ZIMSEC O Level Business Studies Notes: Production: 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

Demand

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

Supply

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

Equilibrium

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

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