3. The economy involves producers and consumers
The economy involves producers and consumers. Consumers are normally seen as the households and producers the firms, but these roles can be reversed as well. Money flow forward and back in this cycle. (This coming together of consumers and producers is called the market, where demand and supply for goods meet.) The first relationship is the one where the households demand and the firms supply. This happens in the market for goods and services. This relationship is illustrated in the top part of the diagram. The households ask for (demand) goods and services and the firms provide them with it (supplies it; the orange line at the top). This relationship is illustrated in the top part of the diagram. The households ask for (demand) goods and services and the firms provide them with it (supplies it; the orange line at the top). In return the households pay them for it (the green line at the top). The second relationship is given in the bottom part of the graph. This is where the two parties come together in the market for production factors. When this happen the demand and supply roles are reversed. The households are now the suppliers and the firms the demanders. For example: Labor services are supplied by households and flow to firms (the orange line at the bottom). Money flows in the opposite direction (the green line).

5. First of all it is important to define a market, because this is where the transactions, which determine demand, supply and price, takes place. A market can be seen as a mechanism through which buyers and sellers interact to set prices and exchange goods and services. The market brings supply and demand together as it is the place where buyers (demand) and sellers (supply) meet, to form the relevant price for a product. It doesn’t need to be a building or a physical place. It can be concrete or abstract. The word `market' just represents an exchange situation. Therefore if you buy a apple from the store, or a second hand book from me, the interaction forms a market in this context.

6. We all know what price is, we come into contact with prices everyday
We all know what price is, we come into contact with prices everyday. When we buy something in a market-whether it is a car, a house, or a loaf of bread-we pay a price. In plain language, it is what you pay for a good, or what you exchange for a good. Formally, prices express the rate at which buyers and sellers agree to exchange either money for commodities (so many Rand, for so many bags of fertilizer) or an exchange of commodities (so many pairs of shoes for so many bags of fertilizer), or a exchange of a service for money or a commodity.

9. In a world of scarcity, where people's wants are larger than the resources available to satisfy those wants, some type of rationing device is necessary. In plain terms, you need a mechanism to determine who will get what of the available resources, goods and services. A rationing device, formally, is a device, which will allocate the resources optimally and get efficiency. This mechanism may be price, first-come-first-served, brute force, or something else. Only price though gives us an optimal outcome, because the people who value it the most, get the good. In short the people who are will­ing and able to pay the price of a good, obtain the good; those persons who are not willing and able to pay, do not obtain the good. The fact that you might want it most, but can’t pay for it is not relevant. The market is a harsh place, it only cares about the people that want it most and is willing to pay that amount. You need a mechanism to determine who will get what of the available resources, goods and services. Price rations the scarce supply of goods and services, only those that can afford it will buy it. The people who are willing and able to pay the price of a good, obtain the good; those persons who are not willing and able to pay, do not obtain the good.

10. Allocative function: i. e
Allocative function: i.e. price serves as signals in determining the allocation of resources/production factors, it determines who gets what. Informative function: It conveys information, we can see by the price of something what people are willing to pay for it and therefore we can put a value on the product according to prices. We value goods in terms of its price. If the price of game drives at Skukuza is high, it means that people value the game-watching highly.

11. Demand refers to the willingness and the ability of buyers to purchase different quantities of a good at different prices. In other words, the demand for a commodity shows a relationship between prices and quantities consumers are willing to purchase. In plain terms it is an indication of how much the people will ask of the good, at a given price.

12. It is important that the person must be able to buy the good
It is important that the person must be able to buy the good. We thus look at the demand from people who have income to allow them to make actual purchasing decisions. This is called effective demand. Therefore most of the people in your class’s effective demand for private jets would be zero, because they are not able to buy it. When we refer from now on to demand we automatically mean the effective demand.

13. What is the relationship between the price of a good and the quantity that is demanded of that good? As the price of a good increases, the demand of that good will decrease, and vice versa. The relationship between price and quantity demanded is an inverse one, ie, more of a commodity is demanded at a lower price than at a higher price. If the price of a commodity rise, the quantity demanded of that good will fall.

15. It is an everyday phenomena which you always follow when you buy something. It is logical to expect that consumers will demand more of a product at a lower price and less of it at a higher price. If you(Whenever I use “you” in the examples of this course, I refer to people in general.) go to Sport Scene this week, and you walk pass a Nike-shirt special for R20, you will buy it, next week when it’s back to R150 you probably won’t, and people on average would also buy less. You will buy more T-shirts when it is cheap and less if it is more expensive. If the price of game drives in the Kruger Park goes down more people will go on it and when the price rise less people will go on it. You will buy more of something when it is on special, and less of it when it has gone up in price. Thus as p goes up, quantity demanded goes down, when p goes down then quantity demanded rise.

16. People feel relative more poor or rich as price change
People feel relative more poor or rich as price change. If price rise you can buy less with your given income. In plain words you can’t afford this good anymore. It doesn’t fit into your budget to buy the same amount as before. When the price of movies goes up, you will go watch less, because you only have a given amount of money to spend on luxuries in a month. When the price of movies goes down to R14, on the other hande, as is the case now, you can afford to go watch more, you feel richer. This is commonly known as the income effect.

17. The second reason is that this product will cost more than alternatives if it’s price rise. You will rather choose the cheaper substitutes, than the product that’s price has gone up. Thus the quantity demanded for the product with the higher price falls. People will substitute when something gets more expensive. Say the price of Hunter’s Gold goes up by R5 per bottle to R10, but Redds stays R5. You will rather buy Redds than Hunter’s Gold. Therefore as the price goes up, of Hunter’s Gold, the quantity demanded, of Hunter’s, goes down. This is known as the substitution effect. The substitution effect also works the other way around, if the products price fall, people will not buy its substitutes anymore, but rather this good. If the price of accommodation in the Kruger Park rise a lot, less people will go there and they will rather go to the other cheaper game parks.

18. A demand schedule is a numerical way of showing the relationship between the quantity demanded and price of a good. That is showing how much a person would be willing to buy at different prices. Thus it is just data that you have acquired, inserted in a table. How much would you demand if the good is for free…. When price is R10? and R11? and R12? and R13?…. and so it goes on until you have filled your schedule. The Market demand is derived from individual demand and is the summation of all the individual quantities demanded at each specific price.

19. If we plot all the points of the demand schedule on a graph with the price on the vertical axis and quantity demanded on the horizontal axis, and connect these points, we get what is called a demand curve. The demand curve shows the quantity of a commodity (bread) that the people would like to buy at every possible price (Remember this is exactly the information that is in the demand schedule). A single point on the demand curve indicates a single price-quantity relation of the demand schedule. The demand curve is thus a tool that helps us to explain economic behavior and predict certain outcomes.

20. All these points on the demand schedule is plotted and then connected by a straight line which forms the demand curve. From this graph we can see that all the points on the demand schedule is represented on the demand curve, Point A on the Demand curve represents a price of R4 and a quantity demanded of 10 for example. Point B Quantity demanded of 20 and price at R3.

21. This is thus an indication of the inverse relationship between price (P) and quantity demanded (Q), due to the law of demand (as p goes up q goes down), they move in opposite directions (law of demand). We can see that when price rise the quantity demanded falls and vice versa. If you look at the curve you will see that when price rise from R2 to R3 (points C to B, on the y-axis) then quantity demanded falls from 30 to 20 (points C to B, on the x-axis).

25. A shift in the demand curve is referred to as a change in demand this is due to factors other than price. If demand change the whole curve shifts. If the curve shifts to the right as in our example, we say that the demand increased, this means that more will be demanded at each price, than before. If the curve shifts to the left, we say that the demand decreased, less will be demanded at each price, than before this shift. Demand will rise due to factors mentioned in next section, quantity demanded only due to its own price. You will then understand this better. In the graph, demand increased, you will see that where the Q demanded was 500 at R30 (point A), it is now 700 at the same price (point B). This will happen to all the points on the demand curve. More will be demanded at every price on the grey demand curve than on the old blue demand curve.

27. You will realise that the demand for a good increase when people are willing to buy more at every single price in the demand schedule, than before the change. The demand decreases when people are willing and able to buy less at each price in the demand schedule.

28. If a person’s income rises, he is able to buy more at any given price
If a person’s income rises, he is able to buy more at any given price. He is not necessarily willing to buy more. Most goods` demand goes up with rise in income. Normal goods follow the normal expectation that you would intuitively have. That is if your income rise, you will demand more of the product at every price. If you have more money you will go to the movies more often, at all the prices in the demand schedule. Where at first you would be willing to go to the movies 2 times a month, if it cost R15, you might go 3 times a month at R15. If you would be willing to go once if the price is R20, you would now go twice because you got more money. The demand curve will shift right, you will buy more at any given price.

30. No consumer decides to buy goods in isolation, each decision is made in the broader picture. The price of other goods is taken into consideration. The price of one good affects the demand for others because we have a limited budget. We distinguish between substitutes and complements.

31. Two goods are substitutes if you can use the one in place of the other
Two goods are substitutes if you can use the one in place of the other. If goods satisfy a similar need they can usually be substitutes. For example you can drink Pepsi instead of Coke. (Again this is subjective, for some Pepsi is a substitute for Coke for others not.) If the price of the one good rise (fall), the demand for the other will rise (fall). If a product’s price rise a lot, you would rather buy the substitute than the more expensive good. If the price of Coke rises, in relation to the price of Pepsi, then demand for Pepsi will rise, because Pepsi is now relatively cheaper, in relation to the price of Coke. If Coke’s price rise from R5 to R10 per can, quantity demanded falls for Coke. But the people still want something to drink. They would now rather buy Pepsi, Pepsi’s demand would increase and the demand curve would thus shift out. If we put this in an environmental context if the price visiting parks in South Africa goes up a lot, it is to expensive to come to South Africa and overseas tourists will rather go to Kenya to see parks. The demand for park-accommodation in Kenya will rise and the quantity demanded of park-accommodation in SA will fall, when the price of visiting game-parks in SA rise.

32. This is goods that are used together, the more you use one, the more you use the other. This is demand for two or more goods that are needed together at the same time, one being not very useful without the other. If price of one rises (falls) the demand for the other falls (rise). For example hiking shoes and hiking trials. If the price of hiking shoes rise, people won’t be able to buy it therefore they will go on less hiking trials. Quantity demanded for shoes fall and demand for hiking trials also fall.

33. This can happen for whatever reason, and can cause the curve to shift either way. If people prefer say, pink skirts this season then the demand for that will increase. Preferences or taste can change with time. If goods are more desirable, people will buy more, which will lead to an increase in demand. If a good is heavily advertised, demand is likely to rise. If the Kruger Park goes on a big marketing project, people will want to go there, because it looks attractive, the demand will rise. If, on the other hand, there is a cholesterol scare for example, people’s demand for hamburgers will fall, because of health reasons.

34. If price is expected to rise in a month’s time, then there would immediately be a rise in demand. You would rather buy a car now if you know that it would cost more next month. If it is announced in the news that petrol prices are expected to rise in 2 days, people are likely to buy more petrol now and fill their cars up, while they can still buy at cheap prices. If price is expected to fall, then demand will decrease temporarily. If you know that a t-shirt will go on sale next week, you would rather buy it then, than now.

35. Supply is the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period.

36. Law of supply: as the price of a good increase, the quantity supplied of that good will increase, and vice versa. Just as we did with demand, we will now look at the relationship of price and the quantity supplied. The relationship between price and quantity supplied is a direct/ positive one, in other words, more of a commodity is supplied at a higher price than at a lower price. This relationship is known as the law of supply.

38. This is easily understandable if you think intuitively
This is easily understandable if you think intuitively. If the price is higher then there is bigger profit* opportunities, thus the quantity supplied will rise. If there is a higher price for a product the suppliers will increase their quantity supplied, because they get higher profits. If house prices rise down the coast, the supply of houses will increase down the coast, because more developers will want to get this higher price. Profit = Revenue – Cost; and Revenue = Price x Quantity; Thus if P rise, your revenue rise, therefore your profit rise, ceteris paribus.

39. When you supply more, after certain point cost rise more and more rapidly. Go back to the PPF and you will see that it is the same line of arguing, increased production comes at a higher opportunity cost. You use your best resources first, because you have to use less suitable land, also reach capacity, workers etc, when you produce more, your marginal cost rise. Your marginal cost is the cost of producing an additional unit. Therefore to produce more, the producer will only do that at higher price, because their cost rise.

40. A supply schedule is a numerical way of showing, in a table, the relationship between the quantity supplied and price of a good. That is showing how much a firm would be willing to supply at different prices. Or how much a producer would be willing to produce at different prices. This is the same concept as the demand schedule.

41. Here we can see the supply curve of good X
Here we can see the supply curve of good X. The A, B, C, D corresponds to the values in the supply schedule. We can see the law of supply in action through the positive slope of the curve which indicates the positive relationship between the two variables. The two variables move in the same direction. As the price rise from R1 to R2 (Point A to B, y-axis) the Quantity supplied increase from 10 to 20 (Point A to B, x-axis). The same is true for a price decrease; as price fall the quantity supplied falls as well.

42. As the case was with demand, so it is with supply
As the case was with demand, so it is with supply. When the price of a commodity changes, the quantity supplied, rather than total supply, changes. A change in price does not alter the position of the supply curve. Instead, it results in a movement along the supply curve.

44. In contrast with this a change in other factors will result in change of supply and a movement of the whole supply curve. Now more will be supplied at every price, than before the price increase. You will realise that the supply for a good increase when firms are willing to supply more at every single price in the supply schedule. In the graph you will see that where the Q supplied was 200 at R5 (A), it is now 300 at the same price if the supply increase (B). This will happen to all the points on the supply curve. More will be supplied at every price on the blue supply curve than on the old red supply curve The supply decreases when firms are willing and able to supply less at each price in the supply schedule.

45. There are a lot of factors, other than the price of the good that affects supply, and shifts the supply curve. We now discuss the effects of these determinants on supply. When these factors change, the supply also changes. A higher cost of supply would mean that it is less profitable to supply that good, thus suppliers cut back on supply.* A lower cost would mean that it is more profitable. Thus the supply decrease, when supply cost increase and the supply increase, when supply cost decrease. (You can change producer with supplier and supply with produce, it is the same effect). * Profit = Revenue – Cost; Thus if cost rise, your profit would decrease and vice versa.

46. Prices of relevant resources – If the price of resources goes up the supply falls, and vice versa. If the price of resources increase, production is more expensive and vice versa. If the price of wood falls, it is cheaper to make tables, therefore the supply of tables will increase. If the price of wood rise, it is more expensive to make tables, profits will decrease and therefore, supply of tables will decrease. Taxes and Subsidies (T) - Taxes causes cost to rise, because you have to pay more money to the government. Supply will therefore decrease if taxes rise, and vice versa.Subsidies has the opposite effect, it makes production cheaper. If government initiate a subsidy, it means that they make the usage of some good or service cheaper. Supply will increase when subsidies increase. Government Restrictions - Licensure (limit competitors) e.g. Alcohol license etc, or other restrictions have the effect of increasing the input cost and therefore will decrease supply. Technology - Improvement in technology lowers production costs, because you can now make more goods with the same input cost, increased supply is the result. Weather conditions - The weather has got an influence on production cost. It may make it cheaper or more expensive to produce certain kinds of goods, especially agricultural goods. If it is very dry, the price of water will go up for example (supply falls, price increase).

47. Number of sellers - If more producers are making a good, supply will rise. Expectations of Future Prices – If the price is expected to rise in the future, suppliers will lower supply now and wait for the higher profit opportunities. That is why you will not find petrol at some stations just before a price increase. The suppliers will decrease supply to wait for tomorrow when they can get the higher price.

48. You have learned how demand and supply works, an important step now, is to combine the demand and supply, to get the price that a good would sell for. Prices and quantities sold are formed by the interaction of supply and demand in the market. The eventual price that a good would sell for is called the equilibrium price, this happens when quantity supply equals quantity demanded (When the demand and supply curve intersect). You can never really say which is responsible for the determination of price, which a good would be sold for. It’s like a pair of scissors, you don’t know which blade does the actual cutting. The market mechanism (invisible hand) brings buyers and sellers to a point where both are satisfied with both price and quantity.

50. Imagine that this is the market for milkshakes
Imagine that this is the market for milkshakes. At point E there is equilibrium. The quantity demanded and supplied at a certain price is equal. 100 Units is supplied and demanded at R10, therefore we have mutual consent and thus equilibrium. At other points the quantity demanded at supplied at a price will differ, both parties won’t be happy and we will move towards equilibrium. Market equilibrium: When supply equals demand, the market is said to clear, no shortage or surplus exists. This happens at R10 for a milkshake where a 100 would be sold. If no shortage or surplus exists, there is no force that will necessitate a change. Only one price exists where the price and quantity can stabilise. This equilibrium point (point E in our example) is the point towards which the market will move. In a free market this will automatically be obtained through the price mechanism.

52. At any time there can be one of three situations in the market at a given price. Quantity demanded can exceed quantity supplied (below E), quantity supplied can exceed quantity demanded (above E), or they can be equal (E). There are offers by both parties, like an auction, till the quantity demanded equals the quantity supplied. Say this is the price and quantities for milkshakes.

53. Quantity demanded is bigger than quantity supplied at current price
Quantity demanded is bigger than quantity supplied at current price. Prices will rise. When there was a shortage at the low price, q demanded where bigger than q supplied, the price was pushed up until equilibrium is achieved. There are more milkshakes demanded, than what is supplied. Therefore prices rise, the suppliers will see the profit opportunities.

54. Reason for this rise in price: Consumers would be unable to get all that they want and would thus be willing to pay a higher price to make sure that they get the good. Buyers begin to compete for the product, they offer higher price to the suppliers so that they will get the product (rationing function of price). Some sellers will see that there is an opportunity to increase profits and then let the price rise. When price rise, quantity demanded falls and quantity supplied rise, and the shortage is progressively eliminated. When this happens then there is no natural tendency to change, we stabilise and the equilibrium price is formed. In short: if p rise then q demanded falls and q supplied rise, so then shortage is eliminated).

56. Quantity supplied is bigger than quantity demanded at current price
Quantity supplied is bigger than quantity demanded at current price. The demand for milkshakes is to low to buy all the milkshakes that is supplied. There is a surplus of milkshakes. Price will decline, to act as an incentive for people to buy more. Because P falls, the Q supplied falls and q demanded rise until the two is equal. (Law of supply and law of demand). If we look at the example, we see that when the price was high, there was a surplus, q supplied bigger than q demanded, so then price is lowered so that we can move to equilibrium.

57. The reason for the lowering of price: The demand is too small to buy all that is supplied. Suppliers can’t sell everything and stocks mount up, in order for them to get rid of excess stock, the price is lowered. Sellers start to go into competition with each other in order to attract the buyers and so lowers price. Q demanded rise when p is lowered (law of demand) so then we get to equilibrium. In short: if p is lowered, then q demanded rise and q supplied falls, so then the surplus is eliminated.

58. The equilibrium price will remain unchanged only as long as the demand and supply curves remain unchanged. Thus changes in price will cause a movement along both curves until it stabilises at the equilibrium point, as we just saw in the previous section. If either curves shift, on the other hand, a new equilibrium will be formed. Go and revise the factors that can cause the curves to shift. The equilibrium price will change and settle at a new price.

59. This may happen for reasons like change in Income, Prices of related goods, Tastes or Expectation, as you have learned. A new equilibrium is formed after the quantity supplied reacted to the increase or decrease in demand. Just an example: Say the demand for game park drives increase, then the price will rise and therefore the new equilibrium price will be at a higher price and equilibrium quantity, see the graph on next slide.

60. Say the demand for game park drives increase, then the price will rise and therefore the new equilibrium price will be at a higher price and quantity (Point B). The demand for SA game parks might increase if other destinations are less attractive. For example because of the Tsunami people don’t want to go to Asia, they rather come to SA. Therefore the demand for SA game parks rise and so a higher price and quantity is the result.

61. If the demand for visits to SA game-parks fall then the equilibrium price and quantity will fall (A to B). The demand for visits to SA-game parks might fall because people may rather want to go to substitute tourist attractions like Kenya or Island holidays.

62. Supply might change because of number of reasons, including input costs, weather, expectations etc. You will understand this slide better if you look at the graph on the next slide.

63. The supply increases. A new equilibrium is formed at B, with a lower price and a higher quantity. For example if it rained a lot, the supply of water increases therefore we expect the price to fall and the quantity to increase. The quantity might increase because it is cheaper and people will now use more water on their gardens.

64. If there is a drought the supply of water falls
If there is a drought the supply of water falls. Therefore you would expect a rise in price and a fall in quantity ( point A to B).

65. YOU MUST JUST BE ABLE TO DRAW A GRAPH WHERE BOTH CURVES HAS SHIFTED
YOU MUST JUST BE ABLE TO DRAW A GRAPH WHERE BOTH CURVES HAS SHIFTED. DON’T WORRY ABOUT THE SIZE OF THE SHIFTS YOU DON’T HAVE TO KNOW THIS! THIS IS JUST FOR COMPLETENESS. Left hand graph: Demand rises and supply falls by an equal amount. Equilibrium price rises, equilibrium quantity is constant. Right hand graph: Demand falls and supply rises by an equal amount. Equilibrium price falls, equilibrium quantity is constant.

66. YOU MUST JUST BE ABLE TO DRAW A GRAPH WHERE BOTH CURVES HAS SHIFTED
YOU MUST JUST BE ABLE TO DRAW A GRAPH WHERE BOTH CURVES HAS SHIFTED. DON’T WORRY ABOUT THE SIZE OF THE SHIFTS, YOU DON’T HAVE TO KNOW THIS! THIS IS JUST FOR COMPLETENESS. Left hand graph: Demand rises by a greater amount than supply falls. Equilibrium price and quantity rise. Right hand graph: Demand rises by a lesser amount than supply falls. Equilibrium price rises, equilibrium quantity falls.

69. Measure the areas by taking halve the base times the height of the triangles.