Chapter 5:
Demand and
supply in action
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
CHAPTER OUTLINE
LEARNING OUTCOMES
INTRODUCTION
5.1 CHANGES IN DEMAND
5.2 CHANGES IN SUPPLY
5.3 SIMULTANEOUS CHANGES IN DEMAND AND SUPPLY
5.4 INTERACTION BETWEEN RELATED MARKETS
5.5 GOVERNMENT INTERVENTION
5.6 AGRICULTURAL PRICES
5.7 SPECULATIVE BEHAVIOUR: SELF-FULFILLING EXPECTATIONS
IMPORTANT CONCEPTS
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LEARNING OUTCOMES
Once you have studied this chapter you should be able to
• explain how a change in demand affects the equilibrium price and quantity
in the market
• explain how a change in supply affects the equilibrium price and quantity in
the market
• predict the effects of simultaneous changes in demand and supply
• analyse the interaction between related markets
• show what happens if the government interferes in the market, for example
by setting minimum or maximum prices
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
INTRODUCTION
• Equilibrium price
• Equilibrium quantity
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: explain how a change in demand affects the equilibrium price and quantity in the market
5.1 CHANGES IN DEMAND
Increase in demand
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
CHANGES IN DEMAND LO: explain how a change in demand affects the equilibrium price and quantity in
CONTINUED the market
Decrease in demand
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
CHANGES IN DEMAND LO: explain how a change in demand affects the equilibrium price and quantity in
CONTINUED the market
Figure 5-1(a) Changes in demand (Textbook page 84)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
CHANGES IN DEMAND LO: explain how a change in demand affects the equilibrium price and quantity in
CONTINUED the market
Figure 5-1(b) Changes in demand (Textbook page 84)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
CHANGES IN DEMAND LO: explain how a change in demand affects the equilibrium price and quantity in
CONTINUED the market
Figure 5-2 Examples of changes in demand
Click on the letter below to reveal the graph. (Textbook page 85)
Click again to hide.
Increase in income:
(a)
X is a normal good
Increase in income:
(b)
X is an inferior good
Decrease in income:
(c)
X is a normal good
(d)
Decrease in income:
X is an inferior good
(e)
Increase in the price
of a substitute for X
(f) Decrease in the price
of a substitute for X
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: explain how a change in supply affects the equilibrium price and quantity in the market
5.2 CHANGES IN SUPPLY
Increase in supply
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: explain how a change in supply affects the equilibrium price and
CHANGES IN SUPPLY CONTINUED quantity in the market
Decrease in supply
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: explain how a change in supply affects the equilibrium price and
CHANGES IN SUPPLY CONTINUED quantity in the market
Figure 5-3(a) Changes in supply (Textbook page 86)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: explain how a change in supply affects the equilibrium price and
CHANGES IN SUPPLY CONTINUED quantity in the market
Figure 5-3(b) Changes in supply (Textbook page 86)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
CHANGES IN DEMAND LO: explain how a change in demand affects the equilibrium price and quantity in
CONTINUED the market
Figure 5-4 Examples of changes in supply
Click on the letter below to reveal the graph. (Textbook page 87)
Click again to hide.
Increase in price of
factor of production
(b)
Decrease in price of
factor of production
(c)
Decrease in
productivity
(d) Increase in
productivity
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: predict the effects of simultaneous changes in demand and supply
5.3 SIMULTANEOUS CHANGES IN
DEMAND AND SUPPLY
Table 5-1 Simultaneous changes in demand and supply (Textbook page 88)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
SIMULTANEOUS CHANGES IN DEMAND AND LO: predict the effects of simultaneous changes in demand
SUPPLY CONTINUED and supply
What happens when we have a simultaneous
increase in demand and decrease in supply? To a
large extent, the effect is determined by the relative
magnitude of the changes - how big the changes are
across demand and supply relative to one another. In
this diagram, the original demand, supply,
equilibrium price and equilibrium and equilibrium
quantity are represented by DD, SS, P0 and Q0. Let’s
look at some examples.
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
SIMULTANEOUS CHANGES IN DEMAND AND LO: predict the effects of simultaneous changes in demand
SUPPLY CONTINUED and supply
Figure 5-5 A simultaneous increase in demand and decrease in supply (Textbook page 88)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
SIMULTANEOUS CHANGES IN DEMAND AND LO: predict the effects of simultaneous changes in demand
SUPPLY CONTINUED and supply
Figure 5-5 A simultaneous increase in demand and decrease in supply (Textbook page 88)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
SIMULTANEOUS CHANGES IN DEMAND AND LO: predict the effects of simultaneous changes in demand
SUPPLY CONTINUED and supply
Figure 5-5 A simultaneous increase in demand and decrease in supply (Textbook page 88)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: Analyse the interaction between related markets
5.4 INTERACTION BETWEEN
RELATED MARKETS
Fish and meat
Figure 5-6 Interaction
between the markets
for fish and meat
(Textbook page 89)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
INTERACTION BETWEEN RELATED MARKETS
LO: Analyse the interaction between related markets
CONTINUED
Motorcars and tyres
Figure 5-7 Interaction between markets for motorcars and tyres (Textbook page 90)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: Show what happens if the government interferes in the market, for example by setting minimum or maximum prices
5.5 GOVERNMENT INTERVENTION
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: Show what happens if the government interferes in the
GOVERNMENT INTERVENTION CONTINUED market, for example by setting minimum or maximum
prices
Maximum prices (price ceilings, price control)
Governments set maximum prices to
• keep the prices of basic foodstuffs low, as part of a policy to assist the poor
• avoid the exploitation of consumers by producers, that is, to avoid “unfair”
prices
• combat inflation
• limit the production of certain goods and services (eg in wartime).
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Maximum prices (price ceilings, price control) continued prices
Figure 5-8 Maximum prices Click on the numbers below to work through
(Textbook page 91) the graph’s explanation.
1 If the government sets a
maximum price of Pm
below the equilibrium
price of P0
2 this results in an excess
demand of Q2 – Q1
(or ab).
RESET
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Maximum prices (price ceilings, price control) continued prices
Black markets
Fixing prices below the equilibrium (or market-clearing) price thus
• creates shortages (or excess demand)
• prevents the market mechanism from allocating the available quantity among
consumers
• stimulates black market activity by providing an incentive for people to
obtain the good and resell it at a higher
• price to those consumers who are willing to pay higher prices to obtain it.
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Maximum prices (price ceilings, price control) continued prices
Price controls
See Box 5-1 Rent control (Textbook page 92)
See Box 5-2 Administered prices (Textbook page 93)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Maximum prices (price ceilings, price control) continued prices
The welfare costs of maximum price fixing
Figure 5-9 The welfare costs
of maximum price fixing
(Textbook page 94)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: Show what happens if the government interferes in the
GOVERNMENT INTERVENTION CONTINUED market, for example by setting minimum or maximum
prices
Minimum prices (price supports, price floors)
Figure 5-10 A minimum Click on the numbers below to work through
price (Textbook page 94) 9–4=5 the graph’s explanation.
1 DD and SS represent the
demand and supply of beef.
2 The equilibrium price is R30 per
kg and the equilibrium quantity
is 7 million kg.
3 The introduction of a minimum
price of R40 per kg results in a
market surplus of 5 million kg
(represented by ab).
RESET
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
Setting minimum prices above equilibrium prices is a highly inefficient way of
assisting small or poorer producers, since
• all consumers, including poor households, have to pay artificially high prices
• the bulk of the benefit accrues to large producers or concerns owned by big
companies
• inefficient producers are protected and manage to survive
• the disposal of the market surpluses usually entails further cost to taxpayers
and welfare losses to society.
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
The welfare costs of minimum price fixing
Figure 5-11 The welfare costs of
minimum price fixing (Textbook page 95)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
Subsidies
Figure 5-12 A subsidy paid to
suppliers (Textbook page 96)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
Taxes
Figure 5-13 The incidence of an excise
tax on cigarettes (Textbook page 96)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
The welfare implications of a specific excise tax
Figure 5-14 The welfare costs of a
specific excise tax (Textbook page 97)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
Quotas
Figure 5-15 The impact of a production
quota (Textbook page 98)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
Import tariffs
Figure 5-16 The impact of a specific
import tariff (Textbook page 98)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
GOVERNMENT INTERVENTION LO: Show what happens if the government interferes in the
market, for example by setting minimum or maximum
Minimum prices (price supports, price floors) continued prices
The welfare effects of an import tariff
Figure 5-17 The welfare costs of
a tariff (Textbook page 99)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
LO: Show what happens if the government interferes in the market, for example by setting minimum or maximum prices
5.6
AGRICULT
URAL
PRICES
Figure 5-18 An increase in supply
as a result of an expected high price
of potatoes (Textbook page 100)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
5.7 SPECULATIVE BEHAVIOUR:
SELF-FULFILLING
EXPECTATIONS
Figure 5-19 Self-fulfilling
expectations (Textbook page 100)
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
IMPORTANT CONCEPTS
• Change in demand • Welfare costs
• Change in supply • Administered prices
• Market shortage (excess demand) • Subsidies
• Market surplus (excess supply) • Taxes
• Maximum prices (price ceilings) • Quotas
• Minimum prices (price floors) • Import tariffs
• Rationing • Agricultural prices
• Black market • Speculative markets
• Price control • Self-fulfilling expectations
• Rent control
• Deadweight loss
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Master ECONOMICS FOR SOUTH AFRICAN STUDENTS
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CHAPTER 5: DEMAND AND SUPPLY IN ACTION
