Demand and Supply - Business Studies Form 3 Notes

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  • Quantity of a commodity that buyers are willing and are able to buy at a given price over a given period of time.

Factors that Influence the Demand of a Product/Determinant of Demand

  1. Price of the commodity
    - When the price of a product increases its demand decreases and when the price decreases its demand increases.
  2. Level of consumer income
    - An increase in consumers disposable income generally leads to an increase in the demand for goods and services because the ability to buy increases.
  3. Price of other related products
    - Commodities are related in two ways. That is as either complimentary or as a substitute.
    - Complementary are goods used together while substitutes can be used instead of each other. Hence the demand for a commodity can be affected by the prices of other commodities depending on the relationship. Reduction of price of a substitute will reduce the demand of the substituted goods while increase in price of the complimentary goods will reduce the demand for the goods.
  4. Changes in taste, fashion and preference of consumers
    - If taste change in favor of commodity, more of that commodity is likely to be bought even if it‟s expensive
  5. Government policy
    - The government may come up with policies that are meant to encourages or discourage the consumption of certain commodities.
    - This policies may be inform of:
    • Taxation
      - An increase in tax on commodity increases its price which makes its demand to fall and vice versa.
    • Subsidies
      - The government meets part of a cost or production of a commodity so that it can be sold cheaply. Hence the demand rises
    • Legislation
      - The government may pass laws meant to encourage or discourage consumption of a certain commodities.
    • Price controls
      - The government may control the price of certain commodities to ensure that they do not go beyond a certain limit.
  6. Change in the population
    - An increase in population will bring about an increase in demand for goods and services.
    - While a decrease in population will reduce demand.
  7. Future expectations of changes in price and quantities supplied
    - If the consumers expect prices of commodity to rise or shortage of the supply of the commodities in future they will buy more of it. while if they anticipate a decline in price of a commodity, they may buy less of it when the price is still high.
  8. Seasonal changes
    - Demand for some commodities depends on the season.
  9. The distribution of incomes
    - The demands for goods and services is usually higher when incomes are distributed among many people as opposed to where incomes are in the hands of a few people.
  10. Terms of sale
    - The demands for goods or services can increase if and when favorable terms of sale are offered to consumers. The terms may be offering goods on credit, giving discounts to consumers and lengthening the credit period.

Derived Demand

  • Derived demand is where a good is needed because it give rise to a commodity that is actually demanded e.g. hen and eggs

Joint Demand

  • These are goods that are consumed together .E.g. tea and sugar

Demand Schedule

  • It is a table showing the quantities of a commodities that consumers are willing and are able to buy at different prices within a given period of time.

Demand Curve

  • A graph showing the quantities demanded against the prices. On the y axis is recorded the price and on the x axis the quantities demanded.
  • The tendency of the demand to increase as prices decrease and to reduce as prices increase is referred to as the law of demand. By obeying the law of demand, the demand curve slopes downwards from left to right.

demand curve

Movement along the Demand Curve

  • The quantities demanded increase with decreases in prices while the demand decreases with the increase in prices.
    movement along demand curve
  • From the above diagram it can be observed that:
    • The initial price was and the quantity demanded was .The price/quantity combination is at point a.
    • When prices increased to P2, The quantity demanded reduced to Q2, leading to a movement along the demand curve from point a to point c.
    • When the price reduced to P1, the quantity demanded increased to Q1, Resulting to a movement along the demand curve from point a and point b.

Shift in Demand Curve

  • Shift in demand curve is caused by other factors except price. An increase in demand would be indicated by a shift of the demand curve to the right as shown below.
    Increase in demand curve
  • The original demand curve D0D0 has shifted to D1D1. Note that the quantities demanded have increased even though the prices have remained unchanged.
  • On the other hand, reduction in demand may be indicated by a shift of the demand curve D0D0 has shifted to D1D1 as shown below.
    decrease in demand curve


  • The quantity of a commodity that sellers are willing and able to bring to the market at a particular price over a given period of time.

Factors Which Influence Supply of a Product.

  1. Price of the product
    - Producers will supply more goods to the market when the prices are high while if the prices go down ,less of the commodity will be supplied in the market.
  2. Law of supply
    - Increase in supply increases with the increase in price and reduce with the reduction in prices.
  3. Cost of production
    - An increase in the cost of factors of production or of inputs such as raw materials and labor will lead to an increase in total production costs, The prices of the commodity will go up making the demand to fall hence producers will reduce their supply to avoid excess supply in the market.
  4. Availability of factors of production
    - The amount of commodity supplied to the market will depend on availability of factors of production and inputs such as raw materials. The lower the factors of production the lower the supply of the commodities
  5. Government policies
    - Government policies such as taxes, subsidies, quotas and price controls affect supply.
  6. Future expectations of changes in price
    - The supply will reduce when producers expect prices to rise as they will hoard the goods and sell them when the prices are higher reducing the supplies at the current time.
  7. Natural factors
    - These can affect the quantity of the commodity supplied favorably or in case of agricultural products, weather, diseases and pests may affect the quantity supplied either negatively or positively.
  8. Time
    - It takes time for supply to adjust to market changes. For example in agriculture, one has to wait for the crops to grow.

Supply Schedule

  • A supply schedule shows, in a tabular form, the quantity of a commodity that the producers are willing and able to bring about to the market at different prices over a given period of time.

Supply Curve

  • A supply curve is a graph showing the relationship between the price of a commodity and the quantity of the commodity supplied.

Movement Along the Supply Curve

  • A normal supply curves slopes upwards from left to right. Therefore the quantities supplied increases with the increase in prices and decreases with decrease in prices of the commodity.
    movement along the supply curve
  • Quantity supplied at price P1 is Q1.If the price increase from P1 to P2 the quantity supplied also increases from Q1 to Q2 . The price /quantity combination therefore moves along the supply curve from point Y to Z.
  • On the other hand, if price reduces from P1 to P3 the quantity supplied also reduces from Q1 to Q3 .The price/quantity combination moves along the supply curve from point Y to point X.

Shift in Supply Curves

  • Apart from the price of the commodity, a change in any other factor that influences supply of the commodity will lead to a completely new supply curve. Thus an increase in supply will result into a shift of the supply curve to the right as shown below.
    Increase in supply curve
  • In the above diagram, an increase in supply resulted to a shift of supply curve from S1S1 to S2S2.
  • A reduction in supply will be indicated by a shift in supply curve to the left as shown below.
    decrease in supply curve
  • From the above graph, it can be noted that a decrease in supply resulted into a shift in supply curve from S1Sto S3S3.

Equilibrium Price and Quantity

  • The price which equates the quantity demanded to quantity supplied is the equilibrium price. The corresponding quantity is known as equilibrium quantity
    equilibrium price and quantity
  • Equilibrium as used in price determination shows that:
    • The buyers and sellers are both satisfied with the prices and quantity.
    • Setting any prices or quantity other than the equilibrium, results in market instability.
    • If the factors determining demand and supply do not change, the equilibrium price will prevail in the market.
  • Below figure shows movements of price towards the equilibrium
    movement of price towards equilibrium
  • Note from the above diagram:
    • If the price is set at P1 which is above the equilibrium price, there would be excess supply in the market. In order to clear this excess supply, sellers will be compelled to lower their prices towards the equilibrium.
    • If the prices is set at P2 which is below the equilibrium price, there would be excess demand. The buyers will then be forced to increase their prices towards the equilibrium price in order to attract more supply.

Excess Demand

  • Excess demand refers to the quantities demanded by customers over the quantities that the suppliers are able to supply in the market.

Excess Supply

  • Refers to the quantities supplied over the quantities that customers are able to buy.

Effects on Shift in Demand Curve and Supply Curve on the Equilibrium.

Change in Demand Curve.

  • Where the demand curve slopes downwards to the right and supply curve upwards to the right an increase in demand will result into an increase in equilibrium price and also the equilibrium quantity.
  • This is because an increase in demand will attract higher prices and the high prices will attract more supply.

Increase in Demand

increase in demand curve equilibrium

  • From the above diagram, demand increased from D1D1 to D2D2 with the effect that the equilibrium price and quantity changed from P1 to P2 and Q1 to Q2 respectively. This change moved the equilibrium point from E1 to E2.
  • A decrease in demand will result into a decrease in the equilibrium price and also the equilibrium quantity.

decrease in demand on equilibrium

  • From the figure above, a reduction in demand from D3D3 to D4D4 changed the equilibrium price and quantity from P3 to P4 and Q3 to Q4 respectively. The point of equilibrium hence shifted from E3 to E4.

Change in Supply

  • In a normal situation in which the demand curve slopes downwards from left to the right and the supply curve upwards from left to right ,an increase in supply will bring about a drop in equilibrium price and an increase in equilibrium quantity.
    increase in supply equilibrium
  • This is because with the increase in goods supplied, the suppliers will be compelled to lower their prices so that they can sell the surplus. At the reduced prices the quantities demanded will be higher.
  • A decrease in supply will result in an increase in equilibrium price and a decrease in equilibrium quantity as shown below.
    decrease in supply equlibrium

Other Methods of Price Determination

  1. Haggling /bargaining
    - Buyer and seller negotiate over the price. This process continuous until the two agree on the prices.
  2. Tendering
    - Public is invited to make bids for the supply or sale of a particular product. The person who offers the most reasonable / lowest price usually wins the tender.
  3. Government intervention
    - Government may impose tax or offer subsidies thus determine price. Government may also set a price level at which a product may be sold.
  4. Recommending or fixing by a producer
    - Producer may determine the prices of their products and recommend or even require that they be sold at those prices.
  5. Auction
    - This is a situation where the prices of the commodity is set through bidding ,buyers are given an opportunity to suggest the price one after the other and the one that sugest the highest price called the highest bidder buys the commodity.

Past KCSE Questions on the Topic

Paper 1

  1. Indicate by writing a demand or supply whether each of the following factors influence demand or supply of a commodity. (5mks)
    1. Changes in the prices of inputs
    2. Change in tastes and preferences.
    3. Changes in technology
    4. Changes in outcomes
    5. Changes on the price of other related products.
  2. State the law relating to each of the following.
    1. Demand
    2. Supply
    3. Demand and supply
  3. In each of the following cases, indicate whether the supply will increase, decrease or remain constant.
    1. If the demand for coffee rises, the supply of tea is likely to
    2. If the prices of cars fall, the supply of petrol as likely to
    3. if the demand for beef increases the supply of wool is likely to
  4. State four factors that may cause an increase in the supply of a product. (4mks)
  5. Outline four factors that may cause a decrease in the quantity demand for a product. (4mk)
  6. Draw a demand curve based on the demand schedule below
     Price (Sh)   Quantity Demanded
     5  100
     10  50
     20  25
     25  5
  7. The following diagrams represent demand and supply of a product. (5mks)
    demand and supply q7
    1. State what is represented by curves
      1. ap _____________________________
      2. bq _____________________________
      3. letter c _______________________
    2. On the diagram, indicate equilibrium price (PE) and equilibrium quantity (QE)
  8. State four factors that may lead to an increase in market supply of a product. (4mks)
  9. The diagram below shows a shift in demand curve from d0d0 to d1d1.
    demand and supply q9
    Identify four factors that have made the demand curve to shift from d0d0 to d1d1
  10. The table below illustrates the demand and supply of commodity.
     Price  Quantity Demanded (Kg per month)  Quantity (Kg per month)
     15.00  80  20
     20.00  70  30
     25.00  60  40
     30.00  50  50
     35.00  40  60
     40.00  30  70

    From the table above, state
    1. The nature of the demand for the commodity
    2. The nature of the supply of the commodity
    3. The equilibrium price
    4. The equilibrium quantity.

Paper 2

  1. Outline four ways in which the price of goods and services can be determined in the market other than through the forces of demand and supply curve.
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