Transcript STUDY UNIT 2

STUDY UNIT 4
DEMAND, SUPPLY
AND PRICES
7.2: Demand
When we talk about demand we are referring
to the quantities of a good or service that the
potential buyers are willing and able to buy.
Figure 7.1: The interaction between households
and firms
The law of demand states that other things
being equal (i.e. ceteris paribus), the higher
the price of a good, the lower is the quantity
demanded.
A demand schedule is a table which lists the
quantities demanded at different prices when
all other influences on planned purchases are
held constant.
Figure 7.3: The market demand curve
You only need to draw in figure (b), but note that the market demand
curve is the “horizontal summation” of the individual demand curves.
Qd = number of tomatoes demanded in the
market
Px = price of tomatoes
Pg = prices of related goods
Y = total income of all prospective purchasers
of tomatoes
T = tastes of all prospective purchasers of
tomatoes
N = total number of potential consumers of
tomatoes
. . . . = allowance for any other possible
influences
A movement along a curve relates to the slope
of the curve, while the shift of a curve relates
to its position.
An increase in the price of a substitute will
cause an increase in demand for the product
in question.
An increase in the price of butter will increase
the demand for margerine, ceteris paribus.
Figure 7.5: Two substitutes: Butter and Margerine
(Adapted)
Complements are goods that tend to be used
jointly to satisfy a certain want, e.g. VCRs and
cassettes, or cars and petrol.
A fall in the price of a complementary product
(VCRs) increases demand for the product (video
cassettes, and this is illustrated by a rightward
shift of the demand curve.
An increase in the price of the complement
(VCRs) will lead to a decrease in demand for the
product (video cassettes).
Demand curve for video cassettes will shift to the
left.
Figure 7.6: Two complements: video cassette
recorders and video cassettes (Adapted)
The increased quantity of VCRs demanded (as a
result of the lower price) leads to an increase in
the demand for video cassettes.
If demand increases when income increases, the
goods are normal goods.
If demand decreases when income increases, the
goods are inferior goods.
Increase in demand for apples, the demand curve
will shift to the right.
An increase in the population will shift the curve
to the right, ceteris paribus.
If price of the good is expected to fall,
consumers will reduce current demand.
A common example: petrol
Demand by low income households will
increase, and
Demand by high income households will
decrease.
7.3: Supply
Supply can be defined as the quantities of a
good or service that producers plan to sell at
each possible price during a certain period.
The higher the price, the greater the quantity
that the producer will plan to grow and sell,
ceteris paribus.
Quantities that the producer plans to sell at
different prices will also depend on the cost of
production.
New technologies that enable producers to
produce at lower costs will increase the
quantity supplied at each price.
Qs = number of tomatoes supplied in a
particular period
Px = price of the product (tomatoes)
Pg = prices of alternative outputs
Pf = prices of factors of production and other
inputs
Pe = expected future prices of the product
Ty = technology
N = number of firms supplying the product
. . . . = allowance for any other possible
influences
Subsidies on particular goods and services
tend to raise their supply, while taxes tend to
reduce their supply.
Some products are produced jointly, e.g. beef
and leather.
If productivity falls, production costs increase
(ceteris paribus), and supply decreases.
Figure 7.8: Annual market supply of tomatoes
(Adapted)
Figure 7.9: Movement along a supply curve: A
change in the quantity supplied
A
A change in the price of
the product leads to a
movement along the
supply curve SS. For
example, when the price
of the product increases
from P1 to P2 the quantity
supplied increases from
Q1 to Q2. In other words,
there is a movement
along SS from a to b.
Figure 7.10: Shifts of the supply curve: Changes in
supply
A
Original supply curve is SS.
A change in any of the
determinants of the quantity
supplied other than the price
of the product will lead to a
change in supply, illustrated by
a leftward shift of the supply
curve. Any factor which
reduces supply will shift the
supply curve to the left, to
S1S1. Any factor which
increases supply will shift the
supply curve to the right, to
S2S2.
The market is in equilibrium when the
quantity demanded is equal to the quantity
supplied.
Excess demand (or a market shortage)
Excess supply (or a market surplus)
The demand and supply of tomatoes in a market on a
particular day
Price of
tomatoes
(R/kg)
Quantity
demanded
(kg)
Quantity
supplied (kg)
Excess supply
or demand
(kg)
Pressure on
price
1
350
50
300 ED
Upward
2
300
100
200 ED
Upward
3
250
150
100 ED
Upward
4
200
200
0
None
(equilibrium)
5
150
250
100 ES
Downward
6
100
300
200 ES
Downward
7
50
350
300 ES
Downward
Figure 7.11: Demand, supply and market equilibrium
(Adapted)
• DD intersects supply curve at a price of R4 per kg.
• Equilibrium quantity is 200 kg per week.
• At price of R2, Qd is 300 kg and Qs is 100 kg. Excess
demand is indicated by points bc.
• At price of R7, Qd is 50 kg and Qs is 350 kg. Excess
supply of 300 kg is indicated by points df.
When there is EXCESS DEMAND:
• As the price increases, the quantity supplied increases
along the supply curve (existing firms produce more),
while the quantity demanded falls along the demand
curve.
When there is EXCESS SUPPLY:
• They cut their production and compete with each other
to find buyers for their products by reducing the price.
• This process continues until equilibrium is reached
where Qd = Qs.
• Market equilibrium occurs at the intersection of the
demand and supply curves.
• This is the point where buyers and sellers agree on
quantity of goods to be exchanges and the price at
which they will be exchanged.