1

STUDY UNIT 4

DEMAND AND

SUPPLY

2

SOME STUDY OBJECTIVES

Draw and read simple graphs

Explain the difference between demand and quantity demanded

Differentiate between a movement along and a shift of a demand

curve

Identify the determinants of demand

Differentiate between a movement along and a shift of a supply

curve

Identify the determinants of supply

Explain how the equilibrium price and equilibrium quantity are

determined

3Chapter 7 Demand, supply and prices

© Van Schaik Publishers 3

Figure 7-1 The interaction between households and

firms

4

DEMAND - CONSUMERS

DEMAND = QUANTITIES OF A GOOD OR SERVICE THAT THE

POTENTIAL BUYERS ARE WILLING AND ABLE TO BUY

DEMAND IS NOT NEEDS, WANTS, CLAIMS OR REQUESTS

DEMAND IS A FLOW CONCEPT

INDIVIDUAL DEMAND vs. MARKET DEMAND

WHAT DETERMINES INDIVIDUAL DEMAND? Textbook 4th ed. pp

111-112

LAW OF DEMAND

– P → Qd

– P → Qd

DEMAND SCHEDULE

GRAPHIC ILLUSTRATION

5Chapter 7 Demand, supply and prices

© Van Schaik Publishers 5

Figure 7-2 Anne Smith’s weekly demand for

tomatoes

6Chapter 7 Demand, supply and prices

© Van Schaik Publishers 6

Figure 7-3 The market demand curve

7

BUT LET’S DO OUR OWN EXAMPLE:

DEMAND SCHEDULE

PRICE/PAIR OF CHILDREN SHOES

QUANTITY DEMANDED

NEW QUANTITY DEMANDED

R50 600 800

R60 380 580

R70 220 420

R80 130 330

R90 50 250

R100 20 220

8

DEMAND CURVE

0

20

40

60

80

100

120

0 20 50 130 220 380 600

Quantity

Pri

ce

in

Ra

nd D1

D2

D

9Chapter 7 Demand, supply and prices

© Van Schaik Publishers 9

Figure 7-4 A movement along a demand curve

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DEMAND - CONSUMERS

DETERMINANTS OF MARKET DEMAND:

– Consumer’s income

– Prices of complements and substitutes in consumption– Consumer Preferences

– Population/number of buyers/size of the households

– Consumer expectations of future prices

– Advertisement campaign

11

Substitutes in consumption

0

1000

2000

3000

4000

5000

0 2 4 6 8 10 12 14 16

QUANTITY OF DVD -players

PR

IC

E O

F D

VD

-p

la

ye

rs

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70 80 90

QUANTITY OF VIDEO MACHINES

PR

ICE

OF

VID

EO

MA

CH

INE

S

12Chapter 7 Demand, supply and prices

© Van Schaik Publishers 12

Figure 7-5 Two substitutes: butter and margarine

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Complements in consumption

0500

100015002000250030003500400045005000

0 2 4 6 8 10 12 14

QUANTITY OF VCRs

PR

ICE O

F V

CR

s

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70 80 90

QUANTITY OF VIDEO CASSETTES

PR

ICE O

F C

ASSETT

ES

14Chapter 7 Demand, supply and prices

© Van Schaik Publishers 14

Figure 7-7 A change in the quantity demanded

versus a change in demand

15

SUPPLY - PRODUCERS

DEFINITION OF SUPPLY: THE QUANTITIES OF A GOOD OR

SERVICE THAT PRODUCERS PLAN (AND ARE ABLE) TO SELL AT

EACH POSSIBLE PRICE DURING A CERTAIN PERIOD

SUPPLY ALSO A FLOW CONCEPT

INDIVIDUAL SUPPLY – determined by …. – see textbook pp 122-123

LAW OF SUPPLY

– P → Qs

– P → Qs

SUPPLY SCHEDULE

GRAPHIC ILLUSTRATION

16Chapter 7 Demand, supply and prices

© Van Schaik Publishers 16

Figure 7-8 Johnny’s annual supply of tomatoes

17

SUPPLY SCHEDULE

PRICE/PAIR OF CHILDREN SHOES

QUANTITY SUPPLIED

NEW QUANTITY SUPPLIED

R50 100 300

R60 190 390

R70 220 420

R80 380 580

R90 560 760

R100 700 900

18

SUPPLY CURVE

0

20

40

60

80

100

120

0 100 190 220 380 560 700

Quantity

Pri

ce

in

Ra

nd

S1

S2

S

19

SUPPLY - PRODUCERS

DETERMINANTS OF MARKET SUPPLY:

Prices of substitutes in production

Prices of complementary goods in production.

Price if inputs:

– Electricity

– Rent

– Interest rates

– Wages of workers

Expected future price of the product.

Technology

Number of firms

20

SUPPLY - PRODUCERS

DETERMINANTS OF MARKET SUPPLY:

Government policy (subsidies & taxes)

Climate and natural disasters

Productivity

21Chapter 7 Demand, supply and prices

© Van Schaik Publishers 21

Figure 7-9 A movement along a supply curve: a

change in the quantity supplied

22Chapter 7 Demand, supply and prices

© Van Schaik Publishers 22

Figure 7-10 Shifts of the supply curve: changes in

supply

THE MARKET SUPPLY CURVE: A SUMMARY

SEE TABLE 7-5

BRIEF DISCUSSION IF TIME ALLOWS

ANY QUESTIONS/DISCUSSION ON DEMAND AND SUPPLY

SO FAR?

AFTER WHICH, WE TURN TO MARKET EQUILIBRIUM

NOTE THE IMPORTANT FUNCTIONS OF PRICES IN A

MARKET ECONOMY – textbook pp 127 - 129

23

24

DEMAND AND SUPPLY SCHEDULES

Price of

children

shoes

Quantity

demanded

Quantity

supplied

Excess

demand/Excess

supply

R50

600 100 -500

R60 380 190 -190

R70

220 220 0

R80 130 380 250

R90 50 560 510

25

THE MARKET MECHANISM

Q

P

S

D

E

220

70

26Chapter 7 Demand, supply and prices

© Van Schaik Publishers 26

Figure 7-11 Demand, supply and market equilibrium

27

ILLUSTRATE THE LAW OF DEMAND GRAPHICALLY

28

ILLUSTRATE THE LAW OF DEMAND GRAPHICALLY

Q

P D

220

70

250

50

Must show :

• Arrows

• Price Quantity demanded

29

ILLUSTRATE AN INCREASE IN THE PRICE OF BEEF

DEMANDED

30

ILLUSTRATE AN INCREASE IN THE PRICE OF BEEF DEMANDED

Q

P D

220

70

250

50

Must show :

• Arrows

• Price Quantity demanded

31

ILLUSTRATE WHAT HAPPENS TO DEMAND OR SUPPLY IF THERE IS

AN INCREASE IN POPULATION

32

ILLUSTRATE WHAT HAPPENS TO DEMAND OR SUPPLY IF THERE IS AN

INCREASE IN POPULATION

D

D1

33

ILLUSTRATE WHAT HAPPENS TO THE SUPPLY CURVE IF THE

PRICE OF THE PRODUCT SUPPLIED INCREASES

34

ILLUSTRATE WHAT HAPPENS TO THE SUPPLY CURVE IF THE PRICE OF THE PRODUCT SUPPLIED

INCREASES

S

A

B

35

ILLUSTRATE A DECREASE IN THE SUPPLY OF TOMATOES

P

Q

S

S1

15050

70

36

ILLUSTRATE WHAT HAPPENS TO THE DEMAND OR SUPPLY CURVES IF THERE IS AN INCREASE IN THE NUMBER OF

FIRMS

37

ILLUSTRATE WHAT HAPPENS TO THE DEMAND OR SUPPLY CURVES IF THERE IS AN INCREASE IN THE NUMBER OF

FIRMS

S

S

S1

38

ILLUSTRATE WHAT HAPPENS TO THE SUPPLY CURVE FOR CAULIFLOWER IF THERE IS AN INCREASE IN THE PRICE OF

TOMATOES A SUBSTITUTE IN PRODUCTION

39

ILLUSTRATE WHAT HAPPENS TO THE SUPPLY CURVE FOR CAULIFLOWER IF THERE IS AN INCREASE IN THE PRICE OF TOMATOES A SUBSTITUTE IN

PRODUCTION

S1

S

40

S

A

B

S1

41

QUESTIONS TO SLIDE 40

Name one factor which causes a movement from point A to

Point B?

Name three reasons for a shift in the curve from S to S1.

Indicate clearly direction of change in each case?

42

Shifts vs. Movements along for potatoes

Q

PS0D0

a

g

S1

D1

h

b

43

QUESTIONS RELATING TO SLIDE 42

Which movement or shift in the graph indicates a decrease in supply?

Which movement or shift in the graph indicates an increase in the cost of labour?

If the price of potatoes increases in the graph then quantity demanded changes from?

Suppose the price of rice ( a substitute in consumption for potatoes ) decreases, it will cause a shift or movement along the curve from ……….. to ………

44

QUESTIONS RELATING TO SLIDE 42

If consumers expect the price of potatoes to decreases, it will

cause a shift or movement along the curve from ……….. to

………

The impact of a decrease in the price of potatoes on the quantity

supplied is indicated by a shift or movement along the curve from

……….. to ………

Suppose the number of potato producers increase, it is indicated

by a shift or movement along the curve from ……….. to ………

45

QUESTIONS RELATING TO SLIDE 42

If a cost-saving technological improvement in the production of potatoes is discovered, it is indicated by a shift or movement along the curve from ……….. to ………

If government increases it’s subsidy to potato farmers, it is indicated by a shift or movement along the curve from ……….. to ………

Suppose the population which consumes potatoes increases, it is reflected by a shift or movement along the curve from ……….. to ………

46

Market demand and supply for Puma T-Shirts

Q

PS0

D0

ag

S1

D1

h

b

47

QUESTIONS RELATING TO SLIDE 46

If the price of Nike T-shirts (a substitute in consumption) increases, how will

curves change?

Which shift or movement represents a cost-saving technological change in the production of Puma T-shirts?

If the price of Puma Track suites (a complement in consumption) increases, indicate the movement on the curves of Puma T-shirts.

Which shift or movement represents an increase in the labour cost of factory workers in the Puma T-shirt factory?

An increase in the price of Puma T-shirts on quantity supplied is reflected by which change in the curves?

48

Indicate the effect of a decrease in the demand for the

product on the equilibrium price and quantity?

Q

P

S

D

49

Indicate the effect of a decrease in the demand for the

product on the equilibrium price and quantity?

Q

P

S

D

D1

e

e1

50

Make use of the set of axes in the diagram below to illustrate what will happen to the demand and/or supply curve of a consumable good if a cost-improving

change in technology occurs, ceteris paribus.

51

Make use of the set of axes in the diagram below to illustrate what will happen to the demand and/or supply curve of a consumable good if a cost-improving change in technology occurs, ceteris paribus.

0

20

40

60

80

100

120

0 100 190 220 380 560 700

Quantity

Pri

ce

in

Ra

nd

S

S1

52

THE MARKET MECHANISM

Q

P

S

D

70

50

90 cba

53

QUESTIONS – BASED ON SLIDE 52

At which price level will the market experience excess supply?

What happens at a price level of R50?

Indicate the extend of excess demand on the graph?

Suppose we experience excess supply in the market, what must

happen to restore equilibrium?

What is the extent of excess supply in the market?

54

Illustrate market equilibrium and indicate the equilibrium price

and quantity.

55

Illustrate market equilibrium and indicate the equilibrium price

and quantity.

E

D

S

Qe

Pe

56

A decrease in the price of T-shirts supplied. An increase in the demand for ‘Handy Andy’

57

SHORTER QUESTIONS

If there is a successful advertising campaign for milk, then

(a) the demand for milk decreases.

(b) the demand for milk increases.

(c) the supply of milk increases.

(d) the supply of milk decreases.

If the price of domestic airline tickets increases, the demand for

(a) domestic air travel increases

(b) car rentals, a complement in consumption, increases

(c) domestic air travel decreases

(d) car rentals , a complement in consumption, decreases

58

SHORTER QUESTIONS

If there is an increase in the price of broccoli, a substitute in

production for beans, then the

(a) supply curve for broccoli decreases.

(b) supply of beans increases.

(c) demand curve for broccoli increases.

(d) supply curve for beans increases.

If there is a technological breakthrough in the beer manufacturing process, the

(a) supply of beer will decrease.

(b) demand for beer will increase.

(c) supply of beer will increase.

(d) demand for beer decrease.