Other factors that shifts demand Change in population The larger the population, the greater the demand will be for a product, similarly a small population will demand less of a product. A change in expected future prices If consumers expect an increase in the price of a product, they will demand more of that product now in order to avoid paying a higher price in the future. An expected increase in a price of a product will cause demand to decrease now and increase later when the price of the product decreases. Distribution of income A distribution of income from high-income households to low-income households will cause a decrease in the demand for the products that high-income households demand and an increase in the demand for products that low-income households demand.

The importance of relative prices Study Box 4-1 in your textbook The importance of relative prices It is important to distinguish between relative prices Let us assume that Sally is the only consumer in the market and there are only 2 products, coffee and shoes The prices of these products are as follows: The absolute price of a cup of coffee is R10, while the absolute price of shoes is R50 We also want to know what the relative prices of these products are A cup of coffee costs 5 times as much as a pair of shoes (R10x5 = R50), that is the relative price of coffee Thus when the law of demand states that the price of a particular product increases ceteris paribus (all other factors kept constant), it means that the absolute and relative price of a product has changed However, if ALL prices change in the same proportion, e.g. the prices of all products increase by 10%, this does not affect the relative price only the absolute price R50 R10

Let us add the increase of 10% to Sally’s products + 10% = 𝑅10 100 ×10+𝑅10=𝑹𝟏𝟏 R50 + 10% = 𝑅50 100 ×10+𝑅50=𝑹𝟓𝟓 Thus a pair of shoes still costs 5 times as much as coffee, but the absolute price of both coffee and shoes have changed 𝑅55 𝑅11 =5 When the prices of goods change in the same proportion, the allocation of resources in households and firms will remain unchanged However when the price of one good changes relative to another, the plans of market participants will tend to change, they may choose to allocate their resources differently following the price change

Study pg. 68- 74 in your textbook 4.3 Supply Mark farms with coffee beans. While Sally, the consumer demanded coffee, Mark, the producer, will supply coffee. Supply can be defined as the quantities of a good or service that producers plan to sell at each possible price during a certain period. Hence Mark has to decide how much coffee he will supply to his customers at each give price. Supply is a flow concept

What will determine the quantities of coffee Mark plans to sell? Individual Supply What will determine the quantities of coffee Mark plans to sell? Price of Coffee The higher the price of coffee, the larger the quantities of coffee that Mark will want to sell. Expected future prices Mark has to plan long in advance, hence Mark’s decisions will be based on what his expectations for the future are. If he expects the price of coffee to increase in the future, he will produce more coffee, so he may be ready to supply greater quantities when the price of coffee eventually increases. Prices of alternative products Mark’s decision to produce coffee will depend on the prices of alternative products. If the price of tea increases, he will choose to produce more tea instead of coffee. If the price of coffee increases or tea falls, he will produce more coffee and less tea. Price of factors of production&other inputs If the prices of one or more of Mark’s inputs to produce coffee increase (machinery, labour), Mark will supply less coffee. The state of technology New technologies, such as improved production techniques or machinery will allow Mark to supply more at each price

The supply function 𝑄 𝑠 =𝑓( 𝑃 𝑥 , 𝑃 𝑔 , 𝑃 𝑓 , 𝑃 𝑒 , 𝑇 𝑦 ) 𝑄 𝑠 =𝑓( 𝑃 𝑥 , 𝑃 𝑔 , 𝑃 𝑓 , 𝑃 𝑒 , 𝑇 𝑦 ) Where: 𝑄 𝑠 = Quantity of Coffee supplied 𝑃 𝑥 = Price of coffee 𝑃 𝑔 = Prices of alternative goods 𝑃 𝑓 = Price of factors of production and other inputs 𝑃 𝑒 = Expected future price of coffee 𝑇 𝑦 = Technology 𝑄 𝑠 is the dependent variable and is expressed as a function of five independent variables ( 𝑃 𝑥 , 𝑃 𝑔 , 𝑃 𝑓 , 𝑃 𝑒 , 𝑇 𝑦 )

Once again, we make the ceteris paribus assumption meaning that all other variables are assumed to be constant except the price of the product. Hence the quantity demanded becomes a function of the price 𝑄 𝑠 =𝑓( 𝑃 𝑥 )

Mark’s supply of coffee Mark’s supply of coffee clearly shows that as the price of coffee increases, Mark’s supply of coffee will increase. Mark’s supply can be presented graphically by putting the price of coffee on the y-axis and the quantity demanded on the x-axis. This will create a supply curve Price of coffee Quantities of coffee supplied R10 20 R20 40 R30 60 R40 80 R50 100

Quantities of coffee supplied Mark’s supply curve 𝑃 𝐶𝑜𝑓𝑓𝑒𝑒 Price of coffee Quantities of coffee supplied R10 20 R20 40 R30 60 R40 80 R50 100 Mark’s supply curve is upward sloping depicting the positive relationship between the price of coffee and the quantity supplied. 𝑄 𝐶𝑜𝑓𝑓𝑒𝑒

Market supply curve To move from the individual supply to the market supply, all suppliers are added together horizontally, just as we did with the market demand curve. The market supply curve shows the relationship between the price of the product and the quantities supplied. The market supply curve is the same as the individual supply curve with the exception that the total number of firms (N) in the market has to be taken into account, as well as other factors that could influence the supply of a product