SUPPLY AND DEMAND

• How are prices determined?

In a free market, products which are very similar or the

same, will have prices which are determined by supply
and demand.

Demand: is the quantity that consumers are prepared to

purchase at the existing price in a certain period of time.

Supply: refers to a firm’s willingness to produce goods or

services demanded by customers.
 Supply and Demand
120

100
80
Demand
Price

60
Supply
40

20
0
20 40 60 80 100
Quantity
Factors that influence consumer
demand:
• The price of the product- the relationship
between the price of a product and the quantity
demand is referred to as the demand curve.
 Factors that influence the
demand for products:
• The price of substitute products
• The price of complementary products
• Advertising
• Tastes and fashion
• Consumer’s income
• Changes in population
• Government legislation and regulation
• Changes in interest rates or income tax
• speculation
 Demand curves are useful for:
• Calculating the revenue to be earned for
any given price change.

• To predict the likely reaction of consumers

to any given price change.

• To predict the likely impact upon revenue

of price changes.
 Factors that influence the
supply of a product:

• Changes in price
• Wage increases or decreases
• Changes in the cost of raw materials
• Improvements in technology
• Weather
• Subsidies offered to producers
ELASTICITY