SkillBuilder discussion Interpreting and analysing data 1. Study FIGURE2 . As a consumer, which price would you prefer to pay for bananas? 2. Explain what happens to demand as the price rises. 3. Can you provide another
FIGURE2 The demand line shows the law of demand for bananas, where the quantity demanded varies inversely with price.
The demand line for bananas
D 1 = Original quantity of bananas demanded each year (’000 kg)
Price per kg of bananas
5
Contraction (from B to A as price increases)
A
4
$1
5
3
$2
4
Expansion (from A to B as price decreases)
B
2
$3
3
1
$4
2
D 1
example that shows the same relationship between price and demand?
$5
1
0
2
3
4
5
6
1
Quantity of bananas demanded each year (’000 kg)
16.5.2 Supply The lawof supply simply states that the quantity of a particular good or service that sellers are prepared to sell (or supply) is dependent upon the price they will receive for their good or service, assuming other factors do not change. Hence:
• As the price increases, there is an increase in the quantity supplied. • As the price decreases, there is a reduction in the quantity supplied.
This relationship can be shown on a diagram known as a supply curve. This curve will show that as the price falls, the supply of a product will decrease as suppliers hope to gain a higher price for the product by making it scarce. The opposite will also be true as suppliers will want to supply as much of the product as possible at the highest price possible to maximise their proýts.
SkillBuilder discussion Interpreting and analysing data 1. Study FIGURE3 . As a producer, which price would you prefer to sell your bananas for? 2. Explain what happens to the supply of bananas as price rises. 3. Can you provide another
FIGURE3 The supply line shows the law of supply for bananas, where the quantity supplied varies directly with price.
Price per kg of bananas
S 1 = Original quantity of bananas supplied each year (’000 kg)
The supply line for bananas
5
Expansion (from A to B as price increases)
B
4
$1
1
3
$2
2
A
Contraction (from B to A as price decreases)
2
$3
3
$4
4
1
S 1
$5
5
example that shows the same relationship between price and supply?
0
1 2 Quantity of bananas supplied each year (’000 kg) 3 4 5
6
16.5.3 Equilibrium The laws of demand and supply are straightforward but it is important to remember that consumers and businesses don’t operate in isolation — consumers need businesses to supply goods and services for them to buy, and businesses need consumers to buy the products they supply. As both buyers and sellers want different things from the market, they often need to negotiate to come up with a price for a product that both consumers and suppliers are happy with. This is called the equilibrium price. In a diagram, it is the point where the demand curve and the supply curve intersect.
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