ELEMENTS OF DEMAND AND SUPPLY

Chapter 3 ECONOMICS: its concepts and principles By: BKG Gabay RM Remotin, Jr. EAM Uy Prepared by: GREGAR DONAVEN E. VALDEHUEZA, MBA Lourdes College Instructor

DEMAND
Refers

to the number or amount of goods and services desired by the consumers.

Quantity demanded
The

amount of goods and services consumers are willing and able to buy/purchase at a given price, place, and at a given period of time.

Determinants of Demand

Price of goods itself

As

the price of certain goods and services increases, the demand for these goods and services decreases or vice versa. change in income will cause a change in demand. Consumers tend to buy more goods and acquire more services when their income increases and vice versa. The direction in which the demand will shift in response to a change in income depends on the type of goods.

Consumers income
A

Normal goods refers to a good for which quantity demand at every price increases when income rises. Inferior goods refers to a good for which quantity demand falls when income rises.

Consumers expectation of future prices

The quantity of a good demanded within any period depends not only on prices in that period but also on prices expected in future periods. The quantity demanded of any particular good will be affected by changes in the prices of related goods.
Substitute goods are goods that can be used in place of other goods. Complementary goods are goods that go together.

Prices of related commodities/goods

Consumers tastes and preferences

An increase in the preference and taste for a certain good will certainly increase the demand for that particular good. An increase in the population means more demand for goods and services and vice versa.

Population

Demand Schedule
The

relationship between the quantity of a good demanded and the price of that good.

other factors that may affect the quantity demanded, such as prices of other goods, are held constant (ceteris paribus) in drawing up the demand schedule.

Example of a Demand Schedule

Price (Php 000) 1 2 3 4 5 Quantity Demanded 1000 800 600 400 200

Demand Curve
Shows

graphically the relationship between the quantity of a good demanded and its corresponding price, with other variables held constant.

The demand curve is typically downward-sloping

Example of a Demand Curve

Law of Demand
States

that as price increases, quantity demanded decreases; and as price decreases, quantity demanded increases, if other factors remain constant.

The law of demand is only true if the assumption of ceteris paribus is applied or other determinants remain constant.

Justification for the Law of Demand

Income effect
When

the price of goods decreases, the consumer can afford to buy more of it or vice versa.

Substitution effect
It

is expected that consumers tend to buy goods with a lower price.

Changes Involving Demand

Change in Quantity Demanded

Movement

along a demand curve which indicates movement from one point to another point of the same demand curve.

Due to a change in the price of goods and services.

Change in Demand
Shifting

from one demand curve to another demand curve.

Brought by the changes in all determinants of demand except price.

SUPPLY
Maximum

units/quantity of goods or services producers can offer.

Determinants of Supply

Change in technology
State

of the art technology that uses high-tech machines increases the quantity supply of goods which causes the reduction of cost of production.

Cost of inputs used

An

increase in the price of an input or the cost of production decreases the quantity supplied because the profitability of certain business decreases.
producers expect higher prices in the future commodities, the tendency is to keep their goods and release them when the price rises.

Expectation of future price

When

Change in the price of related goods

Changes

in the price of goods have a significant effect in the supply of such goods.

Government regulation and taxes

It

is expected that taxes imposed by the government increases cost of production which in turn discourages production because it reduces producers earnings.
or the financial aids/assistance given by the government reduces cost of production which encourages more supply. increase in the number of firms in the market leads to an increase in supply of goods and services.

Government subsidies
Subsidies

Number of firms in the market

An

Supply Schedule
The

relationship between the quantity of a good supplied and its price.

Other factors that may affect the quantity supplied, such as the prices of inputs and available production techniques, are held constant (ceteris paribus) in drawing up the supply schedule.

Example of a Supply Schedule

Price (Php 000) 1 Quantity Supplied 200

2
3 4 5

400
600 800 1000

Supply Curve
Shows

graphically the quantity of a good supplied at each price, with other factors that affect quantity supplied held constant.

The supply curve is typically upward-sloping

Example of a Supply Curve

Law of Supply
States

that as price increases, quantity supplied also increases; and as price decreases, quantity supplied also decreases if other factors remain constant.

The law of supply is only true if the assumption of ceteris paribus is applied or other determinants remain constant.

Changes Involving Supply

Change in Quantity Supplied

Movement

along the supply curve which shows the movement from one point to another point on the same supply curve.

Due to a change in the price of goods and services.

Change in Supply
Shifting

curve.

from one supply curve to another supply

Brought by the changes in all determinants of supply except price.

Determination of Market Equilibrium

Law of demand and supply stipulate that when demand is greater than supply, price increases; when supply is greater than demand, price decreases; and when demand is equal to supply, price remain constant. It is noted that there is contradiction between the two parties. The consumer dislikes high price while the producer likes high price. Law of demand infers that consumers are willing and able to buy/purchase goods and services at a lower price while law of supply infers that producers are willing and able to offer or sell more goods and services at higher price. This force in the market place creates equilibrium price and equilibrium quantity, or the market equilibrium.

Market Equilibrium
Is

a state which implies a balance between the opposing forces, a situation in which quantity demanded and quantity supplied are equal.
The market equilibrium is determined by the intersection of the demand and supply curves. In other words, the quantity that consumers will buy is equal to the amount or quantity the producers are able and willing to offer.

Demand and Supply Schedules

Points Price (Php 000) Quantity Demanded Quantity Supplied State of Market Pressure on Price

A
B C D E

1
2 3 4 5

1000
800 600 400 200

200
400 600 800 1000

Shortage (-800)
Shortage (-400) Equilibrium (0) Surplus (400) Surplus (800)

Upward
Upward Neutral/ Equal Downward Downward

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