STUDY UNIT 4

DEMAND AND SUPPLY

1

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

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Figure 7-1 The interaction between households and firms

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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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 – –



4



P P

→ Qd → Qd

DEMAND SCHEDULE GRAPHIC ILLUSTRATION

Figure 7-2 Anne Smith’s weekly demand for tomatoes

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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Figure 7-3 The market demand curve

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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BUT LET’S DO OUR OWN EXAMPLE: DEMAND SCHEDULE

7

PRICE/PAIR OF CHILDREN SHOES R50

QUANTITY DEMANDED 600

NEW QUANTITY DEMANDED 800

R60

380

580

R70

220

420

R80

130

330

R90

50

250

R100

20

220

DEMAND CURVE

120

Price in Rand

100

D1

80 60

D

40

D2

20 0 0

20

50

130 Quantity

8

220

380

600

Figure 7-4 A movement along a demand curve

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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DEMAND - CONSUMERS 

DETERMINANTS OF MARKET DEMAND: – –

– –

– –

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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

Substitutes in consumption PRICE OF VIDEO MACHINES

70

PRICE OF DVD-players

5000 4000 3000 2000 1000 0 0

2

4

6

8 10 12 14 16

QUANTITY OF DVD -players

60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 QUANTITY OF VIDEO MACHINES

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Figure 7-5 Two substitutes: butter and margarine

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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Complements in consumption 60

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

PRICE OF CASSETTES

PRICE OF VCRs

70

40 30 20 10

0

2

4

6

8 10 12 14

QUANTITY OF VCRs

13

50

0 0 10 20 30 40 50 60 70 80 90 QUANTITY OF VIDEO CASSETTES

Figure 7-7 A change in the quantity demanded versus a change in demand

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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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 –

–

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P P

→ Qs → Qs



SUPPLY SCHEDULE



GRAPHIC ILLUSTRATION

Figure 7-8 Johnny’s annual supply of tomatoes

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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SUPPLY SCHEDULE

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PRICE/PAIR OF CHILDREN SHOES R50

QUANTITY SUPPLIED 100

NEW QUANTITY SUPPLIED 300

R60

190

390

R70

220

420

R80

380

580

R90

560

760

R100

700

900

SUPPLY CURVE

S1

120

S

Price in Rand

100 80

S2

60 40 20 0 0

100

190

220 Quantity

18

380

560

700

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 

 

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Expected future price of the product. Technology Number of firms

SUPPLY - PRODUCERS 

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DETERMINANTS OF MARKET SUPPLY: 

Government policy (subsidies & taxes)



Climate and natural disasters



Productivity

Figure 7-9 A movement along a supply curve: a change in the quantity supplied

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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THE MARKET SUPPLY CURVE: A SUMMARY

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SEE TABLE 7-5

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BRIEF DISCUSSION IF TIME ALLOWS

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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

DEMAND AND SUPPLY SCHEDULES

24

Price of children shoes R50

Quantity demanded

Quantity supplied

600

100

Excess demand/Excess supply -500

R60

380

190

-190

R70

220

220

0

R80

130

380

250

R90

50

560

510

THE MARKET MECHANISM

P

D S

70

E

220

25

Q

Figure 7-11 Demand, supply and market equilibrium

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Chapter 7 Demand, supply and prices © Van Schaik Publishers

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ILLUSTRATE THE LAW OF DEMAND GRAPHICALLY

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ILLUSTRATE THE LAW OF DEMAND GRAPHICALLY

P

D

Must show : • Arrows

• Price

Quantity demanded

70 50

220

28

250

Q

ILLUSTRATE AN INCREASE IN THE PRICE OF BEEF DEMANDED

29

ILLUSTRATE AN INCREASE IN THE PRICE OF BEEF DEMANDED

P

D

Must show : • Arrows

• Price

Quantity demanded

70 50

220

30

250

Q

ILLUSTRATE WHAT HAPPENS TO DEMAND OR SUPPLY IF THERE IS AN INCREASE IN POPULATION

31

ILLUSTRATE WHAT HAPPENS TO DEMAND OR SUPPLY IF THERE IS AN INCREASE IN POPULATION

D1 D

32

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

33

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

S

B A

34

ILLUSTRATE A DECREASE IN THE SUPPLY OF TOMATOES S1 P

S

70

50

35

150

Q

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

36

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

S S

S1

37

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

38

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

39

S S1 B A

40

QUESTIONS TO SLIDE 40

41



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?

Shifts vs. Movements along for potatoes

D1

P

S0

D0

S1

g h

a b

Q

42

QUESTIONS RELATING TO SLIDE 42

43



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 ………

QUESTIONS RELATING TO SLIDE 42

44



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 ………

QUESTIONS RELATING TO SLIDE 42

45



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 ………

Market demand and supply for Puma T-Shirts

P

D1

D0

S0 S1 a

h

g

b

Q

46

QUESTIONS RELATING TO SLIDE 46

47



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?

Indicate the effect of a decrease in the demand for the product on the equilibrium price and quantity?

P

D S

Q

48

Indicate the effect of a decrease in the demand for the product on the equilibrium price and quantity?

P

D D1

S e

e1

Q

49

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.

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.

120

S

Price in Rand

100 80

S1

60 40 20 0 0

100

190

220 Quantity

51

380

560

700

THE MARKET MECHANISM

P

D 90 a

b

c

S

70 50

Q

52

QUESTIONS – BASED ON SLIDE 52

53



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?

Illustrate market equilibrium and indicate the equilibrium price and quantity.

54

Illustrate market equilibrium and indicate the equilibrium price and quantity. S

E Pe

D

Qe

55

A decrease in the price of T-shirts supplied.

56

An increase in the demand for ‘Handy Andy’

SHORTER QUESTIONS

57



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

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.

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58

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.