to show the direction of the shift. Don’t
forget to label your axis on your graph properly.

Your diagram should show that at each and every price, razor producers are willing to make
and sell more than they did before. The whole supply curve has shifted outwards from S to S1.

What happens if producers are only willing to sell less at each and every price than previously?

Price per lb of potatoes (p) Original supply per month (lbs) New supply per month (lbs)
100 50 000 40 000
80 40 000 30 000
60 30 000 20 000
40 20 000 10 000
20 10 000 0

Plot both of the above supply schedules on a graph labelled supply curve 3. The curves
should be labelled S and S1. Make sure the direction of the shift is shown by an arrow and that
the axis are labelled.

What causes a shift in supply?

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Below is a table containing some of the reasons why supply curves shift. Using your textbook,
make notes to complete the table.

Factor which
causes the shift Explanation

Changes in the
price of other
commodities

Changes in the
costs of the factors
of production

Technical progress

Taxes

Subsidies

The weather

Market price

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We have now looked at the two market forces which determine price (supply and demand). So
far we have worked with separate schedules and graphs for both. If we combine the two
curves together we should find that the quantity demanded and the quantity supplied are the
same at one point. This is the market price (or equilibrium price). It is a price and quantity of
goods that both buyers and sellers agree upon.

Examine the demand and supply schedule shown.

Possible price of a packet of Quantity demanded per
Quantity supplied per month
crisps (p) month
50 100 000 420 000
40 150 000 300 000
30 200 000 200 000
20 260 000 120 000
10 330 000 60 000
5 400 000 40 000

On one piece of graph paper (labelled market price 1), plot the demand and supply curves for
crisps. Label your Y axis ‘Price per packet of crisps (p)’, and your X axis ‘Quantity per month’.
At the point where the curves cross, draw a dotted line to both the X and Y axis and mark the
price as P and the quantity as Q.

The price at which demand and supply are in equilibrium is

This will be the market price for crisps because, at this price, consumers are willing to buy and
producers are willing to sell.

The number of packets traded at the market price is

When the quantity demanded exceeds (or is more than) the quantity supplied, there is said to
be excess demand.

When the quantity supplied exceeds (or is more than) the quantity demanded, there is said to
be excess supply.

Complete the table below using your graph.

Possible price of a packet of
Is there excess demand? Is there excess supply?
crisps (p)
50 No Yes, 320 000 packets
10
40
20
30
So we can see that at any price ABOVE the market (or equilibrium) price, there is a state of
excess supply, and at any price BELOW the market (or equilibrium) price, there is a state of
excess demand.
Changes in market prices

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The market or equilibrium price can change as a result of changes in either demand or supply.

A shift in demand

As you have already discovered, an increase in demand for a commodity (either due to an
increase in peoples incomes or because the price of a substitute has gone up) will cause the
demand curve to shift outwards.

Below is the market demand and supply schedule for A4 lined paper in packs of 200 sheets.

Possible price of a packet of

Original demand per week Original supply per week
A4 lined paper (£)
3.00 100 500
2.50 200 400
2.00 300 300
1.50 400 200
1.00 500 100

Plot and label the demand (D) and supply (S) curves for lined paper, labelling your page market
price 2. Label your axis correctly and mark on the market price (P) and quantity (Q).

Imagine now that demand falls by 100 packs at each and every price. Complete the new table
below.

Possible price of a packet of

Original demand per week New demand per week
A4 lined paper (£)
3.00 100
2.50 200
2.00 300
1.50 400
1.00 500

On the same graph, draw the new demand curve (showing the direction of the shift). Label the
new equilibrium price (P1) and quantity (Q1).

What has happened to the supply of A4 lined paper? And the market price?

A shift in supply

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An increase in supply of a commodity because workers have accepted lower wages, or

technical progress has increased the performance of capital equipment, will be seen as an
outward shift in the supply curve from S to S1. As a result the market price will fall from P to P1
as a greater supply is available. As price falls so consumers will extend their demand for the
commodity along the demand curve from Q to Q1. The exercise below will demonstrate this.

Below is the market demand and supply schedule for jars of instant coffee.

Possible price of a jar of

Original demand per week Original supply per week
instant coffee (£)
2.00 300 700
1.75 400 600
1.50 500 500
1.25 600 400
1.00 700 300

Plot and label the demand (D) and supply (S) curves for coffee, labelling your page market
price 3. Label your axis correctly and mark on the market price (P) and quantity (Q).

Imagine now that supply increases by 200 jars at each and every price. Complete the new
table below.

Possible price of a jar of

Original supply per week New supply per week
instant coffee (£)
2.00 700
1.75 600
1.50 500
1.25 400
1.00 300

On the same graph, draw the new supply curve (showing the direction of the shift). Label the
new equilibrium price (P1) and quantity (Q1).

What has happened to the demand for jars of coffee? And the market price?

Drawing your own demand and supply curves

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So far you have had PLENTY of practice at plotting graphs based on demand and supply
schedules. In other words, you have been given the numbers to plot in order to draw the
graphs in question. However, you also need to be able to draw a graph without a set of figures
to illustrate a point you are trying to make. THIS IS A VERY IMPORTANT SKILL and you
should practice this by completing the questions below. The first example has been done for
you.

Explanation
Price

S
S1
As the supply curve has shifted from S to
P S1, there has been an extension along
P1
the demand curve from Q to Q1, causing
D
the market price to fall from P to P1. This
Q Q1 Quantity could have been caused by technological
Show an outward shift in supply progress.

Explanation

Show an inward shift in demand

Explanation

Show the effect on demand of an increase

in the population of the country

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Explanation

Show the effect on the supply of an

increase in the wages of workers

Explanation

Show the effect on the demand for butter

if the price of margarine increases

Explanation

Show the effect on supply of an increase

in the tax on a product

Explanation

Show the effect on supply if government

grants a subsidy to an industry

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Final question

Below is the market demand and supply schedule for wheat

Possible price of wheat per

Original demand per year Original supply per year
tonne (£)
2.00 100 000 500 000
1.75 200 000 400 000
1.50 300 000 300 000
1.25 400 000 200 000
1.00 500 000 100 000

Plot and label the demand (D) and supply (S) curves for wheat, labelling your page market
price 4. Label your axis correctly and mark on the market price (P) and quantity (Q).

The market price (P) is The quantity traded (Q) is

Imagine now that the supply of wheat falls by 200 000 tonnes at each and every price. Draw
and label the new supply curve S1 and mark on the new market price (P1) and quantity traded
(Q1).

The new market price The new quantity

(P1) is traded (Q1) is

What has happened to the demand for wheat? And why?

Suggest four reasons why the supply of wheat may fall

Congratulations, you have finished the

demand and supply workbook.

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