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Demand and Supply

Welcome to Business Studies Form 3 students. This digital CD is interactive and easy to navigate. The topics in the CD are Demand and Supply, Size and location of the firm, Product Market, Chain of Distribution, National Income, Population and Employment, Net worth of a Business, Business Transactions, Ledger, and Cash Book. Learn and enjoy.

Background
Firms would always wish to sell all goods and services they produce. On the other hand consumers desire to have all goods they need supplied to them. Some markets may have few suppliers of similar or differentiated goods .In the markets the number of suppliers may vary from one to infinity. The following photos shows various persons involved in trade;

 

DEMAND AND SUPPLY

Consumers are willing and ready to buy more goods and services when prices are low to get value for their money.On the other hand suppliers are wlling and able to bring more goods and services to the market when prices are high in order to maximize profits.

Prices of goods and services are determined by market forces of supply and demand,tendering,bargaining,government policy such as price control among others.

Meaning of demand

Demand refers to the quantity of a commodity that a buyer is willing and able to buy at a given price over a specific period of time.This picture shows a consumer paying for rice.

Demand is backed by ability to buy a commodity at a given price over a specific period of time.

The diagram below illustrates the meaning of demand.

Factors influencing demand of a product

  • Price of the commodity

Under normal circumstances the lower the price the higher the quantity of a commodity demanded and vice versa other factors remaining constant that is the law of demand.

Seasonal changes

Demand for some commodities depends on season, for example, sweaters and umbrellas are in high demand during rainy season and low demand during the hot seasons.

Derived and joint demand

Derived demand refers to demand for a commodity arising from the demand of another commodity, for example, demand for eggs may give rise to demand for hens. The diagram below illustrates the meaning of derived demand.

Joint demand

Joint demand refers to the demand for a commodity which arises from the demand of another commodity which are used together, for example, mobile phone and air time.

Demand schedule

Demand schedule is a table showing the quantities of a commodity that consumers are willing and able to buy at different prices within specific period of time as shown below:

Demand schedule for dresses

Deriving a demand curve

Demand curve is a graphical representation of quantities demanded against price. It is normally derived from the demand schedule. From the demand schedule of dresses we may derive a demand curve by plotting quantities on x-axis and prices on the y-axis, and title at the top.The diagram below illustrates this concept.

From the diagram on the demand curve, it can be observed that as prices of commodity increases, demand decreases and vice versa. The demand curve slopes downwards from left to right.

Distinguishing between movement along a demand curve and a shift in the demand curve

Movement along a demand curve refers to change from one point to another on the same demand curve as a result of changes in prices. The diagram below illustrates movement along a demand curve.

From the diagram we may note that movement along the demand curve is caused by change in price of a commodity. When price of the commodity increases from Sh.10 to Sh.20, quantity demanded reduces from 20 to 15.This leads to movement along the demand curve from point C to B representing a decrease in quantity demanded.

On the other hand, when price of the commodity reduce from Sh.10 to Sh.5,quantity demanded increase from 20 to 30 leading to movement along the demand curve from point C to A representing an increase in quantity demanded.

A shift in demand curve

A shift in demand curve refers to change in position of the demand curve either to the left or to the right of the original curve.This is brought about by other factors which affect demand other than the price.

The original demand curve slopes downwards from left to right as shown below.

A shift in the demand curve to the right means an increase in demand. It leads to the original demand curve DoDo shifting to the right to D1D1 as illustrated below.

A shift in the demand curve to the left means a decrease in demand. It leads to the original demand curve D0D0 shifting to the left to D2D2 as illustrated below.

Factors which influence the supply of a product

These factors are also referred to as determinants of supply. They include the following;

Price of the product. Generally producers will supply more of a commodity to the market when the prices are high and supply less when the prices are low.This is the law of supply.

State of technology

Improved technology increases the quantity supplied using the same amount of factors of production, for example, use of high breed maize has increased yield of maize per hectare .

Natural factors

Natural factors may affect the quantity supplied either negatively or positively for example floods, diseases and pests may negatively affect the quantity supplied.

Government policy

Government may impose policies which may increase or decrease the supply of a commodity.

Prices of other related products

Supply of a commodity also depends on supply of other commodities related to it .For example supply of hides and skins will be influenced by supply of beef.

Deriving a supply schedule

Supply schedule is a tabular form showing the quantity of a commodity that the suppliers are willing and able to bring to the market at different prices over a specific period of time as demonstrated below.Click on the price and quantity supplied to appear on the opposite side.

Deriving a supply curve from supply schedule

A supply curve is a graph showing the relationship between prices of a commodity and the quantity supplied in the market. From the supply schedule of maize we may derive a supply curve by plotting quantities on x-axis and prices on the y-axis, and title at the top as shown in the diagram.Click on each price and supply curve will appear bit by bit.

Click on each price and supply curve will appear bit by bit.

From the diagram above it may be concluded that the supply curve slopes upwards from left to right meaning the higher the price, the higher the supply and vice versa.

Exercise

From the supply schedule below, derive a supply curve. Price per bottle of quencher [ksh] Quantity supplied (Bottle of quencher) 500 100 400 80 300 60 200 40 100 20

Distinction between movement along a supply curve and a shift in a supply curve

Movement along a supply curve refers to a change from one point to another on same supply curve as a result of changes in prices. The following diagram illustrates movement along a supply curve.

From the diagram, we may note that movement along the supply curve is caused by change in price of a commodity. For example when the price of the product increases from Kshs 2 to Kshs 3 the quantity supplied increases 20 Kgs to 30 Kgs. 

A shift in supply

A shift in supply curve refers to change in position of the supply curve either to the left or to the right of the original supply curve as illustrated below.

An increase in supply

A shift in the supply curve to the right means an increase in supply which results in supply curve moving to a new position. The original supply curve SOSO shifts to S1S1 as illustrated below.

A decrease in supply

A shift in supply curve to the left means a decrease in supply which results in supply curve moving to a new position. The original supply curve S0S0 moves to S2S2 as illustrated below.

Determination of equilibrium price and equilibrium quantity

Price of a commodity is normally determined by the interaction of demand and supply in the market. The following diagram illustrates how equilibrium price and equilibrium quantity are determined in a market.

Equilibrium price (PO ) is the price at which demand and supply of a commodity is equal. Equilibrium quantity (QO) is the quantity at which quantity demanded is equal to the quantity supplied of a commodity.

 

Equilibrium

The term equilibrium means equal.This is the point at which the quantity demanded is equal to the quantity supplied.

Equilibrium point E is where the buyers and sellers are satisfied with the price and quantity.

Equilibrium price is the price at which the buyers are willing and able to buy and sellers are willing to sell.

Equilibrium quantity is where the amount supplied and amount demanded is the same at the equilibrium price.

Any price above or below the equilibrium will lead to shortage or surplus in the market respectively.

Excess demand is the quantity by which the amount demanded is more than the quantity supplied at a given time.

Excess supply is the quantity by which the amount supplied is more than the quantity demanded at a given time.

Effect of a shift in demand curve to the right on equilibrium price and equilibrium quantity

A shift in demand curve to the right means an increase in demand, relocating demand curve from D1D1 to D2D2 as illustrated below.

From the diagram ,a shift in demand curve to the right implies an increase in demand, an increase in equilibrium price and equilibrium quantity to P2 and Q2 respectively.

Effect of a shift in demand curve to the left on equilibrium price and quantity

A shift in demand curve to the left means a decrease in demand relocating the demand curve to the left of the original demand curve D1D1 to D3 D3 as shown in the diagram below.

 

From the diagram a shift in demand curve to the left results in a decrease in demand which leads to decrease in equilibrium price and equilibrium quantity to P3 and Q3 respectively as illustrated in the diagram.

Effect of a shift in supply curve to the right on equilibrium price and equilibrium quantity

A shift in supply curve to the right means an increase in supply. It results to a decrease in equilibrium price and an increase in equilibrium quantity as shown below in the diagram.

From the diagram we note that an increase in supply leads to a decrease in equilibrium price from P0 to P1 and an increase in equilibrium quantity from Q0 to Q1.The supply curve shifts from So S0 to S1 S1.

 




From the diagram we may conclude that a decrease in supply results to supply curve shifting from So So to S2 S2.The equilibrium price increases from Po to P2 and equilibrium quantity decreases from Qo to Q2.

Other methods of determining price of a product

Government intervention is whereby government can use measures like price control, taxation and subsidies to regulate price of commodities.

Haggling/bargaining

Haggling/bargaining whereby the prospective buyer and seller argue over the price until they reach one price agreeable by all.

Auction

Auction is where price of a commodity is determined by biding and the highest bidder pays and gets the commodity.

Tendering

Tendering is where price is determined when buyers are invited to quote their prices independently and the one who quotes the favourable price and terms wins the tender.

EXERCISE

Type the correct term in the squares provided at end of the question from the words below. EMADND MULIQENIBRI BSISUDY FITSH DULESCHE. [1]Quantity of a commodity buyers are willing and are able to buy at a given price over a specific period of time. [2]the point at which the demand curve and supply curve meet. [3]A Complete change in the position of supply or demand curve. [4]a payment made by government to producers in order to reduce cost of production to make goods cheaper. [5]Table that represents quantity of a commodity demanded or supplied.

Internal economies of scale

These are benefits enjoyed by a firm as a result of its capacity due to a larger output. As a firm expands it incurs lower costs in production process and hence lower average costs and higher profits. They include;



 Demand and Supply 

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