MARKET:

DEMAND & SUPPLY

MARKET

Any institution that brings together

buyers and sellers.

In understanding how price level is

determined and why price rises or
falls, it is important to know how
demand and supply function.
DEMAND
A. Demand is a schedule or a curve showing
to the various amount or quantity of a product
or service that a buyer is willing and able to
buy (or purchase) at various possible prices
during a specified period of time.

*willing to buy – means he really wants and

has the interest on the goods; while
*able to buy - means if he/she has the ability
to pay. So meaning merely wanting a good is
not a demand.
Law of Demand
states that “Ceteris Paribus, as Price (P) rises
(increases), Quantity demanded (Qd) falls
(decreases), vice versa”.

*Ceteris Paribus (all else equal; all other things held

constant)
*Price – the amount of money needed to buy a
particular good, service or resource.
*Quantity Demanded – the amount of a good or
service that buyer/s desire to purchase at a
particular price at any given period of time.
1. Common Sense - people would
Three (3) ordinarily do buy more of a product at a
low price than at high price.
Explanations of
Law of Demand:
2. Law of Diminishing Marginal Utility – as
Why there is an consumer increases the consumption of a
good or service, the marginal utility
inverse (additional satisfaction) obtained from each
relationship additional unit of the good or service
decreases.
between price
and quantity 3. Income Effect
demanded? and Substitution
Effect
DETERMINANTS OF DEMAND :
1. Taste of Preference – have direct relationship to demand. If one’s
taste is in favor of the product, the higher will be the demand for it.
2. Number of Buyers – has a direct relationship to demand. The more
number of buyers, the higher the demand.
3. Income
a. Normal goods – goods whose demand varies directly with money income. As
income rises, demand for normal good rises.
b. Inferior or Giffen goods – goods whose demand varies inversely with money
income. As income rises, demand for inferior goods falls, vice versa.
4. Price of Related Goods
a. Substitute good – is one that can be used in place of another good. When two products are
substitutes, the price of one and the demand for the other move in the same direction. Directly
proportional.
b. Complementary good – is the one that is used together with another good. When two products
are complements, the price of one good and the demand for the other good move in the opposite
direction.
c. Unrelated goods/independent goods – the vast majority of goods that are not related to one
another. A change in price of one does not affect the demand for the other.

5. Buyer’s Expectations to: Future Price, Future Income or Future Product Availability - has
a direct relationship to demand.
a. Future Price – expectation of higher prices may cause consumers to buy now in order to ‘beat’ the
anticipated price rises, thus increasing current demand.
b. Future Income – may prompt consumers to change their current spending.
c. Future Product Availability - a change in expectations relating to future product availability may
affect current demand.
III. DEMAND CAN BE REPRESENTED AS:

1. Schedule – as a tabular presentation, showing how much of a

commodity is demanded at different Prices
2. Curve
as a graphical presentation, by measuring price on the vertical axis and
quantity on the horizontal axis. Demand curve illustrate the inverse
relationship between the price of a product and the quantity of it
demanded, other things equal.
3. Function – as a algebraic function or
mathematical equation.
Qd = f(P)
Qd = a – bP

• *Qd - is dependent variable

• *a – intercept, the maximum quantity the market can absorb when a
product is free or has zero price.
• *b – is the slope or coefficient, negative change in quantity
demanded over the positive change in Price.
• *P – price of the good, independent variable.
SUPPLY
Supply is a schedule or curve showing the amounts of product that
producers are willing and able to make available for sale at various
possible prices during a specified period of time.
Law of Supply
“states that, “Ceteris Paribus, as Price rises (increases), Quantity
supplied rises (increases)”

*Quantity Supplied – the amount of a good or service that seller/s

desire to sell at a particular price at any given period of time.
DETERMINANTS OF SUPPLY

1. Resource Prices – price of resources used in the production process help determines the
cost of production incurred by firms. High resource prices discourage sellers hence there
will be a decrease in supply. It has an inverse relation to supply.
2. Technology – improvements in technology (techniques of production) enable firms to
produce units of output with fewer resources. An improved technology encourages
producers hence there will be an increase in supply.
3. Number of Suppliers/Sellers – has a direct relation with supply. The larger the number
of suppliers, the greater the market supply.
4. Taxes and Subsidies
a. Taxes – businesses treat most taxes as cost. An increase in sales or property taxes will increase
production costs and reduce supply. Has an inverse relation to supply.
b. Subsidies – if the government subsidizes the production of a good, it’s in effect lowers the
producer’s costs and increases supply.
5. Price of other goods or competing products – has an inverse relation
to supply. Firms that produce a particular product can sometimes use
their plant and equipment to produce alternative good. The higher the
prices of these other good may entice producers to switch production
to other goods in order to increase profits.
6. Price Expectations – changes in expectations about the future price
of a product may affect the producer’s willingness to supply that
product.
SUPPLY CAN BE REPRESENTED AS:
1. Schedule – as a tabular presentation, showing how much of a
commodity is supplied at different prices.
2. Curve
as a graphical presentation, by measuring price on the vertical axis and
quantity on the horizontal axis. Supply curve illustrate the direct
relationship between the price of a product and the quantity of it
supplied, other things equal.
3. Function
as a algebraic function or mathematical equation

Qs = f(P)
Qs = c + dP

* Qs – is a dependent variable
* c – is the intercept
* d – is the coefficient or slope, change in quantity supplied over the change
in Price
*P – price of the good, independent variable.
DETERMINATION OF MARKET EQUILIBRIUM:
Price Equilibrium and Quantity Equilibrium

The term equilibrium means that all forces in the market are ‘in
balance’ or ‘at rest’. Equilibrium (or market clearing) is attained where
Quantity demanded is equal to Quantity supplied: Qd = Qs.

Graphically, the intersection of the upsloping supply curve and the

down sloping demand curve for a product indicates the market
equilibrium – equilibrium price and equilibrium quantity.
Changes in Demand and Supply: Effects on
the Price and Quantity
A. Simple Case
Simple Case
Complex Cases
When both supply and demand change, the effect is a combination of
the individual effects. Simultaneous changes in demand and supply
affect equilibrium price and quantity in various ways, depending on
their direction and relative magnitudes.
1. DEMAND INCREASE, SUPPLY DECREASE
2. DEMAND INCREASE, SUPPLY INCREASE
3. DEMAND INCREASE, SUPPLY INCREASE
4. DEMAND DECREASE, SUPPLY DECREASE
SUMMARY: Effects on both changes in
Demand and Supply

CHANGE IN CHANGE IN SUPPLY EFFECT ON PRICE EFFECT ON

DEMAND EQUILIBRIUM QUANTITY
EQUILIBRIUM
1. Increase Decrease Increase Indeterminate
2. Decrease Increase Decrease Indeterminate
3. Increase Increase Indeterminate Increase
4. Decrease Decrease Indeterminate Decrease
APPLICATION: Government Set Prices
Government sometimes
concludes that supply and
demand will produce prices that
are unfairly high for buyers or
unfairly low for sellers. So
government may place legal
limits on how high or low a
price/s may go.
Price ceiling
Is a maximum legal price set by the
government. The rationale for
establishing price ceilings (or ceiling
prices) on specific products is that
they purportedly enable consumers
to obtain some “essential” good or
service that they could not afford at
the equilibrium price.
Price Floor
Is a minimum legal price set by
the government. Price floors
above equilibrium prices are
usually invoked when society
feels that the free functioning
of the market system has not
provided a sufficient income for
certain groups of resource
suppliers or producers.