Price Theory: Demand, Supply, and Equilibrium

Demand and Price Relationship

Demand is not merely a need or desire; it crucially depends on the ability to afford a product and the willingness to pay for it. Therefore, demand is a combination of:

1. The need or want for a product.

2. The ability to pay for it.

3. The willingness to pay for it.

Demand is always price-related, meaning consumers are willing to buy different amounts of a product at different prices. This relationship is illustrated through the demand curve, which typically slopes downward. This negative slope indicates that as the price decreases, the quantity demanded increases.

Ratio between Demand and Price

As the price of a product decreases, the quantity demanded generally increases. This inverse relationship represents a negative correlation and is visually represented by the demand curve. The following data illustrates this relationship for ice cream:

Drawing the Demand Curve

To draw the demand curve based on the provided data:

1. On the horizontal axis (x-axis), plot the quantity demanded.

2. On the vertical axis (y-axis), plot the price.

3. Each price point corresponds to a specific quantity demanded. For example, at a price of R10, 500 units are demanded; at a price of R8, 750 units are demanded, and so on.

4. Plot each point and then draw a downward-sloping curve that connects these points.

This curve illustrates the inverse relationship between price and quantity demanded, where a higher price corresponds to lower demand, and a lower price corresponds to higher demand.

Influences on Demand

Several factors can shift the demand curve, influencing the overall demand for a product:

1. Change in tastes and habits: If consumer preferences shift, such as increased liking for ice cream, the demand for ice cream increases, shifting the demand curve to the right.

2. Changes in income: Increased income enables consumers to afford more products, thereby increasing demand and shifting the demand curve to the right. Conversely, decreased income reduces demand.

3. Business Cycle (Economic climate): During economic recessions, consumers tend to reduce spending, decreasing demand for non-essential goods like ice cream. During economic growth, demand typically increases.

4. Volume of money in circulation: Increased money circulation in the economy, often through government spending, can lead to higher disposable income and increased demand.

5. Taxes: Higher taxes on goods like ice cream increase the effective price for consumers, potentially reducing demand. Lower taxes can increase demand by lowering prices.

6. Changes in population: A larger population generally increases demand for products, as more people are available to buy them.

Supply

Supply Curve

Supply refers to the quantity of goods that suppliers are willing to provide at different price levels. There is generally a directly proportional relationship between price and quantity supplied. This means that as the price increases, suppliers are willing to supply more of the product.

The following data illustrates this relationship:

Drawing the Supply Curve

1. On the horizontal axis (x-axis), plot the quantity supplied.

2. On the vertical axis (y-axis), plot the price.

3. Each price corresponds to a quantity supplied. For example, at a price of R3, 100 units are supplied; at a price of R4, 200 units are supplied, and so on.

4. Plot the points and draw an upward-sloping supply curve, showing the positive relationship between price and quantity supplied (higher price = more supply).

Equilibrium Price

Equilibrium is the point where the demand and supply curves intersect. At this point, the quantity demanded equals the quantity supplied, and the market is in balance. For example:

• The demand and supply curves intersect at a price of R6 where both the quantity demanded and quantity supplied are 300 units.

• Therefore, the equilibrium price is R6, and the equilibrium quantity is 300 units.

This means that at a price of R6, consumers are willing to buy 300 ice creams, and suppliers are willing to sell 300 ice creams. This is the market-clearing price where supply equals demand.

Price plays a crucial role in the dynamics of the market:

• It is the monetary value of a product.

• Consumers generally want to pay as little as possible for a good.

• Suppliers aim to sell at the highest price possible.

• The higher the demand for a product, the higher the price tends to be, assuming supply is limited.

• The equilibrium price is where the forces of supply and demand are in balance.

By analyzing demand and supply, we understand how prices are determined and how various factors can shift both curves, affecting the overall market equilibrium.

Task Questions and Answers

1. The place where goods and services are bought and sold is called the market.

2. Prices of goods and services are determined by supply and demand.

3. The higher the demand for a product, the higher the price will be, if the supply stays constant.

4. If there are a large number of suppliers selling the same product, there will be competition between them to sell to the same target market. It can therefore be said that an excess supply will lead to decreased prices.

5. The exchange value of an article is the same as the price of the article.

6. One of the advantages of competition is that businesses will try to sell the best quality product at the lowest price to attract more customers.

7. What is Gross Domestic Product (GDP)? (Answer not provided in the transcript)