The equilibrium point is where consumers and suppliers agree on a price and a quantity that will be traded. As a result there is no shortage of products and no surplus of products and both parties are satisýed. Using our banana example, the equilibrium price and quantity traded can be seen in FIGURE4 .
FIGURE4 A demand–supply (D–S) graph shows how the free operation of market forces determines the equilibrium price of bananas.
How demand and supply create equilibrium in the market for bananas
D 1 = Original quantity of bananas demanded each year (’000 kg)
S 1 = Original quantity of
At prices above Pe, there is a glut (i.e. S > D)
5
bananas supplied each year (’000 kg)
Price per kg of bananas
4
Pe
E (equilibrium)
3
$1
5
1
2
At prices below Pe there is a shortage (i.e. D > S)
$2
4
2 3
1
D 1
$3
3
S 1
$4
2
4
0
2
1
3
4
5
6
$5
1
5
Qe, D = S
Quantity of bananas demanded and supplied each year (’000 kg)
16.5.4 Changing conditions for demand and supply The concept of demand and supply is relatively simple — consumers and suppliers make their decisions based on the price of the good or service. However, on occasions, the conditions within the market change. This can affect the demand and/or supply of a product. Some of the factors that can impact demand are as follows: • Change in income : If a person receives a pay rise, their income will change. They may now be able to afford some goods and services they previously couldn’t afford. • Change in the price of a substitute product : Some products have substitutes, products we can buy as alternatives to a product, such as tea or coffee, butter or margarine. If the price of peaches falls, consumers may buy peaches instead of bananas if they consider these products substitutes. • The price of complementary goods : Some products are complementary — they go together. An example is petrol and cars — many cars can’t be used if there is no petrol. If the price of petrol rises, consumers may drive less or use public transport as they can’t afford to spend as much on petrol. Some of the factors that can impact supply are as follows. • Clime conditions : Some products, such as bananas, are dependent upon the weather. Poor growing conditions or extreme weather events such as þoods, drought or storms can damage crops and reduce supply. This can reduce the supply of a product. • Improved technology : Some producers use technology in their production process. If technology improves (such as AI), businesses may be able to produce greater quantities and/or at a cheaper price. This can increase the supply of a product. • The cost of resources becomes cheaper : Nearly all products require the use of other resources to ensure they are ready for sale. If the cost of those resources (ingredients, components, labour or capital) become cheaper, a business can increase its supply of their product. In these circumstances, the supply curve will ‘shift’, reþecting the changed conditions of supply.
564 Jacaranda Humanities Alive 7 Victorian Curriculum Third Edition
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