### ZIMSEC O Level Business Studies Notes: Production: Supply and Demand (Market Forces)

• As we have already discussed elsewhere in a free market economy, the forces of supply and demand determine the price at which a product is sold
• It is important to note that even in an economy like Zimbabwe where the economy is mixed the forces of supply and demand still play a critical role in determining the price at which various products can be sold at
• This is especially true about businesses that are in the private sector
• Even when a business is in the public sector forces of supply and demand are also important as whoever is in charge of setting the price of products in this sector cannot just go against the forces of supply and demand as we will explain below
• The 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
• As you might guess they are made up of two opposing but related forces of supply and demand
• We will now examine each force in detail

#### Demand

• 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

• 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 the 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

• 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

NB

Supply and demand cannot be just covered in one topic. Please click on the link to the topic list below to see more topics on the issue