# Supply and Demand (Market Forces)

## Supply and Demand (Market Forces)

### ZIMSEC O Level Business Studies Notes: Production: Supply and Demand (Market Forces)

• In a free market economy the forces of supply and demand determine the price at which a product is sold
• These two forces: supply and demand are also known as market forces
• They are used to determine the price at which customers are willing to purchase a given quantity of a product
• They are also used to determine the price at which suppliers/sellers are willing to sell a given quantity of a product

#### Demand

A simple demand curve

• Demand refers to the desire to purchase a certain good or service
• Because people have unlimited wants it would be useless to consider everyone’s demands for example most people want to purchase a plane
• For this reason only effective demand is considered
• Effective demand is the desire to purchase a given product and the capacity to pay for it
• Effective demand is also known as actual demand
• It is refers to the willingness and ability to purchase the said product
• Demand is generally high when the price of a product is low/cheap
• Demand is generally low when the price of a product is high/expensive
• As a rule of thumb demand increases with the fall in price
• In mathematical terms: Demand varies inversely with price
• The rationale is that customers want to pay the least possible price to get more of a product
• If this was to be plotted on a curve it would create a demand curve
• This line/curve slopes down as we move to the right as shown above
• The curve slopes downwards i.e. the gradient is negative

#### Supply

Simple supply curve

• Supply refers to the quantity of a product that suppliers are willing to sell at a given price
• Producers will try to obtain the highest possible price
• As a general rule suppliers want to supply more at a higher price
• Supply is low when the price is low
• Supply therefore increases with the increase in price
• In mathematical terms supply varies directly with price
• If this was plotted on a curve it would create a supply curve
• The line/curve slopes upwards as we move to the right as shown above
• The curve slopes upwards i.e. has a positive gradient

#### Equilibrium

Supply and Demand showing the equilibrium price

• As established above customers want to pay the least possible price while suppliers want to sell at the highest possible price
• If we combine the supply and demand curves we can determine the equilibrium price
• This is also known as the market price
• At the equilibrium price the quantity that suppliers are willing to sell is equal to the amount that customers are willing to buy
• If the price is below the equilibrium price customers will demand more than the market is willing to supply driving the price upwards back to the equilibrium price
• If the price is set above the market price there will be excess on the market and competition between suppliers will force the price down
• If the government/authorities were to intervene, as the Zimbabwean government has done in the past, by setting price controls
• Excessive demand will create shortages and ultimately the black market will supply goods at market prices

To access more topics go to the O Level Business Notes

By |2017-06-28T12:07:37+00:00June 28th, 2017|Notes, O Level Business Studies Notes, Ordinary Level Notes|Comments Off on Supply and Demand (Market Forces)

### About the Author: Garikai Dzoma

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.