Demand and supply, one of the most important topics of economics. Demand focuses on the consumers while supply concentrates mainly on the producers. Demand is defined as the quantity of a good or service that consumers are willing and able to purchase at a give time and place, ceteris paribus. The definition of supply is the same, however it becomes the quantity of a good or service that the producers are willing and able to produce in a given time and place. I will be using the recession as an example of the change of demand and supply during that time.
The Wall Street Crash in 2008 had lead to a recession that spread worldwide. No economy was safe from this economic crash in the United States. This recession lead to the fall of many incomes. Many companies had also found that they could not accomodate so many workers leading to rise in unemployment. In addition, those who stayed with the company had many cuts in their annual salary. Income decreased rapidly during that period of the recession.
Fall in the annual income lead to the change in demand and therefore supply would also change. As income decreases, fewer people would be able to buy more goods as they need to save for better times, for example. This would lead to a much lower demand for goods such as electronics and clothing. From this, we can see that the change in income leads to a change in the demand. As the income is falling, demand falls as well, leading to the production possibility curve, PPC, to shift towards the left. However, there are some goods like basic neccessities which are exceptions to the usual flow of demand. As the income of a certain country falls, the demand of these particular goods would rise. This is because of the expectations of the future. Due to the prices of these goods rising, many believe that buying them earlier would make them cheaper. This causes the PPC to shift towards the right as the demand rises. From the recession, this proves that as income changes, the demand changes according to the change in the income. However, this also depends on the good itself, sometimes the goods are inversely related and sometimes they follow the change.
This change in demand would therefore affect the change in supply. The income falling leads to the change in supply as well. If the demand for a certain good drops, the producers would work to produce less. It would be a waste of resources if they try to produce more than the people needed. Thus, the PPC curve of the supply for the goods which have a fall in demand would shift towards the left. Moreover, for the PPC curve which supplies for those goods whose demands increase would lead to a shift towards the right.
The recession is a very good example of demand and supply. Income becomes affected by this recession leading to the many changes in the demand and supply of many goods.
sophiachan
Kudos on being the first to post! When there is a fall in demand, "quantity supplied" changes, not supply. At this stage, we treat demand and supply as independent. PPC does not shift when demand falls, because the maximum possible combination of goods and services that can be produced remains the same, although the point we are at may shift to inside the PPC. Also, if we expect the recession to be prolonged, wouldn't we buy now instead of later?
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