JEREMIAH NYAGAH TECHNICAL INSTITUTE

AGRICULTURE DEPARTMENT

ECONOMICS & FARM MANAGEMENT COURSE OUTLINE

LEVEL: CRAFT IN GENERAL AGRICULTURE

CLASS: CGA2022S

TERM 1, 2022/2023 ACADEMIC YEAR

TRAINER: MR. SAGINI

TOPIC SUBTOPIC
1. Introductory  Definition
economics  Types of economies
 Principles of demand and supply
2. Production economics  Characteristics of agricultural production
 Factors of production
 Production function
3. Introduction to farm  Definitions
management and  Functions of farm manager
business firms  Sole proprietor
 Partnership
 Cooperative
 State corporations
4. Farming systems  Types of farming systems
 The farming business
5. Farm records and  Importance of farm records and accounts
accounts  Types and uses of farm records and accounts
 DEFINITION OF TERMS
Economics
 Economics is defined as a science that aims at maximizing output while minimizing
costs, by using limited resources to produce goods and services over a period of time.
Price
 Amount of money that a buyer gives a seller in exchange of goods or services
Supply
 Supply refers to the quantity of a product available in the market for sale at a
specified price at a given point of time
Demand
 The readiness and potential of consumers to purchase a specific quantity of a good or
service at a specific point in time or over a specific period of time.

Opportunity cost

 Opportunity cost is defined as the revenue foregone from the best alternative.
 The foregone returns are called the opportunity cost.
 If a farmer chooses to grow maize, the returns that the farmer would have
obtained from cabbages is foregone.
Scarcity
 Scarcity is defined as limed supply of goods, services and resources as demanded by
the consumers.
 Resources, such as labor, tools, land, and raw materials are necessary to produce the
goods and services we want but they exist in limited supply.

Choice
 Choice refers to the ability of a consumer or producer to decide which good, service
or resource to purchase or provide from a range of possible option.
 For instance, if a person grows roses for commercial purpose instead of growing roses
as a hobby, it is an economic choice

Utility

 Utility is defined as the power of a commodity or service to satisfy a human want.

 The term „utility‟ should be differentiated from „satisfaction‟. Utility implies
„expected satisfaction‟ whereas satisfaction stands for „realized satisfaction‟
Microeconomics
 Is a branch of economics with studying of individuals, households and firms' behavior
in decision making and allocation of resources

Macroeconomics
 Is a branch of economics that deals with studying performance and behavior of an
economy as a whole.
 For example macroeconomics explains taxes of a country, economic growth, how
government uses their taxes.
Resource
 Resources, also known as inputs are means, which are used to produce scarce goods
and services.
 They are also known as factors of production and include land (land, mineral, water,
air etc.), human resources or labour (skilled and unskilled), capital and
entrepreneurship or management.
Allocation
 Allocation is the appointment of resources for a specific purpose or to particular
persons or groups to meet specific need
Wants
 Wants are wishes which people only dream to have without any serious efforts to
actualize the dream.
 TYPES OF ECONOMIES

A. Free Market Economy

Definition

 A free market is a type of economic system that is controlled by the market forces
of supply and demand, and is not regulated by government controls.
 In a free market, companies and resources are owned by private individuals or entities
who are free to trade contracts with each other.

Characteristics of a Free Market

1. Private ownership of resources

Free economies exist because a most resources are owned by individuals or companies in the
private sector and not a central government agency. In this way, the owners exercise total
control over the means of production, allocation, and exchange of products.

2. Thriving financial markets

presence of financial institutions helps free market economies to become successful. Banks
and brokerages exist so that they give individuals and companies the means to exchange
goods and services, and to provide investment services.

3. Freedom to participate

In free market economy any person can take part in it. The decision to produce or consume a
particular product is totally voluntary. It means that companies or individuals can produce or
purchase as much or as little of a product as they want.

Advantages of a Free Market economy

 Freedom to innovate

In a free market economy, business owners enjoy the freedom to come up with new ideas
based on the consumers‟ needs.

 Efficient Allocation of Resources

The free market allows for supply, demand, and prices to work together. This means that
when demand falls, producers know they need to change. That might be to introduce a new
product or reduce prices.

 More Choice

Free markets create additional competition, hence more companies make products based on
customers choice. This creates more choice for the average consumer for example the
different brands of maize flours today.
  Competition

In a free market, there are no rules or regulations – meaning there is not only competition
from domestic firms, but also the whole world. Fewer regulations make it easier for new
firms to enter the market and put pressure on existing firms

 Absence of production limit

A free market has no regulation or other restrictions making it easier for companies to do
business and concentrate on making a product that the consumer wants.

Disadvantages of free market

 There is more emphasis on profit at the expense of the welfare of the citizens.
 Market failures

At times, a free market economy can spin out of control, causing huge economic effects.
Market failures can lead to bad outcomes such as unemployment, homelessness, and lost
income.

B. Mixed Market Economy

Definition;

Mixed market economy is an economic system in which both the private and public
ownership of the means of production and distribution exist together in the country.

Under this economic system, resources or means of production are jointly owned and
managed by both private and public interests.

Features of the Mixed Economy

 There is joint participation of both private and public sectors in the provision of goods
and services.
 Joint decisions are made by both the public and private sectors on what to produce,
how to produce and for whom to produce.
 Consumers have freedom of choice.
 The combination of both the public and private sectors helps to put checks and
balances in the economy.
 There is economic freedom in the area of production, consumption and distribution of
commodities.
 Since the system accommodates the private and state ownership of the means of
production, it results in fair competition.

Advantages of Mixed Economy

 It encourages private initiative in the economy

  There is freedom of choice to the consumers
 It ensures that income is distributed equitably.
 It ensures economic development.
 It ensures job security and employment – for example by protecting local business
through high taxation on imported products.
 Monopoly is prevented because of the joint participation in economic activities by
both the private and public sectors.

Disadvantages of Mixed Economy

 There is more emphasis on profit at the expense of the welfare of the citizens.
 There is usually high level of corruption and mismanagement.
 Wealth is not equitably distributed as there is a gap between the rich and the poor.
 Limited efficiency this type of economy because of involvement of the state.

C. Planned Economy

Planned economy is an economic system where factors of production are owned and managed by
the government . Thus the Government decides what to produce, how much to produce and for
whom to produce.

Characteristics of planned economic system

 All resources are owned and managed by the government.

 There is no Consumer or producer sovereignty.
 The market forces are not allowed to set the price of the goods and services.
 Profit in not the main objective, instead the government aims to provide goods and services
to everybody.
 Government decides what to produce, how much to produce and for whom to produce.

Advantages

 Prices are kept under control and thus everybody can afford to consume goods and services.
 There is less inequality of wealth.
 There is no duplication as the allocation of resources is centrally planned.
 Low level of unemployment as the government aims to provide employment to everybody.
 Elimination of waste resulting from competition between firms.

Disadvantages

 Consumers cannot choose – because goods and services which are produced are decided by
the government.
 Lack of profit motive may lead to firms being inefficient.
 Lot of time and money is wasted in communicating instructions from the government to the
firms.
Examples of Planned economies

 North Korea
 Cuba
 Myanmar
 Belarus
 Laos
 Libya
 Iran

D. Green Economy

Green economy is an economic system that intends to achieve sustainable development

without degrading the environment.

Green economy participates in the reduction of environmental risks and ecological scarcity.

Characteristics of a Green Economy

 Clean transit options - All sectors to use renewable energy sources with less of an
impact on the environment.
 Green building standards - Sustainable construction is another key way to achieve
energy efficiency and environmental stability.
 Renewable energy sources : Clean energy is perhaps the signature resource
necessary to achieve a green economy.
 Sustainable management of resources : In a green economy, waste should be
minimize it as much as possible.

Advantages of Green Economy

 Green economy potentially works towards decreasing environmental pollution - thus

improves the quality of soil, water and air and protects environmental well-being.
 Global warming, loss of biodiversity, deforestation, desertification, resource
depletion can gradually be reduced.
 Economic growth is also enhanced due to the establishment of new markets for
biofuels and renewable energy resources.
 Establishment of new markets has potential to support international advantages -
gained through exports and increase domestic sales.
  Creation of more industries means more employment and more employment means
more stable society as economically, the people will be secured.
 Agricultural industries will be able to achieve a dignified place due to the emphasis
on green technologies.
 Innovation needs innovative skills and this will invite establishment of more
educational institutions, which will ultimately increase the scopes for the students.

Disadvantages of Green Economy:-

 Transition to Green economy is time consuming –and patience is required.

 Initially the costs of the goods can be very high - because establishment of new
green industries and their technologies will involve high expense.
 Green and environment friendly products are always more costly than the
conventional goods.
 Hard Work, constant effort, extra time and skills will be required to develop new
technologies
 New Inventions and discoveries will involve extensive researches, which will cost
large amount of investment by the government.
 Huge Investments require huge funds, which may be raised by increasing tax from
the citizens.

E. Blue / Oceans market economy

Blue market economy is an economic system that uses of ocean resources well for a long
period (sustainably) for economic growth, and reduce ecological scarcities.

Characteristics

 It‟s activities focus on ocean based marine environment

 Promotes aquatic life/ ocean ecosystem services
Advantages

 Generates revenues – through job creation e.g. tourism and fishing

 Source of food – fish, coral reefs
 Rich source of biodiversity (various species) – habitat for wide variety of marine life
 Regulates climate – oceans absorb huge amounts of heat from the sun
 Source of thermal energy
Disadvantages

 Ocean currents – raised temperature around the oceans which can affect negatively
the ecosystem near the ocean.

Differences between green and blue economy

Green economy strategies tend to focus on the sectors of energy, transport, sometimes
agriculture and forestry, while the blue economy focuses on fisheries sectors and marine and
coastal resources.

Similarities

 Both incorporate strategies to address climate change and adaptation

 Both aim to improve wellbeing of the people – e.g. job creation
 Both are rich sources of biodiversity (various species in the environment)

F. Black / underground/ shadow market economy

A black market economy is an economic system where there is buying and selling of illegal
goods and services.

Characteristics

 Black market usually takes place outside the government‟s without government‟s
knowledge so as to avoid tax and any other government regulations.
 Black market presents revenue for government for prohibited goods like hard drugs,
war weapons and firearms to be bought by criminals.
 Involves illegal economic activity that occurs outside of government-regulations
 They contribute positively or negatively to the economic growth – contributes negatively
when fake goods affects genuine businesses

 Involves buying and selling of illegal goods and services for example cybercrimes, human
trafficking, selling of human organs, selling of firearms, illegal drugs, wildlife trade,
prostitution (where not allowed).

Advantage

 Goods and services are sold at a cheaper price

 It helps some people make plenty money

  The illegal sales of human organs e.g. Human kidney have aided in saving some lives

 People actually depend on black market for their dairy brad

 Some of the proceeds from black market have been utilized towards economic growth-
some schools and hospitals have been made by money gained through black market

Disadvantages

 There is high chance of defrauding and scamming buyers in the market

 There is an increasing of buying fake or counterfeit goods and products without warrantee

 Illegal drugs and weapons are moved easily into and outside the country]

 Results to some persons (especially women) to be traded as prostitutes

 The chances of criminal activities are increased through the black market system

 Black market can lead to the reduction of nations’ revenue – for instance, illegal oil
bunkering in south –south region of Nigeria has negative effected its nation revenue.
 PRINCIPLES OF DEMAND AND SUPPLY
1. DEMAND
 Demand in economics means a desire to possess a good supported by willingness and
ability to pay for it.
 If you have a desire to buy a certain commodity, say, a tractor, but do not have the
adequate means (money) to pay for it, it will simply be a wish, a desire or a want and
not demand.
There are two types of demand:-
 Individual demand
 Market demand
Individual's Demand for a commodity:
 The individual‟s demand for a commodity is the amount of a commodity, which the
consumer is willing to purchase at any given price over a specified period.
 This is the schedule of amounts of a commodity, which a person would buy at various
possible alternative prices over a particular interval of time. Therefore, demand is a
function of time and price.

The Market Demand for a Commodity:

 The market demand for a commodity is obtained by adding up the total quantity
demanded at various prices by all the individuals over a specified period of time in the
market
 A market demand is a schedule of total amounts that would be purchased by all
buyers in a particular commodity market at various possible alternative prices within a
particular interval of time.
 A single individual demand cannot affect the market prices for a particular
commodity because there are many buyers in the market, but changes in the market
demand will affect the market, thus, it is the market demand that is important in
economic analysis.

Three main characteristics of demand

 Willingness and ability to pay - demand is the amount of a commodity for which a
consumer has the willingness and the ability to buy.
 Demand is always at a price - If we talk of demand without reference to price, it will
be meaningless. The consumer must know both the price and the commodity. He will
then be able to tell the quantity demanded by him.
 Demand is always per unit of time - The time may be a day, a week, a month, or a
year.
Demand Schedule
 Demand schedule is a tabular representation of the quantity demanded of a
commodity at various prices.
Example 1;
A housewife‟s demand schedule for beef in a month is presented in Table Below
Table 1: Individual Demand Schedule

Price per Kg of Beef Kg of beef per month

250 5
300 4
350 3
400 2
450 1
Example 2;
There are four buyers of apples in the market, namely A, B, C and D.
Table 2: Demand schedule for apples – (individual and market demand schedule)

Price (in Buyer A(demand Buyer B Buyer C Buyer D Market

KS.) in dozen) demand
10 1 0 3 0 4
9 3 1 6 4 14
8 7 2 9 7 25
7 11 4 12 10 37
The demand by buyers A, B, C and D are individual demands. Total demand by the four
buyers is market demand. Therefore, the total market demand is derived by summing up the
quantity demanded of a commodity by all buyers at each price.

Demand Curve
 Demand curve is a diagrammatic representation of demand schedule. It is a graphical
representation of price - quantity relationship.
 Individual demand curve shows the highest price, which an individual is willing to
pay for different quantities of the commodity.
 While, each point on the market demand curve depicts the maximum quantity of the
commodity which all consumers taken together would be willing to buy at each level
of price, under given demand conditions.

The Law of Demand

 The law of demand states that, if all other factors remain constant, the higher the
price of a good or service, the less people will demand that good or service.
 In other words, the higher the price, the lower the quantity of good or service
demanded.
 The amount of a good that buyers purchase at a higher price is less because as the
price of a good goes up, so does the opportunity cost of buying that good.
 As a result, consumers will naturally avoid buying a product that will force them to
forgo the consumption of something else they value more.
 The demand curve is a downward slope.

 A, B and C are points on the demand curve. Each point on the curve reflects a direct
correlation between quantities demanded (Q) and price (P).
 Therefore, at point A, the quantity demanded will be Q1 and the price will be P1, and
so on.
 The demand relationship curve illustrates the negative relationship between price and
quantity demanded.
 The higher the price of a good the lower the quantity demanded (A), and the lower the
price, the more the good will be in demand (C).
 2. SUPPLY
 Supply refers to the quantity of a product available in the market for sale at a
specified price at a given point of time.
 Unlike demand, supply refers to the willingness of a seller to sell the specified
amount of a product at a particular price and within a specified time.
 Hence, supply is always defined in relation to price and time.
 For example, if a seller agrees to sell 500 kgs of wheat, it cannot be considered as
supply of wheat as the price and time factors are missing.
 Similarly, if a seller is ready to sell 500 kgs at a price of Ksh. 130 per kg then
again it would not be considered as supply as the time element is missing.
 Therefore, the statement “a seller is willing to sell 500 kgs at the price of Ksh.
130 per kg in a week” is ideal to understand the concept of supply as it relates
supply with price and time.
Types of supply
 Individual supply
 Market supply
Characteristics of supply
i. Supply is always with respect to a period of time
ii. Supply is always expressed with reference to price
iii. Supply of a commodity does not comprise the entire stock of the commodity
iv. Supply is a desired quantity - It indicates only the willingness, i.e., how much the firm
is willing to sell and not how much it actually sells.

Supply schedule
Supply schedule is a table that shows the quantity supplied at each price.
Price (Shs) Quantity supplied by Market Supply

A B C A+B+C
10 40 60 80 180
8 30 45 60 135
6 22 33 44 99
4 15 23 30 68
2 10 15 20 45

The Law of Supply

 Like the law of demand, the law of supply demonstrates the quantities that will
be sold at a certain price.
 However, unlike the law of demand, the supply relationship shows an upward
slope.
  This means that the higher the price, the higher the quantity supplied - Producers
supply more at a higher price because selling a higher quantity at higher price
increases revenue

A, B and C are points on the supply curve. Each point on the curve reflects a direct
correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will
be Q2 and the price will be P2, and so on.

Supply curve

Supply curve are is a diagram representation of the supply schedule

Supply schedule is a table that shows the quantity supplied at each price.
To draw a supply curve, a graph is plotted with the price on y- axis while quantity supplies in
the x- axis.
Price (Shs) Quantity supplied by Market Supply

A B C A+B+C
10 40 60 80 180
8 30 45 60 135
6 22 33 44 99
4 15 23 30 68
2 10 15 20 45

We can see in the above table, the supply schedule of three producers A, B and C for various
price levels. As seen in the table above the supply of goods decreases as the price of the
goods fall.
Now consider that the market consists of only these three suppliers, soothe market supply
will be the sum of the goods supplied at various price levels all other things remaining same.
The same is depicted using the charts below. The first three charts
FACTORS AFFECTING DEMAND
Even though the focus of economics is the relationship between the price and how much
consumers are willing and able to buy, it is important to examine all factors that affect the
demand of a good or service.
These factors include:
 Price of a product
 Consumers‟ income
 Price of related goods
 Taste and preference of consumers
 Consumers‟ expectation
 Number of consumers in a market

1. Price of a product
 There is an inverse (negative) relationship between the price of a product and the
amount of that product consumers are willing and able to buy.
 Consumers want to buy more of a product at a low price and less of a product at a
high price.
 This inverse relationship between price and the amount consumers are willing and
able to buy is often referred to as The Law of Demand.

2. Consumer’s income
 The effect that income has on the amount of a product that consumers are willing and
able to buy depends on the type of good involved.
 For most goods, there is a positive (direct) relationship between a consumer's
income and the amount of the good that one is willing and able to buy.
 That is, for these goods when income rises the demand for the product will increase;
when income falls, the demand for the product will decrease. These types of goods are
called normal goods.
 However, for some goods the effect of a change in income is the reverse. For
example, think about a low-quality (high fat-content) ground beef.
 You might buy this while you are a student, because it is inexpensive relative to other
types of meat. But if your income increases enough, you might decide to stop buying
this type of meat and instead buy leaner cuts of ground beef, or even give up ground
beef entirely in favor of beef tenderloin.
 If this were the case (that as your income went up, you were willing to buy less high-
fat ground beef), there would be an inverse relationship between your income and
your demand for this type of meat. We call this type of good an inferior good.

3. Price of Related Goods

 Effect of price of related goods on the amount that one is willing and able to buy
depends on the type of good in question.
  When two goods are complements (goods that are typically consumed together), there
is an inverse relationship between the price of one good and the demand for the other
good. For example, bread and butter. If the price of bread goes up, consumers will be
willing to buy less bread. But if less bread will be demanded, then less butter which is
taken together with bread will be demanded. Therefore, an increase in the price of
bread means we want to purchase less butter.

 However, when two goods are substitutes (goods that are not consumed together, but
we instead choose to consume one or the other), there is a positive relationship
between the price of one good and the demand for the other good. For example, for
some people Coke and Pepsi are substitutes. If the price of Coke increases, this may
make Pepsi relatively more attractive. Fewer people will be willing and able to buy
Coke. Some of these people may decide to switch to Pepsi instead, therefore
increasing the amount of Pepsi that people are willing and able to buy.

4. Tastes and Preferences of Consumers

 Change in consumer‟s tastes and preferences cause them to want to buy more or less
of a product.
 Several factors may lead to a change in consumers‟ taste and preference. For example,
if a celebrity endorses a new product, this may increase the demand for a product.
 On the other hand, if a new health study suggests that something is bad for your
health, this may decrease the demand for the product.
 Weather changes may also cause changes in consumers‟ tastes and preferences, for
example, a person may have a higher demand for an umbrella on a rainy day than on a
sunny day.

5. Consumers Expectations
 One's expectations for the future can affect how much of a product one is willing and
able to buy.
 For example, when consumers hear that the government will subsidize the price of
maize flour they will be reluctant to buy, hence a fall in demand.
 Similarly, if you expect the price of petrol to go up tomorrow, you may fill up your
car with petrol now. Hence, your demand for petrol today increased because of what
you expect to happen tomorrow.

6. Number of consumers in the market (population)

 As more or fewer consumers enter the market, this has a direct effect on the amount
of a product that consumers are willing and able to buy.

 For example, a cyber café near Jeremiah Nyagah Institute will print more students‟
assignment when all students are in the college hence more demand for cyber
services, but during the holiday demand for cyber services will decrease because the
number of students (consumers) in the area has significantly decreased.
FACTORS AFFECTING SUPPLY
1. Price
 This is the main factor that influences the supply of a product. Unlike demand, there
is a direct relationship between the price of a product and its supply.
 If the price of a product increases, then the supply of the product also increases and
vice versa.

 Speculation about future price can also affect the supply of a product. If the price of a
product is about to rise in future, the supply of the product would decrease in the
present market because of the profit expected by a seller in future. However, the fall
in the price of a product in future would increase the supply of product in the present
market. For example James has 100 bags of maize. He expects the minimum price to
be Ksh. 3000 per bag and the market price is Ksh. 3,100 per bag. Therefore, he would
release certain amount of the product, say around 50 bags in the market, but would
not release the whole amount. The reason being he would wait for better prices for his
product. In such a case, the supply of his product at present would be 50 bags at Ksh.
3,100 per bag.

2. Cost of Production
 Supply of a product would decrease with increase in the cost of production and vice
versa.
 The supply of a product and cost of production are inversely related to each other.
 If the market price is more than the cost price, the seller would increase the supply of
a product in the market.
 However, the decrease in market price as compared to cost price would reduce the
supply of product in the market. For example, a seller would supply less quantity of a
product in the market, when the cost of production exceeds the market price of the
product. In such a case, the seller would wait for the rise in price in future.
 The cost of production rises due to several factors, such as loss of fertility of land,
high wage rates of labor, and increase in the prices of raw material, transport cost, and
tax rate.
3. Climatic and Weather Conditions
 Climatic conditions directly affect the supply of certain products.
 For example, the supply of agricultural products increases when long rain comes on
time. However, the supply of these products decreases at the time of drought.
 Some of the crops are climate specific and their growth purely depends on climatic
conditions. For example, maize for grains requires dry weather conditions before and
at harvesting time.

4. Technology
 A better and advanced technology increases the production of a product, which results
in the increase in the supply of the product.
 For example, the use of fertilizers and good quality seeds increases the production of
crops. This further increase the supply of food grains in the market.

5. Transport Conditions
 Better transport facilities increase the supply of products.
 Transport is always a constraint to the supply of products, as the products are not
available on time in case of poor transport facilities.
 Therefore, even if the price of a product increases, the supply would not increase.

6. Government’s Policies
 Different policies of government, such as fiscal policy and industrial policy, has great
impact on the supply of a product.
 For example, increase in tax on excise duties would decrease the supply of a product.
 On the other hand, if the tax rate is low, then the supply of a product would increase.

7. Prices of Related Goods

 Prices of substitutes and complementary goods affect the supply of a product.
 For example, if the price of wheat increases, then farmers would tend to grow more
wheat than maize. This would decrease the supply of maize in the market.
THE DETERMINATION OF PRICE AND QUANTITY

 The logic of the model of demand and supply is simple.

 The demand curve shows the quantities of a particular good or service that buyers will
be willing and able to purchase at each price during a specified period.
 The supply curve shows the quantities that sellers will offer for sale at each price
during that same period.
 By putting the two curves together, we should be able to find a price at which the
quantity buyers are willing and able to purchase equals the quantity sellers will offer
for sale.

Equilibrium Price and Quantity

 When supply and demand are equal, (i.e. when the supply function and demand
function intersect) the economy is said to be at equilibrium.
 At this point, the allocation of goods is at its most efficient because the amount of
goods being supplied is exactly the same as the amount of goods being demanded.
 Thus, everyone (individuals, firms, or countries) is satisfied with the current economic
condition.
 At the given price, suppliers are selling all the goods that they have produced and
consumers are getting all the goods that they are demanding.

 As you can see on the chart, equilibrium occurs at the intersection of the demand and
supply curve, which indicates no allocative inefficiency.
 At this point, the price of the goods will be P* and the quantity will be Q*.
 These figures are referred to as equilibrium price and quantity.
 In the real market place equilibrium can only ever be reached in theory, so the prices
of goods and services are constantly changing in relation to fluctuations in demand
and supply.
Demand curve
Let us remind ourselves about the demand curve!
The figure bellow shows a demand schedule and demand curve of coffee that will be
demanded each month with price ranging from $9 to $4 per pound.
We see that the higher the price the lower the quantities demanded
Supply curve
Let us remind ourselves about the supply curve!
The figure bellow shows a supply curve and a supply schedule of coffee. From the curve we
can conclude that the higher the price the higher the supply of quantities demanded of coffee.
Therefore…
 When we combine the demand and supply curves for a good in a single graph, the
point at which they intersect identifies the equilibrium price and equilibrium quantity.
 Here, the equilibrium price is $6 per pound. Consumers demand, and suppliers
supply, 25 million pounds of coffee per month at this price.
 With an upward-sloping supply curve and a downward-sloping demand curve, there is
only a single price at which the two curves intersect.
 This means there is only one price at which equilibrium is achieved. It follows that at
any price other than the equilibrium price, the market will not be in equilibrium.
Disequilibrium
Disequilibrium occurs whenever the price or quantity is not equal to Equilibrium Price or
Quantity.

1. Excess Supply

If the price is set too high, excess supply will be created within the economy and there will be
allocative inefficiency.

At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1,
however, the quantity that the consumers want to consume is at Q1, a quantity much less than
Q2. Because Q2 is greater than Q1, too much is being produced and too little is being
consumed. The suppliers are trying to produce more goods, which they hope to sell to
increase profits, but those consuming the goods are find the product less attractive and
purchase less because the price is too high.

2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is
so low, too many consumers want the good while producers are not making enough of it.
In this situation, at price P1, the quantity of goods demanded by consumers at this price is
Q2. Conversely, the quantity of goods that producers are willing to produce at this price is
Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the
consumers. However, as consumers have to compete with one other to buy the good at this
price, the demand will push the price up, making suppliers want to supply more and bringing
the price closer to its equilibrium.