Question 1

Does a rise in income always cause demand to increase?

Accepted Answer

Not necessarily. For 'normal goods', a rise in income leads to an increase in demand (a rightward shift of the demand curve). However, for 'inferior goods' (e.g., budget supermarket brands, bus travel), a rise in income causes demand to fall (a leftward shift) as consumers can now afford and switch to higher-quality alternatives. It is crucial to distinguish between these two types of goods.

Question 2

If demand for a product increases, won't producers just shift their supply curve to meet it?

Accepted Answer

This is a common misconception. A shift in the demand curve (e.g., due to a successful advertising campaign) does not cause the supply curve itself to shift. Instead, the increase in demand creates a shortage at the original price. This shortage causes the price to be bid up. The higher price then signals to producers to offer more for sale, resulting in an upward *movement along* the existing supply curve to a new, higher equilibrium quantity. The supply curve only shifts if a non-price determinant of supply, like production costs, changes.

Question 3

Why is the supply curve upward sloping? Don't businesses want to sell as much as possible at any price?

Accepted Answer

While businesses want to maximise profit, the upward-sloping supply curve reflects the reality of production costs. To increase output, a firm often faces higher marginal costs (the cost of producing one more unit), perhaps due to needing to pay workers overtime or using less efficient machinery more intensively. Therefore, a higher price is required to justify and cover these higher costs. Furthermore, a higher market price can attract new, less efficient firms into the market, whose costs are only covered at that higher price, thus increasing the overall quantity supplied.

Demand and supply curves

What you need to know

Demand and supply curves