How prices are decided?

1. How prices are decided? Demand & Supply

2. Prices • Signals for produces telling them how to utilize resources. • Rise/ fall • Price Mechanism

3. What is demand? • Demand is the want or willingness of consumers to buy goods and services. • Effective demand – consumers must have enough money to buy commodities given a number of possible prices. • Producers will only make those goods and services for which people will have money to buy them • Quantity demanded is the amount of g/s that consumers are willing and able to buy. • Individual demand is demand of one consumer, while market demand is total demand for the product from all its consumers. • Demand schedule is the table of figures stating the quantity demanded to price.

4. Exercise 2

5. Demand curve • Shows relationship between price and quantity demanded. • Generally as prices fall, quantity demanded increases. • An extension of demand means increase in quantity demanded due to fall in price, with no change in any other factor. • A contraction of demand means decrease in quantity demanded due to rise in price, with no change in any other factor.

6. Why do demand curves slope downwards? • Consumers buy g/s to satisfy their wants. • This satisfaction is known as utility. • Logical reason would be that consumers try to satisfy themselves as much as they can by buying g/s. • Marginal utility of demand • Market demand curve

7. Exercise 3

8. Shifts in demand • Demand curves are drawn on the basis of ceteris paribus – all other things remaining unchanged. • But when other factors do occur, shifts in demand curves occur. • An increase in demand means that consumers now demand more at each and every price than they did before. • A fall in demand means that consumers now demand low at each and every price than they did before.

9. 7 factors, other than price, that can cause shift in demand • Changes in people’s income • Changes in income taxes • Changes in the population – number + demographic • Changes in the prices of other goods – complimentary/substitutes • Changes in taste and fashion • Advertising • Other factors – changes in weather, interest rate

10. Exercise 5

11. What is supply? • Quantity produced and sold by producers at given prices. • Quantity supplied. • Higher the profit, higher the QS. • As prices rise, QS rises. • Therefore, supply curve slopes upwards. • An extension of supply refers to how supply changes with a rise in the price of a commodity, given that no other factor affecting supply changes. • A contraction of supply refers to how supply changes with a fall in the price of a commodity, without a change in any other fact that may affect supply. • Movement along the supply curve is when changes in price cause supply move up or down the supply curve.

12. Exercise 6

13. Factors that cause supply shift • Changes in price of other commodities • Changes in the FoP prices • Technical Progress • Other factors - weather • Government role – subsidy, tax

14. Market Price • Demand and Supply determine the price. • When demand and supply curves are put together, they will be equal at some point which is know as the Equilibrium. This is the market price at which the quantity will be sold in the market. • When the quantity demanded is greater than the quantity supplied, that is excess demand. • When the quantity supplied is greater than the quantity demanded, that is excess supply. • When demand equals supply that is Equilibrium price/market price. • Price above eqm price is excess supply and price below eqm price is excess demand • When demand is not equal to supply, that is disequilibrium.

15. Exercise 8

16. Changes in market prices • In eqm, there will be no forces trying to change price. • Changes in market price will come due to changes in demand or supply.

17. Exercise 9

18. The Price Mechanism • The forces of demand and supply establish a market price. • Changes in demand and supply will cause changes in market price • An increase in demand will raise price. It will act as a signal telling firms what to produce more as more profit can be made. • An increase in supply reduced the market price.