CHAPTER 3: THE ECONOMIC PROBLEM

 Markets and prices

Money Prices Relative Prices
The price of an object is the number of rands that must Is the rate of one price to another. Also known as
be given up for it. opportunity cost.
Can be expressed in terms of a ‘basket’ of all goods and
services
Competitive Market is a market where there are many buyers and sellers, but not a single buyer/seller can influence
the price.

Price index is calculated by dividing the money price of a good by the money price of a basket of goods.

Cand Afford
 Demand Want it. Plan to buy it.
it.

The demand of a good/service is the amount that consumers plan to buy during a given time

 THE LAW OF DEMAND: PRICE

Other things remaining the same, the higher the price of a

good, the lower the quantity demanded, and the lower the
price of a good, the greater the quantity demanded.
DECREASE INCREASE
IN IN
DEMAND DEMAND

 DEMAND CURVE: (AKA THE MARGINAL BENEFIT CURVE)

Shows the relationship between price and quantity demanded.
Willingness and ability to pay not only determines the demand,
but is also called marginal benefit.
QUANTITY DEMANDED

 WHY DOES A HIGHER PRICE REDUCE THE QUANITITY DEMANDED?

 Substitution effect
As s price increases, its relative price aka opportunity cost, it results in consumers buying its
substitutes (goods that can be used in its place).
 Income effect
The price rises relative to people’s incomes e.g., People are limited to buying goods/services
when they have a fixed income.

 DEMAND SCHEDULE
Lists the quantity demanded at each price.
Quantity demanded (x axis) and Price (y axis)

 A CHANGE IN DEMAND
When any factor that changes buying plans other than the price, there is a change in demand.

DEMAND INCREASES-SHIFTS TO THE RIGHT QD INCREASES-DOWN THE SLOPE

DEMAND DECREASES-SHIFTS TO THE LEFT QD DECREASES-UP THE SLOPE
  FACTORS THAT CAUSE CHANGES IN DEMAND

PRICES OF RELATED GOODS:

EXPECTED FUTURE PRICES:
The substitutes of goods
produced. Opportunity prices increases if
INCOME:
prices if prices were expected
As income increases, we buy to increase in the future (Th
more goods and vice versa. good can be stored and
substituted in the future).

FACTORS CAUSING
CHANGES IN DEMAND

POPULATION: PREFERENCES:
The larger the population, the What do people like/what are
greater the demand and vice the recent trends?
versa. EXPECTED FUTURE INCOME:

If income is expected to
increase, demand will increase
and vice versa.

NOTES:

Normal Good (As demand increases, Income increases and vice versa…)

Inferior Good (As demand decreases, Income increases and vice versa…)
 Has
Can profit from
 Supply resources/tech. to
it.
Plans to produce
and sell it.
produce it.

The demand of a good/service is the amount that consumers plan to buy during a given time

 THE LAW OF SUPPLY: PRICE

Other things remaining the same, the higher the price of a

good, the greater the quantity supplied, and the lower the
price of a good, the smaller the quantity supplied.
DECREASE INCREASE
IN SUPPLY IN SUPPLY

 SUPPLY CURVE: (AKA MARGINAL COST CURVE)

Shows the relationship between price and quantity supplied.
Can be interpreted as a min. supply-price-curve showing the
lowest price someone is willing to sell.
QUANTITY SUPPLIED

 SUPPLY SCHEDULE
Lists the quantity supplied at each price.
Quantity supplied (x axis) and Price (y axis)

 A CHANGE IN SUPPLY
When any factor that changes the quantity/selling plans other than the price, there is a change in
supply.

SUPPLY INCREASES-SHIFTS TO THE RIGHT QS INCREASES-UP THE SLOPE

SUPPLY DECREASES-SHIFTS TO THE LEFT QS DECREASES-DOWN THE SLOPE

 FACTORS THAT CAUSE CHANGES IN SUPPLY

STATE OF NATURES:

Good weather results there

is an increase in supply and
vice versa. PRICES OF FOP:
TECHNOLOGY:
An increase in FOP results in
As technology lowers the
a decrease in supply and vice
cost, the quantity supplied
versa
increases. FACTORS CAUSING
CHANGES IN DEMAND

PRICES OF RELATED
GOODS:
NO. OF SUBS:
An increase in
The more firms selling complementary goods
similar products, the more EXPECTED FUTURE PRICES: results in and increase in
products supplied. supply and vice versa.
An increase in future price
results in a decrease in
supply
  Market Equilibrium
Equilibrium price – QS = QD (price)
Equilibrium quantity – QD = QS at the price

A shortage forces the price to go up – Because Demand is higher than supply, the price will increase to a
point where QD=QS
A surplus forces the price to go down – Because supply is higher than demand, the price will decrease to a
point where QS=QD

DEMAND SUPPLY

D+ D- S+ S-
P+ P- P- P+
S+ S- D+ D-

EXAMPLE:
PRICE QUANTITY DEMANDED QUANTITY SUPPLIED SHORTAGE (-) OR
SURPLUS (+)
0,50 22 0 -22
1,00 15 06 -9
1,50 10 10 0
2,00 7 13 +6
2,50 5 15 +10