10/03/2024, 19:39 3.

1 Notes [ ± 120 min ] | Eduvos

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Date: Sunday, 10 March 2024, 7:39 PM

COECA1-11 (2024)
3.1 Notes [ ± 120 min ]

Learning Outcomes
By the end of this lesson, you should be able to:

Distinguish between the concepts of demand and supply in a competitive goods market.
Demonstrate a clear understanding of market equilibrium and the factors influencing equilibrium.

Prescribed Reading
Parkin, M., Antrobus, G., Bruce-Brand, J., Fourie, A., Kohler, M., Mahonye, N., Mlilo, M.,
Neethling, L., Rhodes, B., Saayman, A., Schoer, V., Scholtz, D., Smit, C. and Thompson, K.
2020. Economics: Global and Southern African Perspectives. 3rd edition. Cape Town:
Pearson Education South Africa

Chapter 3

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Introduction
Markets have the function of bringing together buyers and sellers together in order to coordinate their
decisions. A market always responds to everyday-life events, such as bad harvests, technological
advancements, changing consumer tastes and so forth, all of which affect the prices and quantities of goods
and services. At any particular point in time, the demand for some goods might rise, while the demand for
others might fall. Conversely, the supply of some goods might increase, while the supply of others might
decrease. As these changes are inevitable in any market, prices tend to adjust in order to keep markets in
equilibrium. This lesson seeks to analyse and explain how the market forces of demand and supply interact,
thereby determining the equilibrium price and quantity of a good or service. We will also see how prevailing
prices and quantities adjust when demand and supply changes, and how these changes in prices serve as
signals to consumers (buyers) and producers (sellers).

The model of demand and supply which we will analyse is probably the most powerful mechanism in
economic theory. This mechanism will be used throughout this course. In this lesson, we will first define the
term ‘demand’ and look at the various factors that influence demand. We will then flip our focus to supply and
look at the various factors that influence supply. This will then enable us to put demand and supply together

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in order to see how the model of demand and supply operates. That is, given the factors affecting demand
and supply, we will be able to make some powerful predictions about how changes in demand and supply
affect the equilibrium price and quantity of a particular good or service.

Demand
The quantity demanded of a good is the amount that consumers plan to buy in a given period of time at a
particular price.

Wants are the unlimited desires or wishes that people have for products, while the quantity demanded shows
the amount that people are actually willing to buy.

The law of demand states, ‘other things remaining the same, the higher the price of a good, the smaller is the
quantity demanded’ (Parkin et al., 2020: 55).

The law of demand is the result of two effects:

The substitution effect points out that when the relative price of a product rises, people buy less of it
because the opportunity cost of consuming it has increased.
The income effect points out that a higher price for a product effectively lowers people’s incomes and, as
a result, reduces their purchases of most goods.

The demand curve shows the relationship between the quantity demanded of a good and its price. The
demand curve also shows people’s willingness and ability to pay (Parkin et al., 2020: 56).

The demand curve shifts so that there is a change in demand when an influence, other than the price of the
product itself, changes.

Factors that shift a product’s demand curve are (Parkin et al., 2020: 57):

Income, again with two possible relationships:

A normal good is one for which an increase (decrease) in consumers’ incomes shifts the demand
curve rightward (leftward).
An inferior good is a good for which an increase (decrease) in consumers’ incomes shifts the demand
curve leftward (rightward).
Prices of related goods, which have two possible relationships:
Substitutes – Goods that can be used in place of the product being studied (Coke and Pepsi). A rise
(fall) in the price of a substitute of a product shifts the demand curve for the product rightward
(leftward).
Complements – Goods that are used in combination with another good (tea and sugar). A rise (fall) in
the price of a complement of a product shifts the demand curve for the product leftward (rightward).

When the expected future income increases, demand increases.

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If the expected future price of the product is forecast to rise (fall) and the good can be stored, consumers
increase (decrease) demand for it.

The larger (smaller) the population, the larger (smaller) is the demand for goods.
Changes in people’s preferences affect their demand for a product.

The distinction between a ‘change in the quantity demanded’ and a ‘change in demand’ is crucial. A change
in the quantity demanded, i.e. a movement along the demand curve, occurs when the price of the product
changes. A change in demand refers to a shift in the entire demand curve.

Quantity demanded for Good A

Increases when: Decreases when:

The price of Good A decreases The price of Good A increases

Demand for Good A

Increases when: Decreases when:

Income rises (if Good A is a normal good). Income falls (if Good A is a normal good).
Income falls (if Good A is an inferior good). Income rises (if Good A is an inferior good).

The price of Good B, a substitute in consumption, The price of Good B, a substitute in consumption,
increases. decreases.

The price of Good B, a complement in consumption, The price of Good B, a complement in

decreases. consumption, increases.

Preferences shift towards Good A. Preferences shift away from Good A.

The future income is expected to decrease.

The future income is expected to increase.

The future price is expected to increase. The future price is expected to decrease.

Table 3.1 – A ‘change in the quantity demanded’ vs ‘a change in demand’ of a good

Source: Parkin et al. (2020: 58)

Supply (Parkin et al., 2020: 60–64)

The quantity supplied of a good is the amount that producers plan to sell in a given period of time. It is not
the amount that they think they will be able to sell (Parkin et al., 2020: 60).

The quantity supplied is influenced by many factors, one of which is price. The law of supply states, ‘Other
things remaining the same, the higher the price of a good, the greater is the quantity supplied (Parkin et al.,
2020: 57).

Supply is the entire relationship between all possible prices and the quantity supplied at every price.

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The supply curve shows firms’ minimum supply price, i.e. for any quantity, it shows the minimum price that
firms must receive in order to supply the last unit of the given quantity.

A change in supply (a shift in the supply curve) occurs whenever some factor that affects the supply of the
good, other than its price, changes (Parkin et al., 2020: 61).

Factors include (Parkin et al., 2020: 61–63):

Prices of productive resources – a rise (fall) in the prices of resources shifts the supply curve leftward
(rightward).
Prices of other goods produced, which have two possible relationships:
When the price of a substitute in production of a good rises (falls), the supply curve for the good shifts
leftward (rightward).
A rise (fall) in the price of a complement in production of a good shifts the supply curve rightward
(leftward).
If the expected future price of the product rises (falls), the supply curve in the present period shifts
leftward (rightward).
An increase (decrease) in the number of suppliers shifts the supply curve rightward (leftward).
An increase in technology shifts the supply curve rightward.

Similar to demand, the distinction between a ‘change in supply’ and a ‘change in the quantity supplied’ is
crucial.

The former refers to a shift in the entire supply curve, whereas the latter refers to a movement along the
supply curve.

The following table summarises the difference between a change in supply and a change in quantity
supplied:

Quantity supplied of good A

Increases when: Decreases when:

The price of Good A increases The price of Good A decreases

Supply of good A

Increases when: Decreases when:

Input costs decrease Input costs increase

The price of Good B, a substitute in production, The price of Good B, a substitute in production,
decreases increases

The price of Good B, a complement in production, The price of Good B, a complement in production,
increases decreases

Number of suppliers in the market increases Number of suppliers in the market decreases

The future price is expected to rise

The future price is expected to fall

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Technology or production processes improve Technology or production processes deteriorate

Weather conditions become favourable Weather conditions deteriorate

Table 6.3 – A ‘change in supply’ vs a ‘change in the quantity supplied’

Source: Parkin et al. (2020: 63)

Predicting Changes in Price and Quantity

1. An increase in Demand
2. A decrease in Demand
3. An increase in Supply
4. A decrease in Supply

The following table summarises the impact of a change in demand or supply on the equilibrium price and
quantity:

Change in demand

Equilibrium Price Equilibrium Quantity

Increase in demand Increase Increase

Decrease in demand
Decrease Decrease

Change in supply

Equilibrium Price Equilibrium Quantity

Increase of supply Decrease Increase

Decrease of supply Increase Decrease

Source: Adapted from Parkin (2020).

5. All Possible Changes in Demand and Supply

Change in demand, no change in supply
Change in supply, no change in demand
Increase in both demand and supply
Decrease in both demand and supply
Decrease in demand, increase in supply
Increase in demand, decrease in supply

The following table summarises the impact of a simultaneous change in demand and supply on the
equilibrium price and quantity:

Possibility Change Conclusion

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Demand Price Quantity Quantity

1
Price uncertain
Supply Price Quantity

Demand Price Quantity Price

2
Quantity uncertain
Supply Price Quantity

Demand Price Quantity Price

3
Quantity uncertain
Supply Price Quantity

Demand Price Quantity Quantity

4
Price uncertain
Supply Price Quantity

Source: Adapted from Parkin (2020).

Market Equilibrium
Market equilibrium price is the price at which the quantity demanded equals the quantity supplied (Parkin et
al., 2020: 64).

Markets have the function of bringing together buyers and sellers to coordinate their decisions. A market
always responds to everyday-life events, such as bad harvests, technological advancements, changing
consumer tastes and so forth, all of which affect the prices and quantities of goods and services. At any
particular point in time, the demand for some goods might rise, while the demand for others might fall.
Conversely, the supply of some goods might increase, while the supply of others might decrease. As these
changes are inevitable in any market, prices tend to adjust in order to keep markets in equilibrium.

The following table summarises the market force adjustments whenever the market is in disequilibrium:

Shortage Surplus Equilibrium

Quantity demanded > Quantity demanded < Quantity demanded =

Definition
Quantity supplied Quantity supplied Quantity supplied

Effect on price Increase Decrease None

Effect on quantity
Decrease Increase None
demanded

Effect on quantity
Increase Decrease None
supplied

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Source: Adapted from Parkin (2020).

Supplementary Activity
To supplement what we have just learned in this
study unit, follow the link below. This video clip
provides a summary of this section – a description
of demand and supply.

Jacob Clifford. 2014. Demand and Supply

Explained- Macro Topic 1.4 (Micro Topic 2.1).
Video, [Online] Available
at: https://www.youtube.com/embed/LwLh6ax0zTE

Summary
The aim of this study lesson has been to explain the differences and underlying principles of demand and
supply. We have seen that a very important distinction exists between demand and quantity demanded, and
between supply and quantity supplied. A thorough explanation of the underlying factors that influence
consumers’ demand and producers’ supply was given after which we analysed different scenarios where
demand and supply change. It was shown that market forces will always cause the market to move towards
its equilibrium, i.e. the price and quantity whereby quantity demanded equals quantity supplied. This lesson
was concluded with an analysis whereby demand and supply change simultaneously, thereby altering the
equilibrium price and quantity in various ways.

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