DYNAMICS OF MARKETS
Markets are used as a mechanism to bring buyers and sellers togethers. For buyers to be able to
participate in the market, they need to have the MEANS to purchase the goods and services sold
in the market. For sellers to be able to participate in the market, they need to have OWNERSHIP.
Let’s looks at why buyers are willing to part with their money for goods and services:
Value, Price and Utility
VALUE- The value of a good or service will determine the maximum price that a consumer is
willing to pay for said good or service. The value that a good or service has to a consumer is
determined by the amount of satisfaction that a consumer receives from consuming it, this is
called UTILITARIAN VALUE. The value of a good or service differs from person to person, this
means that value is SUBJECTIVE.
PRICE- The price of a good or service is the amount of money that consumers pay for a good or
service. Value is the maximum amount that a consumer is willing to pay for a good or service and
price is the actual amount that a consumer pays for the good or service. Later in the topic, you
will see that the price of goods and services is determined by the interaction of buyers and sellers.
UTILITY
Firstly, we make two assumptions that:
1. Consumers are rational thinkers
2. Consumers always seek to maximize their satisfaction.
We know that consumers consume good and services because they gain satisfaction from them.
Utility is the economic term for the satisfaction that a consumer receives from consuming a good
or a service. Just like VALUE, UTILITY is subjective.
 TOTAL UTILITY
This is the total satisfaction that a consumer gains from all the units of goods and service
that they have consumed at a given period.
Cups of water
0
1
2
3
4
5
Total utility
0
20
32
38
38
34
 MARGINAL UTILITY
Is the additional satisfaction that the consumer gains from consuming one additional unit
of a goods and service at a given time.
Cups of water
0
1
2
3
4
5
Marginal utility
20
12
6
0
-4
Total utility
0
20
32
38
38
34
You will notice that marginal utility decreases as more cups of water are being consumed.
This is what is referred to as DIMINISHING MARGINAL UTILITY.
Now let us look back the at the two assumptions we made in the about consumers.
Consumers will make use of marginal utility to determine how much of a good or a service
they will buy, they will spend their money in a way that ensures that they maximise their
total utility. We did assume that consumers are rational thinkers, therefore consumers
will continue to continue to buy a good or a service until they reach a point where
marginal utility is equal to zero.
Composition of Markets
Let us look at what market are made of:
 Participants: there must be at least one person who wants the good or service and has
the means to make the purchase. There must also be at least one person who has the
good or service and wants to sell it. The buyers are the ones who determine the demand
in the market and the suppliers are the ones who determine supply. A market is formed
when buyers and sellers interact. The number of participants that are in the market
determine what type of market is in operation.
 Communication: the interaction between the participants can be either direct (face-toface) or it can be indirect (telephone, email, or internet).
 Commodities: the goods and services that are traded in the market are commodities.
 Location: markets can be located practically anywhere. Following are some examples of
markets. Markets can be spread worldwide, creating world markets such as the
international oil market. Markets can be physical like flea markets. Markets can be
created online, e.g. online shopping sites like Take-A-Lot.
Kinds of Markets
Markets take on different forms and in order to be able to classify them, we look at FOUR
important characteristics;
Characteristics of markets
a. Number of suppliers
Some markets have only one supplier of a good or a service, for example Eskom is the
sole supplier of electricity in South Africa. Other markets have many suppliers, for
example food stores.
b. Nature of products
Some goods and services offered in markets, are identical, homogenous. Others goods
and services are, different, heterogenous.
c. Barriers to entry
In some markets, the suppliers have the freedom to enter and exit the market freely,
whereas in some markets the suppliers face restrictions with entering the market.
d. Availability of information
You find that in some markets, the participants have full and complete information about
the market conditions, whereas in some markets, participants have incomplete
information about the market conditions.
Types of markets
Type of market
Number of
buyers and
sellers
Perfect market
Many
Unrestricted/
buyers and no barriers to
sellers
entry.
One
Restricted
Homogenous/
they are the
same
Unique
Few
Heterogenous/ Price setters Car
they are
dealerships,
different
cellphone
providers.
Similar
Price setters Restaurants,
products but
– to a lesser petrol
differ due to
degree than stations.
location or
the other
advertising
two
imperfect
markets
Imperfect
market MONOPOLY
Imperfect
market –
OILIGOPOLY
Freedom of
entry and
exit
Restricted
Imperfect
Many
Unrestricted
market buyers and
MONOPOLISTIC sellers
COMPETITION
Nature of
product
Ability of
suppliers to
influence
price
Price takers
Examples
JSE, market
for wheat,
carrots, etc.
Price setters Eskom
 In perfect markets, the participants have perfect knowledge about the market. consumers
have complete information about prices, costs & market opportunities whereas
consumers have complete information about prices, quality and availability of goods and
services.
 In imperfect markets, buyers and sellers have incomplete information about the market.
World Markets
As technology improves and advances, there has been a rise in global trade. In a world market, a
price in one part of the world affects the price in the rest of the world. Examples of these goods
are coffee, oil, gold and basic raw materials (like cotton). Markets are no longer limited to
particular areas and countries.
For a good or service to enter the market, it has to meet a FIVE point criteria:
 The good or service has to have a wide demand. Necessities such as wool, cotton and
wheat enjoy a worldwide demand.
 The good or service has to be mobile. This means that the good or service has to be easily
transportable. There are good that are easily transportable like, basic raw materials
whereas other are impossible to transport like houses and factories. With the
advancement of globalization, services like teaching and healthcare have become a lot
more mobile, for example there has been an increase in the number of South Africans
that go teach English in China.
 The good or service has to be DURABLE.
 The cost of transporting the good or service has to be smaller than the value of the good.
Heavy products that have low value do not qualify for the world market, e.g. bricks. What
about diamonds?
 The import and export of the good or service must not be restricted. It must have the
freedom to enter and exit countries without facing any restrictions from the government
such as import taxes and quotas.
The existence of world markets come with some advantages for the market participants;


Global markets help promote efficiency and the better use of resources through
competition.
Market participants have access to larger markets. This means that they have access to
more capital, technology, cheaper imports and larger export markets.
PRICES
Let us look into how prices are determined. We will be looking at demand, supply and price
formation.
1.1.
DEMAND
Consumers are responsible for the demand shifts of goods and services in the market.
1.1.1. Definition of demand
Demand is the quantity of a good or service that consumers are willing and able to buy in
a given period of time.
1.1.2. Factors determining demand






Consumer level of income
Price of the good or service
Consumer tastes and preferences
Price of related goods and services
Influence of fashion, the climate and advertising on consumers
Consumer expectations of future price changes
Since there are a lot of factors that determine the demand of consumers, we will only focus on
only two to keep things simple. The two factor are; prices of related goods & the actual price of
the good or service.
When we are thinking of the price of related goods and services, we have to speak about
SUBSTITUTE goods and COMPLEMENTARY goods.
A substitute good is one that can be used in place of another good to satisfy a need or want.
Examples of substitute goods include, tea & coffee, butter & margarine, Coke & Pepsi. There is a
positive relationship between price and the demand of substitute goods, when the price of one
good increases, the demand for the substitute good also increases. When we speak of
complementary goods we are speaking of goods that can be consumed together in order to
satisfy a need or a want. Examples of complementary goods include bread and butter, tea and
sugar, cars and petrol. There is negative relationship between demand and the price of goods
and their complementary items.
1.1.3. Demand Schedule
To show how demand works, a demand schedule is used. A demand schedule shows us
the quantity of a good or a service that a consumer demands at different prices at a
given time.
Price
Quantity Demanded
R10
16
R15
14
R20
12
R25
10
R30
8
Table 5.3 The Demand Schedule for the Khumalo Family for burgers per week.
As you can see, when there is a change in price there is also a change in the quantity
demand of burgers by the Khumalo family. What kind of change do you see? WHY DO
YOU THINK THIS IS THE CASE ?
1.1.4. The Law of Demand
The law of demand tells us that, when the price of a good increases, the quantity
demanded of that good, will decrease, all other things remaining constant. As shown by
table 5.3, as the price of burgers increases, the quantity of burgers demanded by the
Khumalo family decreases. This shows that demand has a negative relationship with
price, this will be later illustrated using a graph.
1.1.5. Demand Curve
A demand curve is used to graphically illustrate the relationship between the price of
the good and its relative quantity demanded. We will be using Table 5.3 to draw our
demand curve.
e
30
d
Price (Rands)
25
c
20
b
15
a
10
5
0 2 4
6
8
10
12
Quantity
14
16
18
1.2.
SUPPLY
Business are the ones who decide on the quantity and price of the good they want to
supply.
1.2.1. Definition of supply
Supply is the quantity of a good or service that producers or providers of goods and
service are able and willing to supply over a given period.
1.2.2. Factors determining supply





The price that consumers are willing to pay for good and services
The price consumers are willing to pay for alternative goods and services
The cost of producing the good
The level of technology that the supplier uses
The suppliers expectations about future prices or shortages.
1.2.3. Supply Schedule
The supply schedule is just a table that shows the quantity of goods that producers are
willing and able to supply at different prices over a given period of time.
Price
Quantity Supplied
R10
200
R15
400
R20
600
R25
800
R30
1000
Table 5.5: Supply schedule of a local producer of hamburgers (per week)
As you can see, as the price increases, the quantity supplied by producers/ sellers increases; what
does this tell you about the relationship between price and quantity supplied?
1.2.4. The Law of Supply
The law of supply states that the quantity of a good supplied over a given period, increases
as the price of the good increases and the opposite happens when the price. The law of
supply shows us that there is a DIRECT/ POSITIVE relationship between price and quantity
supplied because they move in the same direction. This will later be shown in a graph.
1.2.5. Changes in Quantity Supplied
A change in price is the only thing that can lead to a change in quantity supplied. A change
in quantity supplied would cause a movement along the same supply curve.
1.2.6. Changes in supply
A change in supply would be a result of a change in one of the factors that determine
supply. A change in supply will result in an upward or downward shift of the supply curve.
Decreases in market supply happen because of the following:





Increase in the cost of production
Decrease in the number of suppliers
Decrease in the price of alternative goods
Negative climate changes (e.g. floods, droughts)
Disruptions in production (e.g. power cuts, labour strikes)
The above will lead to the decrease of market supply which will lead to the supply curve shifting
downward.
Increases in market supply, happen because of the following:





Decrease in the cost of production
Increase in the number of suppliers
Increase in the price of alternative goods
Technological advances
Increases in labour productivity
The above will leave to an upward shift of the supply curve.
Price-formation
Prices are formed when the forces of demand and supply interact. The point where demand
and supply meet is, the point of market equilibrium, at this point quantity demanded and
quantity supplied are equal and the market price is set. Any price that is above the equilibrium
price will lead to market surplus, the forces of demand and supply will strive to reduce this
price until it reaches market equilibrium again. Any price that is below market equilibrium will
result in a market shortage , forces of demand and supply will strive to increase this price until
it reaches market equilibrium again.
S
D
PRICE (R )
P
S
D
Q
QUANTITY
Name
Surname
Grade:
Total:
Question 1
1. Circle the correct answer to each question.
… is the additional utility gained from the consumption of the last unit of a good or service at a
time.