ECONOMICS 1A

Lecturer : Meshel Muzuva

22 April 2023
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Webinar Recap: Market equilibrium
UNIT 5 DEMAND AND SUPPLY IN ACTION
LECTURE OUTLINE

➢ Changes in demand and supply

➢ Government intervention

➢ Consumer surplus and producer surplus

UNIT 5 DEMAND AND SUPPLY IN ACTION

CHANGE IN DEMAND
❖ The result of a change in any of the determinants of demand other than price.
Changes in demand
Summary :Increase in Demand and Decrease in Demand
he impact of an increase in the demand for a good or
ervice can be summarized as follows:
❖ An increase in the demand causes the demand curve to
shift to the right.
❖ At the initial equilibrium price, excess demand (or
shortage) develops in the market. In other words, the
quantity demanded exceeds the quantity supplied.
❖ The excess demand causes the price of the product to
increase, and the excess demand starts to decrease as the
quantity demanded decreases and the quantity supplied
increases.
❖ This process continues until a new equilibrium is reached,
where the price, the quantity demanded and the quantity
supplied are higher compared to the equilibrium position
before the increase in demand.
The impact of a decrease in the demand for a good or service
can be summarized as follows:
❖ A decrease in the demand causes the demand curve to
shift to the left.
❖ At the initial equilibrium price, excess supply (or surplus)
develops in the market. In other words, the quantity
supplied exceeds the quantity demanded.
❖ The excess supply causes the price of the product to
decrease, and the excess supply starts to decrease as the
quantity demanded increases and the quantity supplied
decreases.
❖ This process continues until a new equilibrium is reached,
where the price, the quantity demanded and the quantity
supplied are lower compared to the equilibrium position
before the decrease in demand.
The diagram illustrates the impact of an increase in demand. Study the
diagram and then answer the questions.

1. Before the increase in demand, the equilibrium price is _____and the

equilibrium quantity is_______.
2. Owing to an increase in demand, the demand curve shifts from D to D1. At
a price of R10, after the increase in demand, the quantity demanded is
_______ and the quantity supplied is ______.

3. An excess demand at a price of R10 will lead to (a decrease in the price; an

increase in the price).
4. At a price such as R11, the quantity supplied is ______ and the quantity
demanded is___ and an (excess demand; excess supply) exists at this price.

5. As long as an excess demand exists, the price will (increase; decrease).

6. A new equilibrium position is formed after the increase in demand at an
equilibrium price of ______ and an equilibrium quantity of ______.
CHANGES IN SUPPLY
❖A change in sellers' plans that occurs when some influence on those plans other
than the price of the good changes.
CHANGES IN SUPPLY
Summary of changes in supply
The impact of an increase in the supply of a good or service The impact of a decrease in the supply of a good or service
can be summarized as follows: can be summarized as follows:

An increase in the supply causes the supply curve to shift to A decrease in the supply causes the supply curve to shift to
the right the left.

At the initial equilibrium price, excess supply (or surplus) At the initial equilibrium price, excess demand (or shortage)
develops in the market. In other words, the quantity supplied develops in the market. In other words, the quantity
exceeds the quantity demanded. demanded exceeds the quantity supplied.
The excess supply causes the price of the product to The excess demand causes the price of the product to
decrease, and the excess supply starts to decrease as the increase, and the excess demand starts to decrease as the
quantity demanded increases and the quantity supplied quantity demanded decreases, and the quantity supplied
decreases. increases.

This process continues until a new equilibrium is reached, This process continues until a new equilibrium is reached,
where the price is lower and the quantity demanded and the where the price is higher, and the quantity demanded and
quantity supplied are higher compared to the equilibrium the quantity supplied are lower, compared to the equilibrium
position before the increase in supply. position before the decrease in supply
Activity 2
The diagram below illustrates the impact of an increase in supply. Study
the diagram and then answer the questions.

1. Before the increase in supply, the equilibrium price was _______

and the equilibrium quantity was _____.

2. Owing to an increase in supply, the supply curve shifts from S to S1.

At a price of R10,after the increase in supply, the quantity demanded is
_____ and the quantity supplied is_____ .

3. .At a price of R10, after the increase in supply, there is an (excess

demand; excess supply).
4. An excess supply at a price of R10 will lead to (a decrease in the price;
an increase in the price).

5.As long as there is an excess supply, the price will (increase; decrease).
GOVERNMENT INTERVENTION
GOVERNMENT INTERVENTION
Maximum prices
❖ If the government sets
a maximum price of Pm
below the equilibrium
price of P0

❖ This results in an
excess demand of Q2 –
Q1 (or ab).
Activity 3
The following demand and supply curves for an economics course
illustrate the impact of a price ceiling of R2 500 on the course fee.
Which of the following statements are correct with regard to the
above?
a. Owing to the excess demand that is created, a rationing
mechanism needs to be put in place to determine which students
will be allowed to take the course.
b. In the absence of the price ceiling, only those students who are
willing and able to pay R3 500 will be allowed to take the course.
c. Owing to the price ceiling, more students will be enrolled for
the course.
The welfare cost of maximum price fixing
Consumer Surplus is the difference
between what consumers pay and
the value they receive, indicated by
the maximum amount they are
willing to pay
Producer surplus is the difference
between the amount the producer
receives and the minimum amount
the producer is willing to accept.
Videos:
https://www.youtube.com/watch?v=jNdXt5
GqoMI
https://www.youtube.com/watch?v=r1Xq9
FcxDB8
The welfare cost of maximum price fixing
Consumer Surplus is the difference
between what consumers pay and
the value they receive, indicated by
the maximum amount they are
willing to pay
Producer surplus is the difference
between the amount the producer
receives and the minimum amount
the producer is willing to accept.
Videos:
https://www.youtube.com/watch?v=jNdXt5
GqoMI
https://www.youtube.com/watch?v=r1Xq9
FcxDB8
Minimum prices (price floors)
The welfare costs of minimum price fixing
Activity 4

Which of the following is correct with regard to maximum prices?

[I]: It will only have an impact on market price and quantity exchange if it
is set below the equilibrium price.
[II]: It would never stimulate black market activities.
[III]: If it is set below the equilibrium price, it results in excess demand.
a) [I] and [II] only
b) [I] and [III] only
c) [II] and [III] only
d) [I], [II] and [III]
THANK YOU