supply nd demand
Eduvos Course Material Summary
Course Information
Institution: Eduvos
Course Code: COECA1-B22
Learning Outcomes
Understanding Competitive Markets
Define and understand the implications of competitive markets.
Demand Analysis
Define the law of demand.
Differentiate between demand and quantity demanded.
Describe factors influencing demand.
Supply Analysis
Define the law of supply.
Differentiate between supply and quantity supplied.
Describe factors influencing supply.
Equilibrium Concepts
Define economic concepts such as ‘equilibrium’ and ‘ceteris paribus’.
Explain how demand and supply interact to determine prices and quantities.
Utilization of Demand and Supply Functions
Make predictions about price and quantity changes using demand and supply functions.
Markets and Prices
Concept of Scarcity
People make decisions in response to scarcity; choices are made based on incentives.
Prices serve as incentives influencing consumer and producer behavior.
Definition of a Market
A market is an arrangement enabling buyers and sellers to exchange goods and services.
Markets consist of producers and consumers and can include financial markets like the Johannesburg Stock Exchange (JSE) and various goods markets.
Examples of Markets
Johannesburg Stock Exchange (JSE)
Produce Markets
Takealot (e-commerce)
Competitive Markets
Characteristics
Competitive markets feature many buyers and multiple sellers.
No single buyer or seller can influence the price significantly.
Price Mechanism
Producers offer goods if the price covers their opportunity costs.
Consumers seek cheaper alternatives when prices increase.
Price and Opportunity Cost
Money Price - The amount paid in currency for a good.
Opportunity Cost - The highest valued alternative that must be forgone to acquire a good.
Example of Opportunity Cost
Scenario
When buying a cup of coffee (money price = $1)
The highest valued forgone item is gum (money price = 50¢).
Opportunity cost of coffee = packs of gum.
Demand
Existence of Demand
Demand exists when:
The consumer wants it.
The consumer can afford it.
The consumer plans to buy it.
Quantity Demanded
Defined as the amount consumers plan to buy at a specific price during a given time period.
Quantity demanded can exceed available supply.
Demand curve reflects willingness and ability to pay, representing marginal benefit.
Law of Demand
Statement
When all conditions remain the same (ceteris paribus),
Higher prices decrease quantity demanded
Lower prices increase quantity demanded
Inverse Relationship
If price increases (↑), quantity demanded decreases (↓) and vice versa.
Reasons for Changes
Substitution Effect
As prices increase, consumers substitute expensive goods for cheaper alternatives.
Income Effect
Price increases reduce purchasing power, leading to a decrease in quantity demanded.
Demand Curve Representation
Demand
Represents the entire relationship between price and quantity demanded, depicted on a graph.
Graph Details
X-axis: Quantity Demanded
Y-axis: Price
The slope of the curve is downward due to the inverse relationship.
Changes in Demand
Movements along the Demand Curve
Caused solely by a change in the price of the good:
Increase in price = upward movement
Decrease in price = downward movement.
Shifts in Demand Curve
Determinants
Prices of substitutes or related goods
Expected future prices
Income Changes
Population changes
Preferences
Note:
A leftward shift indicates a decrease in demand; a rightward shift indicates an increase.
Determinants of Shift Explained
Prices of Substitutes
Substitute goods can replace each other.
Expected Future Prices
If the future price is expected to rise, current demand may increase.
Income Variations
Normal goods see an increase in demand as income increases; inferior goods see a decrease.
Population Factors
Increased population generally raises demand.
Preferences
Changes in consumer preferences directly impact demand.
Movements vs. Shifts
Graphical Explanation
Movement from point A to B shows a change in quantity demanded (price change),
Shift from A to C illustrates a change in demand (other factors altered).
Supply
Conditions for Supply
Firms must have the resources and technology to produce goods.
Must be capable of profiting from the production and planning to produce it.
Quantity Supplied
Amount producers are willing to sell at a given price during a specific time period.
Quantity supplied may differ from quantities sold at different times.
Law of Supply
Statement
When all else remains equal (ceteris paribus), higher prices lead to greater quantities supplied and lower prices diminish quantity supplied.
This relationship is affirmative/positive: Higher Price = Increased Supply.
Reason for Increased Supply
Higher prices incentivize more production due to profit motivation.
Also relates to marginal costs, which escalate with increased production.
Supply Curve Representation
Supply Definition
The relationship between the price of a good and the quantity supplied.
Supply schedules detail quantities at different prices, graphed with quantity on the x-axis and price on the y-axis.
Minimum Supply Price
Understanding the Supply Curve
The supply curve represents the lowest price a seller is willing to accept, analyzed in terms of marginal costs.
Changes in Supply
Movement Along the Supply Curve
Triggered solely by price changes:
Increase in price results in upward movement
Decrease leads to downward movement.
Shift in Supply Curve
Determinants
Prices of factors of production
Prices of related goods produced
Expected future prices
Total number of suppliers
Technological changes
Natural environmental factors (state of nature).
Note: Leftward shift signifies decreased supply; rightward shift indicates increased supply.
Market Equilibrium
Definition
Equilibrium is when opposing forces balance; occurs when quantity demanded equals quantity supplied.
The equilibrium price is the price at which this condition holds.
Market Adjustment
Prices regulate buying/selling plans:
Too high a price causes excess supply, prompting a fall in price to restore balance
Too low a price results in demand exceeding supply, causing prices to rise.
Examples of Market Equilibrium
Market for Milk Example
At equilibrium price of $3, quantity demanded equals quantity supplied.
Disequilibrium Scenarios:
Price rises to $5: Quantity demanded drops to 10, while supply increases to 50, illustrating a surplus of 40 units.
Price drops to $1: Quantity demanded rises to 70, while supply reduces to 10, illustrating a shortage of 60 units.
Predicting Changes in Price and Quantity
Change in Demand
Rightward Shift
Creates a shortage at original price; price must rise to restore equilibrium.
Leftward Shift
Creates surplus at original price; price must fall to eliminate surplus.
Change in Supply
Rightward Shift
Generates surplus; price must decrease to restore balance.
Leftward Shift
Creates shortage; price must increase to return to equilibrium.
Changes in Both Demand and Supply
Movement in equilibrium quantity follows direction of more significant change:
If demand increases more than supply, price rises.
If supply increases more than demand, price falls.
Graphical Illustrations
Example 3.11(a): When demand decreases and supply increases, the resultant equilibrium cannot be conclusively predicted without knowing change magnitudes.
Example 3.11(b): When demand increases and supply decreases simultaneously, again equilibrium prediction depends on the extent of each change.
Practice Exercises
Market for hamburgers to determine equilibrium price: Solving for quantity at various price points to visualize shifts and identify market equilibrium.
Mathematical Example
Example
Demand Equation:
Supply Equation:
Goal
Solve for equilibrium price (P) and quantity (Q):
By substituting into both equations and equating the results, derive the solution:
Final values:
Quantity = 200 cones, Price = $4 per cone.