1.1 Demand and supply

Economic and management sciences

Grade 7

Economic principles

Module 2

Demand and supply

What is meant by demand and supply?

Before motor cars appeared on our roads, people used to travel on horseback. Supposing everybody decides to start travelling by car, instead of on horseback. What will happen in everyday life?

• Does the government decide to build factories in Uitenhage and tell workers to relocate and work in the factories?
• Are horse-breeders told to scale down on horse-breeding?
• Does government decide that it would be better to start growing cotton for upholstering car-seats, and that less hay should be grown to feed the horses?

Of course government did nothing of the kind. Consumers bought more motor cars and fewer horses. What happens now?

• Due to higher profits in the motor car industry, more car factories are erected, and workers move to those areas to find jobs.
• The price of horses drop, and horse-breeders find other ways of making money.
• As less hay is needed for feeding the horses, the price of hay comes down and other crops have to be planted.
• At the same time the demand for raw materials such as steel, cotton and rubber increases, as it is needed for the manufacturing of cars. As the prices of these commodities also escalate, more businesses turn to manufacturing.

Eventually the demand for horses decreased by 90% in the previous century, while millions of cars were manufactured.

What was the reason for this revolution? It was caused by changes in buyers’ preferences and new technology resulting from the forces of demand and supply.

Similar changes constantly occur in the economic field, as buyers’ preferences change and new production methods are developed.

“Free” and “Economic” goods

Free goods

When goods exist in such large quantities, like e.g. seawater or air, we can use as much of it as we wish, without paying for it. In other words, it is freely available to all.

Economic goods

When something is scarce and there is a big demand, we have to pay for it. These goods are not always plentiful, and the less there is, the more we have to pay for it.

If everything that we need is plentiful, and the prices are low, we will all lead comfortable lives, and no-one will be worrying about the distribution of income among people. Everybody will be able to have as much as they want, of whatever they want. In such a society of prosperity, there will be no economic goods.

Activity 1:

To distinguish between wants and needs

[lo 1.1]

• What is the difference between wants and needs ?

• Write the following items in the appropriate column:

CD’s, bicycle, ski-vacation, swimming-pool, iPod, medical services,

cellphone, bread flour, clean air, purified water

Far too many flat-screen television sets

All of a sudden there is a surplus of high technology flat-screen lcd television sets. Or rather, there are far more of them in the shops than consumers want to buy. World market-leaders Samsung and LG Philips overestimated the demand for flat screens when they invested tens of millions of rands in new factories over the past few years.