How can we explain all of this?

DemandImportant difference…

Wants: unlimited desires or wishes that people have for goods and services.

Demand: the willingness and ability to purchase a good or service.I.e. must be backed up by buying power.

PRICE

Factors affecting demand

PRICES OF OTHER GOODS

SUBSTITUTES COMPLEMENTARY

Factors affecting demand

INCOME

Factors affecting demand

PREFERENCES

Factors affecting demand

WEATHER

Factors affecting demand

Price usually most important factor. What is the relationship between the price and the quantity demanded of a good?

Let’s do a quick example to work it out for ourselves…

GRADE 9 AUCTION

The Law of DemandThe law of demand states that… the higher the price of a good or service, the smaller the quantity demanded or the lower the price of a good or service the greater the quantity demanded. Only applies if all the other factors (income, preferences, weather etc.) remain unchanged (ceteris paribus).

What does this relationship look like graphically?

The Demand CurvePrice (R)

Quantity Demanded (000s)

Demand

R10

R5

100 150

There is an inverse

relationship between price and

quantity demanded.

Reasons for the law of demand

1. The substitution effect• When the price of a good rises, its price, relative to all other

prices, rises. • Consumers purchase its substitutes.

2. The income effect• When a price increases, the same amount of money buys less.• I.e. people become relatively poorer. • Forced to reduce the quantities demanded.

Demand Schedule for Maize Price (P)

(Rand per bag)

Quantity demanded (Q)

(Bags per month)

A 5 9 000B 4 10 000C 3 12 000D 2 15 000E 1 20 000

Now plot these figures on a graph to show the relationship between price and quantity.Price on Y-axis, Quantity on X-axis

SupplySupply: the relationship between the price of a product and the quantity of that product that producers are willing and able to supply on the market.

SupplyCOSTS OF SUPPLY

Factors affecting supply

VIDEO - How costs influence supply

SupplyEXCHANGE RATES

Factors affecting supply

SupplyPRODUCTION TECHNOLOGY

Factors affecting supply

SupplyTAXES AND SUBSIDIES

Factors affecting supply

SupplyWEATHER

Factors affecting supply

SupplyTO SUMMARISE…

Factors affecting supply

Any factor that causes the cost of production to RISE will decrease the quantity supplied at any given price level.

Any factor that causes the cost of production to FALL will increase the quantity supplied at any given price level.

The Law of Supply The law of supply states that… the lower the price of a good or service, the smaller the quantity supplied or the higher the price of a good or service the greater the quantity supplied. Only applies if all the other factors (costs, subsidies, weather etc.) remain unchanged (ceteris paribus).

What does this relationship look like graphically?

Price R

Quantity Bought and Sold (000s)

Supply

R3

200

R7

800

There is a positive

relationship between quantity

supplied and price.

The Supply Curve

Supply Schedule for Maize

Now plot these figures on a graph to show the relationship between price and quantity.Price on Y-axis, Quantity on X-axis

Price (P)

(Rand per bag)

Quantity supplied (Q)

(Bags per month)

A 5 18 000B 4 16 000C 3 12 000D 2 7 000E 1 0

Price DeterminationSo how do we determine the market price???

Price(Rand per bag)

Quantity demanded(bags per month)

Quantity supplied(bags per month)

Excess demand/Excess

supplyPressure on price?

A 5 9 000 18 000 Excess Supply- Decrease

B 4 10 000 16 000 Excess Supply- Decrease

C 3 12 000 12 000 Neutral

D 2 15 000 7 000 Excess demand- Increase

E 1 20000 0 Excess demand- Increase

Equilibrium price and quantityEquilibrium price and quantity is found where…

SUPPLY = DEMAND

At prices lower than equilibrium price….

<

At prices higher than equilibrium price….

<

Questions relating to the graphIf supply increased, the equilibrium price would increase/decrease.

At a price above $5, there will be excess demand/excess supply?What is the equilibrium price?What is the equilibrium quantity?At a price below $5, there will be excess demand/excess supply?

If demand increased, the equilibrium price would increase/decrease.

The price will remain at the equilibrium price until either demand or supply changes.

PRICE ______

PRICE ______

Explain the effects on supply, demand and the resulting market price of Brussel Sprouts based on the factors mentioned in the video.

VIDEO: Brussels SproutsDemand increases/decreases – WHY?Supply increases/decreases – WHY?

This results in the price of Brussel Sprouts increasing/decreasing.