Supply and Demand (Market Forces)

In a free market economy the forces of supply and demand determine the price at which a product is sold
These two forces: supply and demand are also known as market forces
They are used to determine the price at which customers are willing to purchase a given quantity of a product
They are also used to determine the price at which suppliers/sellers are willing to sell a given quantity of a product

A simple demand curve

Demand refers to the desire to purchase a certain good or service
Because people have unlimited wants it would be useless to consider everyone’s demands for example most people want to purchase a plane
For this reason only effective demand is considered
Effective demand is the desire to purchase a given product and the capacity to pay for it
Effective demand is also known as actual demand
It is refers to the willingness and ability to purchase the said product
Demand is generally high when the price of a product is low/cheap
Demand is generally low when the price of a product is high/expensive
As a rule of thumb demand increases with the fall in price
In mathematical terms: Demand varies inversely with price
The rationale is that customers want to pay the least possible price to get more of a product
If this was to be plotted on a curve it would create a demand curve
This line/curve slopes down as we move to the right as shown above
The curve slopes downwards i.e. the gradient is negative

Simple supply curve

Supply refers to the quantity of a product that suppliers are willing to sell at a given price
Producers will try to obtain the highest possible price
As a general rule suppliers want to supply more at a higher price
Supply is low when the price is low
Supply therefore increases with the increase in price
In mathematical terms supply varies directly with price
If this was plotted on a curve it would create a supply curve
The line/curve slopes upwards as we move to the right as shown above
The curve slopes upwards i.e. has a positive gradient

Supply and Demand showing the equilibrium price

As established above customers want to pay the least possible price while suppliers want to sell at the highest possible price
If we combine the supply and demand curves we can determine the equilibrium price
This is also known as the market price
At the equilibrium price the quantity that suppliers are willing to sell is equal to the amount that customers are willing to buy
If the price is below the equilibrium price customers will demand more than the market is willing to supply driving the price upwards back to the equilibrium price
If the price is set above the market price there will be excess on the market and competition between suppliers will force the price down
If the government/authorities were to intervene, as the Zimbabwean government has done in the past, by setting price controls
Excessive demand will create shortages and ultimately the black market will supply goods at market prices

To access more topics go to the O Level Business Notes

Supply and Demand (Market Forces)- Updated 2024