2.5 The price factor

Economic and management sciences

Grade 7

The successful entrepreneur

Module 9

The price factor

The price of goods/services is determined by the manufacturers (sellers) and consumers (buyers). The price is influenced by the supply (the availability of a product/service) and demand (the number of people who want a product or service and are able to pay for it).

1. Demand

When clients want a product and are willing to pay for it, we say that there is a demand for the specific product. There has to be a demand for a product before a manufacturer can sell it. Demand does not only have to do with the need to have a product or a service, but also with the willingness and ability to buy it at the price changed for it.

ANDREW’S GRAPE JAM

Andrew and his mother decided to earn extra money by selling grape jam at the local craft market. Mrs Jeffries would buy the ingredients and make the jam. Andrew would help his mother to seal it in jars and they planned to sell it at the market on Saturday mornings.

Before starting to boil the jam, they decided to test the market to see whether people would be interested in buying their product. Mrs Jeffries therefore boiled a few jars of jam and asked their friends and family if they were interested in buying it and how much they would be willing to pay for it. Everyone was encouraged to taste some of the jam before making a decision.

Andrew entered the sales on a table as follows:

He also presented it in a graph to indicate the demand at different prices:

The line on the graph indicates the way in which the change in price brought about a change in demand. It is referred to as the demand curve. It specifies the amount of a product according to the demands for it at a specific price.

Activity 1:

To establish if someone is well-suited to become an entrepreneur

[lo 1.4]

Study Andrew’s graph carefully and answer the following questions:

• What was the effect of the price of the jam on the demand for the jam?

• Is this phenomenon true for all products?
• Are you able to think of any product where price does not affect the demand of the product?

NOBOBY WANTED TO BUY THE JAM AT MORE THAN R6,00 PER JAR.

2. Supply

Sellers provide the market with goods and services. The supply of something has to do with the quantity that is available for sale. The manufacturers or sellers who offer goods want to sell as much of it as possible at the best prices possible. They want to make as much profit as possible.

ANDREW’S GRAPE JAM (continued)

Andrew and his mother calculated that they were not able to make and store more than 100 jars of jam per week.

They would like to sell the jam at R6,00 per jar, but they know that everybody would not be willing to pay R6,00 for it. If they have to make the jam at R3,00 per jar, they are not willing to sell more than 25 jars at that price. They could store the rest and sell it at a better price, later.

Andrew drew up another table to indicate how many jars they were willing to sell at the specific prices:

The supply curve would then look like this:

3. Market price

Before goods or services can be bought or sold, both seller and buyer must agree on the price to be paid. Prices normally are determined by the manufacturers or sellers. The consumer can decide whether he or she is willing to buy it at that price, or not. At some markets buyers and sellers negotiate with one another until they reach a point at which both are satisfied with the price.

A combination of the supply and demand curves may illustrate this phenomenon best.

Remember:

• Sellers want to sell as much as possible at the highest prices.
• Buyers want to buy as much as possible at the highest prices.

They have to come to an agreement somewhere!

Supply and demand meet at the price where the amount of the demand is equal to the amount supplied.

Activity 2:

To make inferences about the interaction between buyer and seller

[lo 1.3]

1. Group discussion: Who benefits most when the price is higher than the market price and who benefits most when the price is lower than the market price?
2. Are you able to think of reasons why a product may cost less/more than the market price?

Assessment