PRICES AND MARKETS

Definitions

Market: an effective arrangement which enables buyers and sellers to exchange goods and services and
determine price.

Price: the value of a commodity expressed in terms of a currency.

Value: the power a commodity has which enables it to be exchanged with other commodities. It is referred
to as “value in exchange”.

Consumer: a person who is willing to buy (demand) goods and services for a price.

Supplier: a person who is willing to sell (supply) goods and services for a price.

Demand: the quantity of a commodity consumers are willing and able to buy at a given price over a given
period of time.

Supply: the quantity of a commodity offered for sale at a given price over a given period of time.

DEMAND AND SUPPLY

DEMAND

Definition: Demand is defined as the quantity of a commodity consumers are willing to buy at a given price
over a given period of time.

In Economics, demand is the Effective Demand. Demand is effective when demand is backed up by
purchasing power. Purchasing power means the ability to pay.

Want (desire) and demand are different. Demand is desire backed up by the willingness and ability to pay
for it.

Individual Demand and Market Demand

Individual Demand is the quantity demanded for a product by only one consumer.
Market Demand is the quantity demanded for a product by all its consumers. It is the horizontal
summation of all the individual demand.

Economics Grade 9, GNAEC Page 1

Law of Demand
The Law of Demand states that “other things being equal (ceteris paribus) more will be demanded at lower
prices than at higher prices and vice-versa”. That is, quantity demanded (QD) increases as price decreases
and vice-versa.

Demand Schedule
A demand Schedule is a table which shows the quantities demanded of a product at a range of prices over
a given period of time.

Price (RF) QD per day

250 2
200 4
150 6
100 8
50 10

Demand Curve
A demand curve is a graphical representation of the quantities demanded of a product at a given price
over a given period of time.

A normal demand curve always slopes downward from left to right; this is because there is a negative
relationship between price and quantity demanded. A negative relationship means when price goes up the
quantity demanded falls and vice-versa.
When drawing a demand curve, the y-axis should be labeled ‘price’ and the x-axis as ‘quantity demanded’.

Draw on your own a demand curve using the demand schedule given above.

Economics Grade 9, GNAEC Page 2

CHANGES IN DEMAND

Demand changes mainly due to two factors, one is the price factor, and the other is the non-price factors.
Changes in demand can be categorized into two:
 Movement along the demand curve (occurs due to price factor).
 Movement of the demand curve (occurs due to non-price factors).

1. Movement along the Demand Curve

Movement along the demand curve occurs due to changes in price. When the price of a good change, the
quantity demanded of that product also changes.
Other things being equal, more will be demanded at lower prices than at higher prices and vice-versa.

There are two types of movement of the demand curve. They are:
a) Extension in Demand (occurs due to a decrease in price)
b) Contraction in Demand (occurs due to an increase in price)

EXTENSION IN DEMAND
Extension in demand refers to a downward movement along the demand curve due to a fall in price. It is
an increase in the quantity demanded due to a fall in price.
PRICE At a price of Rf30, the quantity demanded
of Archie Comics were 10 per week, but
40
when the price fell from Rf30 to Rf20, the
A
quantity demanded increased from 10 to
30
15 comic books. There has been a
20 B downward movement along the demand
curve from point A to B; this is known as
10

D
extension in demand.
0 5 10 15 20 QD

CONTRACTION IN DEMAND
Contraction in demand refers to an upward movement along the demand curve due to a rise in price. It is a
decrease in the quantity demanded due to a rise in price.
PRICE
At a price of Rf 20, the quantity
demanded of Archie Comics were 15 per
week, but when the price rose from Rf20
40
to Rf30, the quantity demanded
C
30 decreased from 15 to 10 comic books.
20 B There has been an upward movement
along the demand curve from point B to
10
C; this is known as contraction in
D
demand.
0 5 10 15 20
QD

(Note: when there is a movement along the demand curve, it will always be quantity demanded which decreases or
increases).
Economics Grade 9, GNAEC Page 3
2. Movement of the Demand Curve

Movement of the demand curve or a shift in demand curve occurs due to changes in the non-price factors
of demand (that is, factors other than price).

There are two types of movement of the demand curve:

 Increase in Demand
 Decrease in Demand

INCREASE IN DEMAND

An increase in demand means, more is now demanded at each and every price. When there is an increase
in demand the demand curve shifts to the right. In the diagram the demand curve shifts to the right from D
to D1.
PRICE

D1
D
0 Q Q1
QD

DECREASE IN DEMAND

A decrease in demand means, less is now demanded at each and every price. When there is a decrease in
demand the demand curve shifts to the left. In the diagram the demand curve shifts to the left from D to
D1.
PRICE

D
D1
0 Q1 Q QD

(Note: when there is a movement of demand curve, it will always be demand which increased or decreased).

Economics Grade 9, GNAEC Page 4

SHIFTS IN DEMAND (THE NON-PRICE FACTORS OF DEMAND)

1. Changes in income
Other things remaining the same, when there is a rise in income, consumers buy more of most
goods and services which increases the demand for goods and services and vice versa.
But there are some goods when our income increases; we buy less of those goods. These types of
goods are called as Inferior Goods example, cheap perfume. Goods which are demanded more
when our income increases are known as Normal Goods.

2. Changes in the price of related goods

Related goods are classified into two:
a) Substitute goods: substitute goods are those goods that can be used instead of another good.
For example butter is a substitute for margarine, tea can be a substitute for coffee, ball-point
pen can be a substitute for fountain pen …etc.
An increase in the price of a good leads to an increase in demand for its substitute good and
vice-versa. Example: when price of butter increase, people will demand more of margarine and
vice-versa.

b) Complementary goods: complementary goods are those goods that are used along with
another good. These are jointly demanded goods. Example: camera and film, CD and CD player,
fountain pen and ink …etc.
An increase in the price of a good leads to a decrease in the demand for its complementary
good and vice-versa. Example: when the price of ink increases, the demand for the fountain
pens is likely to decrease and vice-versa.

3. Changes in weather
Some goods are demanded seasonally, and at certain times of the year the demand for these goods
will increase and vice-versa. Example: in rainy seasons the demand for umbrella’s and rain coats
will increase.

4. Changes in fashion and taste

For certain products such as clothes, changes in fashion can bring about large and frequent changes
in the demand. Example: when jeans are in fashion, the demand for jeans will increase. Mostly the
demand will be high for those goods which are highly in fashion at that time period.

5. Advertisement
The aim of advertising is to increase the demand for the advertised product. A successful
advertisement will increase the demand for the advertised product while the competing products
may experience a fall in the demand for its products.

6. Changes in population
Other things being equal, an increase in population will increase the demand for goods and services
and vice-versa.

7. Expected future price

If the price of a good is expected to rise, it makes sense to buy more of that good today and less in
the future when its price is higher. Thus, the higher the expected future price of a good, the larger
is today’s demand for the good.
Economics Grade 9, GNAEC Page 5
SUPPLY
Definition: Supply is defined as the quantity of a commodity offered for sale at a given price over a given
period of time.

Supply = Output -Stock

Law of Supply
The Law of Supply states that “other things being equal (ceteris paribus) more will be supplied at higher
prices than at lower prices and vice-versa”. That is, quantity supplied (QS) increases as price increases and
vice-versa.

Supply Schedule
A Supply Schedule is a table which shows the quantities supplied of a product at a range of prices over a
given period of time.

Price (RF) QS per day

50 20
100 40
150 60
200 80
250 100

Supply Curve
A supply curve is a graphical representation of the quantities supplied of a product at a given price over a
given period of time.

A normal supply curve always slopes upwards from left to right; this is because there is a positive
relationship between price and quantity supplied. A positive relationship means when price increases the
quantity supplied also increases and vice-versa.
When drawing a supply curve, the y-axis should be labeled ‘price’ and the x-axis as ‘quantity supplied’.

Draw on your own a supply curve using the supply schedule given above.

Economics Grade 9, GNAEC Page 6

CHANGES IN SUPPLY

Supply changes mainly due to two factors, one is the price factor, and the other is the non-price factors.
Changes in Supply can be categorized into two:
 Movement along the supply curve (occurs due to price factor).
 Movement of the supply curve (occurs due to non-price factors).

1. Movement along the Supply Curve

Movement along the supply curve occurs due to changes in price. When the price of a good change, the
quantity supplied of that product also changes.
Other things being equal, more will be supplied at higher prices than at lower prices and vice-versa.

There are two types of movement of the supply curve. They are:
c) Extension in supply (occurs due to an increase in price)
d) Contraction in supply (occurs due to a decrease in price)

EXTENSION IN SUPPLY
Extension in supply refers to an upward movement along the supply curve due to a rise in price. It is an
increase in the quantity supplied due to a rise in price.
PRICE At a price of Rf20, the quantity supplied of
Archie Comics were 10 per week, but
40 S when the price increased from Rf20 to
Rf30, the quantity supplied increased from
30
10 to 15 comic books. There has been an
B
20 A upward movement along the supply curve
from point A to B; this is known as
10
extension in supply.
0 5 10 15 20 QS

CONTRACTION IN SUPPLY
Contraction in supply refers to a downward movement along the supply curve due to a fall in price. It is a
decrease in the quantity supplied due to a fall in price.
PRICE
At a price of Rf30, the quantity supplied
of Archie Comics was 15 per week, but
S when the price fell from Rf30 to Rf20,
40
the quantity supplied decreased from 15
30 to 10 comic books. There has been a
B
20 C
downward movement along the supply
curve from point B to C; this is known as
10
contraction in supply.

0 5 10 15 20 QS

(Note: when there is a movement along the supply curve, it will always be quantity supplied which decreases or
increases).
Economics Grade 9, GNAEC Page 7
2. Movement of the Supply Curve

Movement of the supply curve or a shift in supply curve occurs due to changes in the non-price factors of
supply (that is, factors other than price).

There are two types of movement of the supply curve:

 Increase in Supply
 Decrease in Supply

INCREASE IN SUPPLY

An increase in supply means, more is now supplied at each and every price. When there is an increase in
supply the supply curve shifts to the right. In the diagram the supply curve shifts to the right from S to S1.

PRICE

S
S1

0 Q Q1 QS

DECREASE IN SUPPLY

A decrease in supply means, less is now supplied at each and every price. When there is a decrease in
supply the supply curve shifts to the left. In the diagram the supply curve shifts to the left from S to S1.

PRICE

S1
S

0 Q1 Q QS

(Note: when there is a movement of supply curve, it will always be supply which increased or decreased).

Economics Grade 9, GNAEC Page 8

SHIFTS IN SUPPLY (THE NON-PRICE FACTORS OF SUPPLY)

1. Prices of factors of production

An increase in the price of the factors of production like land, labour…etc would increase the cost of
production. This increase in the cost of production means that the producers cannot produce as many
output as before, hence, supply decreases and vice-versa.

2. Price of related goods

a) Substitute goods: when the price of a substitute good in production increase, the supply of its related
good in production decreases, because it is more profitable to sell the product which has got the high
price and vice-versa.
For example: if the price of ‘race cars’ increase, producers will increase the supply of ‘race cars’ and the
supply of ‘normal cars’ will decrease.

b) Complementary goods: these are goods in ‘joint supply’. When the price of a good increase, the supply
of its complementary good in production increases as it automatically produced.
For example: if the price of crude oil increases, the supply of crude oil increases along with it, the supply
of natural gas also increases.
If price of mutton increases, the supply of mutton increases, at the same time the supply of wool also
increases as wool is taken from the sheep.

3. Expected future price

If the prices are expected to increase in future, the current supply will decrease as it would be more
profitable to sell the goods when the price is high and vice-versa.

4. Number of suppliers (producers)

An increase in the number of producers will increase supply and vice-versa. More producers mean that they
will all produce different products and the total supply in the market increases.

5. Technology
In the modern world with new and better technology producers are able to produce the goods at very low
cost. This means their cost of production is less hence, the supply of goods increase.

6. Weather
Weather is a very important factor affecting the supply of agricultural goods. A bad weather condition may
decrease the harvest thereby decreasing the supply of the agricultural goods and vice-versa.

7. Taxes
Tax is a compulsory payment made by the people to the government. There are mainly two types of taxes
that is, direct tax and indirect tax.
Direct taxes are taken directly from the people’s income; this would reduce people’s income and decrease
the demand.
Indirect taxes are taxes charged indirectly from people, these taxes would be added up in the price. Part of
this tax is borne by the producer. Therefore, imposition of a tax on the production of goods and services will
increase the cost of production on the producer’s side thereby, supply decreases.

8. Subsidies
Subsidies are gifts or grants given by the government to the producers. A subsidy will reduce the cost of
production of the supplier hence, increase the supply.

Economics Grade 9, GNAEC Page 9

THE MARKET PRICE (EQUILIBRIUM PRICE)

The market price determined by the market forces of demand and supply where quantity demanded is
equal to the quantity supplied.
Equilibrium price is the price at which the quantity supplied satisfies the quantity demanded. It is also
known as the market price.

Price

S P = Equilibrium Price

Q = Equilibrium Quantity
E
P
E = Equilibrium Point

Q
Quantity Demanded and Supplied/period

EFFECTS OF CHANGES IN MARKET PRICE

The market price changes due to major three reasons:

1. Changes to market price due to shift in demand (assuming that supply remains constant)
2. Changes to market price due to shift in supply (assuming that demand remains constant)
3. Changes to market price due to shift in both supply and demand

1. Changes to market price due to shift in demand (assuming that supply remains constant)
There are basically two shifts in demand that is,
a) Increase in demand
b) Decrease in demand

a) Effect on the market price due to increase in demand

Other things being equal, an increase in demand will increase the market price and increase the quantity
supplied.
The following diagram explains it.

-The diagram shows the initial equilibrium at E,

Price where the original demand and supply curve
S intersects.

- Due to a change in one of the non-price factors

E1
of demand, the demand increased from D to D1
P1
P E - This increase in demand increased the market
price from P to P1

- Which increased the quantity traded (supplied)

D1
from Q to Q1
D

Q Q1 - There is an extension in supply from E to E1.

Quantity Demanded and Quantity supplied Hence, the new equilibrium is at E1.

Economics Grade 9, GNAEC Page 10

b) Effect on the market price due to a decrease in demand
Other things being equal, a decrease in demand will decrease the market price and decrease the quantity
supplied.
The following diagram explains it.

-The diagram shows the initial equilibrium at E,

Price where the original demand and supply curve
intersects.
S

- Due to a change in one of the non-price factors

of demand, the demand decreased from D to
P
E D1
E1
P1
- This decrease in demand decreased the
market price from P to P1
D - Which decreased the quantity traded
D1 (supplied) from Q to Q1
Q1 Q - There is a contraction in supply from E to E1.
Quantity Demanded and Quantity supplied Hence, the new equilibrium is at E1.

2. Changes to market price due to shift in supply (assuming that demand remains constant)
There are basically two shifts in supply that is:
a) Increase in supply
b) Decrease in supply

a) Effect on the market price due to increase in supply

Other things being equal, an increase in supply will decrease the market price and increase the quantity
demanded.
The following diagram explains it.

- The diagram shows the initial equilibrium at E,

Price where the original demand and supply curve
S
intersects.
S1
- Due to a change in one of the non-price factors of
supply, the supply increased from S to S1

- This increase in supply decreased the market price

P E
from P to P1
P1 E1
- Which increased the quantity traded (demanded)
from Q to Q1
D
- There is an extension in demand from E to E1.
Q Q1
Hence, the new equilibrium is at E1.
Quantity Demanded and Quantity supplied

Economics Grade 9, GNAEC Page 11

b) Effect on the market price due to decrease in supply
Other things being equal, a decrease in supply will increase the market price and decrease the quantity
demanded.
The following diagram explains it.

- The diagram shows the initial equilibrium at E,

Price where the original demand and supply curve
S1
intersects.
S
- Due to a change in one of the non-price factors
of supply, the supply decreased from S to S1

E1 - This decrease in supply increased the market

P1
E price from P to P1
P
- Which decreased the quantity traded
(demanded) from Q to Q1
D
- There is a contraction in demand from E to E1.
Q1 Q Hence, the new equilibrium is at E1.
Quantity Demanded and Quantity supplied

3. Changes to market price due to shift in both supply and demand

There are four different ways in which both demand and supply can shift.

a) Increase in both Demand and Supply

1. Both curve shift equally
2. Increase in Demand more than Increase in Supply
3. Increase in Supply more than Increase in Demand

b) Decrease in both Demand and Supply

1. Both curve shift equally
2. Decrease in Demand more than Decrease in Supply
3. Decrease in Supply more than Decrease in Demand

c) Increase in Demand and Decrease in Supply

1. Both curve shift equally
2. Increase in Demand more than Decrease in supply
3. Decrease in Supply more than Increase in Demand

d) Decrease in Demand and Increase in Supply

1. Both curve shift equally
2. Decrease in Demand more than Increase in Supply
3. Increase in Supply more than Decrease in Demand

Economics Grade 9, GNAEC Page 12

a) Increase in both Demand and Supply b) Decrease in both Demand and Supply
1- Both curve shift equally 1. Both curve shift equally

Price Price
S1
S
S
S1

E E1 E1 E
P P

D1 D
D D1

Q Q1 Q1 Q
Quantity Demanded and Supplied/period Quantity Demanded and Supplied/period

When Demand and Supply both increase equally there is no When Demand and Supply both decrease equally there is
change in the market price but the quantity traded no change in the market price but the quantity traded
increases from Q to Q1. decreases from Q to Q1.

2- Demand increasing more than Supply 2. Demand decreasing more than Supply

Price Price
S S1
S1 S

E1
P1
E E
P P
E1
P1

D1
D
D
D1
Q Q1 Q1 Q
Quantity Demanded and Supplied/period Quantity Demanded and Supplied/period

When Demand increases more than Supply, the market When Demand decreases more than Supply, the market
price increases from P to P1 and the quantity traded price decreases from P to P1 and the quantity traded
increases from Q to Q1. decreases from Q to Q1.

3- Supply increasing more than Demand 3. Supply decreasing more than Demand
S1
Price Price
S
S1 S

E1
P1
E E
P P
E1
P1

D1 D
D D1

Q Q1 Q1 Q
Quantity Demanded and Supplied/period Quantity Demanded and Supplied/period

When Supply increases more than demand, the market When Supply decreases more than Demand, the market
price decreases from P to P1 and the quantity traded price increases from P to P1 and the quantity traded
increases from Q to Q1. decreases from Q to Q1.
Economics Grade 9, GNAEC Page 13
c) Increase in Demand and Decrease in Supply d) Decrease in Demand and Increase in Supply
1. Both curve shift equally 1. Both curve shift equally

Price Price
S1 S
S S1

E1 E
P1 P
E
P P1 E1

D1 D
D D1

Q Q
Quantity Demanded and Supplied/period Quantity Demanded and Supplied/period

When Demand increase and Supply decrease equally there When Demand Decrease and Supply Increase equally there
is no change in the quantity traded but the market price is no change in the quantity traded but the market price
increases from P to P1. decreases from P to P1.

2. Increase in Demand more than Decrease in 2. Decrease in Demand more than Increase
Supply in Supply

Price Price
S
S1
S1
S
E1
P1 E
P

E
P E1
P1
D1
D

D D1
Q1 Q
Q Q1
Quantity Demanded and Supplied/period
Quantity Demanded and Supplied/period

When Increase in Demand is more than the Decrease When Decrease in Demand is more than the Increase in
in Supply the market price increases from P to P1 and Supply the market price decreases from P to P1 and the
the quantity traded also increases from Q to Q1. quantity traded decreases from Q to Q1.

3. Decrease in Supply more than Increase in 3. Increase in Supply more than Decrease in
Demand Demand
S1
Price
Price
S
S1
S
E1
P1 E
P

E
P E1
P1

D
D1
D1
D
Q Q1
Q1 Q
Quantity Demanded and Supplied/period
Quantity Demanded and Supplied/period
When Increase in Supply is more than the Decrease in
When Decrease in Supply is more than the Increase in
Demand the market price decreases from P to P1 and the
Demand the market price increases from P to P1 and the
quantity traded increases from Q to Q1.
quantity traded decreases from Q to Q1.
Economics Grade 9, GNAEC Page 14
Disequilibrium (market failure)

Disequilibrium refers when the market price is not equal to demand and supply, this is also known as
market failure. Disequilibrium is when the market fails to attain equilibrium.

It is a situation where internal and/or external forces prevent market equilibrium from being reached or
cause the market to fall out of balance.

External factors could be multiple changes in Demand or Supply.

Most of the time, the market is often in disequilibrium. This results in Excess Supply or Excess Demand of
some goods in the market now and then.

Price
Exess Supply
S

E
P

Excess Demand
D
Q QD/QS per period

What if price is not high enough to make QD = QS? It results in Excess Demand

A situation where the quantity demanded is more than the quantity Supplied. Thus, demanders will compete
against one another, offering higher prices for the limited supply, and the price will rise.

What if price is not low enough to make QD = QS? It results in Excess Supply

A situation where the quantity supplied is more than the quantity demanded. Thus, suppliers will compete to
sell what they can by cutting the price.

Economics Grade 9, GNAEC Page 15

NON-MARKET PRICES

Non-market prices are prices which are determined by the government not by the market forces of demand and
supply. It is fixed by the government when the market fails.

There are two types of non-market prices:

1. Maximum Price Control (price ceiling).
2. Minimum Price Control (price floor).

1. Maximum Price Control (price ceiling)

Maximum price control is adopted by the government when the government feels that the existing price in
the market is too high. This policy is adopted mostly on the necessity goods such as food items.
At the time of shortage (supply too less than demand) the price of essential commodities like food will be very
high and many people may not be able to afford these goods hence, the government imposes a maximum
price which is fixed below the market price.
It is called a price ceiling because once the government impose the maximum price the sellers cannot sell the
commodity above the maximum price but they can sell at any price below the maximum price, hence, it is
known as the price ceiling.

Price
S

E
P

Max. Price
{

Px

Excess Demand
D

Qs Q Qd
QD/QS per period

Effects of a Maximum Price Control

1. Shortage of the product
When the government imposes maximum price control the price is reduced (Px in the diagram) which
increases the quantity demanded (Qd in the diagram) at the same time quantity supplied decreases (Qs in
the diagram) which leads to excess demand hence, all people may not be able to enjoy the product.
In order to overcome the excess demand the government may introduce rationing. Rationing refers to the
act of putting a limit to the number of goods a person can buy so that everyone can have an equal
opportunity of enjoying the product.

2. Black Marketing
Black marketing refers to the act of selling goods illegally. Though the government may have imposed a
maximum price there could be sellers who might sell the product at higher prices in the black market.
In order to overcome the black marketing the government can charge a fine on those people who are
involved in this illegal act.

Economics Grade 9, Aminiya School Page 16

2. Minimum Price Control (price floor)

Minimum price policy is adopted by the government when the government feels that the existing price in the
market is too low. It is adopted to protect some producers or suppliers of certain products.

When price is too low in the market, the producers especially producers of agricultural products may not earn
enough income, hence, the government fixes a minimum price above the market price.

Once the government fixes minimum price the sellers can sell the products any price above the minimum price but
not lower than that, therefore, minimum price is known as the price floor.

Price
Excess Supply S

Pm { E
Min. Price

Qs Q Qd
QD/QS per period

Effects of a Minimum Price Control

1. Surplus in the market

When government imposes a minimum price above the market price (Pm in the diagram) the price is
increased so quantity demanded decreases (Qd in the diagram) and quantity supplied increases (Qs in the
diagram) leading to excess supply. This excess supply should be dealt with other wise excess supply in the
market may reduce the price level and this policy could become a failure.

In order to overcome this excess supply government procurement has to be adopted. Government
procurement means government will buy all the excess supply and keep it stored and they will release it
when shortage arises for the product in the market.

Economics Grade 9, GNAEC Page 17