05 Demand and Supply

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ECON 2 PRINCIPLES OF ECONOMICS 2

DEMAND AND SUPPLY


Lesson 5

In a market economy, the forces of demand and refers to the rates of purchases at alternative
supply play a very significant role in the determination of prices.
what goods to produce and at what prices they should be 5. Demand Schedule – a table that shows the quantity
sold. demanded of a good at given various prices. It
shows the quantity of the product demanded by a
The Market Mechanism consumer or an aggregate of consumers at any
given price
Market: is a mechanism through which buyers and sellers
interact in order to determine the price and quantity of a 6. Demand Curve – graphical illustration of a demand
good or a service schedule. Each point on the curve refers to a
specific quantity that will be demanded at a given
Price: is the value of a good in terms of money price.

In the market system, prices serve as signals to * The normal demand curve slopes downward from
both the producers and the consumers. If a consumer left to right. Any point on the demand curve
wants more of a good, this will cause the price of that reflects the quantity that will be bought at the
good to increase. Rising prices encourage producers to given price.
increase the supply of a good.
However, if a good is overstocked, suppliers of this 7. Law of Demand
good will lower their prices so they can dispose of their  Quantity demanded rises as price falls, other
excess supply. These low prices will attract consumers to things constant; quantity demanded falls as
buy the goods. price rises, other things constant. (Nebres,
2008)
DEMAND SCHEDULE AND DEMAND CURVE  When prices of products increase, the
tendency of consumers is to buy less of the
Demand Concepts product; and when prices of products decrease,
the normal tendency of consumers is to buy
1. Aggregate demand – the totality of a group of more of the product, ceteris paribus. (Azarcon,
consumer’s demand. et al. 2008)

2. Demand – refers to the behavior of people with 8. Shifts in Demand Curve – pertains to the graphic
regard to their willingness and ability to buy goods representation which shows the effect of anything
and services at given prices. It also refers to the on demand other than price, that is, the non-price
goods or services that a buyer is strongly willing determinants in demand. A change in quantity
and able to buy. It reflects the consumer’s desire demanded could generally mean a shift in the
for a commodity. entire demand curve either rightward or leftward.

3. Demand Function – shows how quantity demanded 9. Non-price determinants in demand:


is dependent on its determinants. It shows how the a. Income
quantity demanded of a particular good responds to b. Population (number of consumers)
price change. c. Tastes and preferences
d. Prices of related goods (substitutes and
QD = f (P, Y, PC, Ps) complements)
QD = quantity demanded e. Quality of goods
P = price of goods and services f. Advertising and Promotion
Y = income of consumers g. Consumers’ expectations of future prices
PC = price of related commodities h. Consumers’ expectations of future income
Ps = population size
Ceteris Paribus Assumption
4. Quantity Demanded – refers to the actual number
of goods and services a buyer or consumer is The functional relationship between price and
willing and able to buy at a certain price level. It quantity demanded is essential since these non-price
factors are assumed as constant. The Law of Demand

INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN LESSON 5 PAGE 1


ECON 2 PRINCIPLES OF ECONOMICS 2

now states, “Assuming other things constant, price and becomes lesser as price falls, other things
quantity demanded are inversely proportional.” constant. (Nebres, 2008)
Changes in Demand and Shifts in the Demand Curve  When prices of commodities tend to increase,
the quantity being supplied by producers also
If the ceteris paribus assumption is dropped, then tend to increase; while the opposite holds true,
changes in the non-price factors shall take place. This will such that when prices of commodities in
result in a change in the position or slope of the demand consideration tends to decrease, the
curve and a change in the entire demand schedule. corresponding quantities being supplied also
tend to decrease, ceteris paribus. (Azarcon, et
Change in Demand – refers to the increase or decrease al. 2008)
in the entire demand; is shown through a shift of the
entire demand curve. 8. Shifts in Supply Curve – pertains to the graphic
presentation of the quantity supplied which is
The following changes in the non-price factors may affected by anything other than price, that is, by the
cause the corresponding shift in the demand curve: non-price determinants in supply. A change in
quantity supplied could generally mean a shift in
Increase in income: shift to the right the entire supply curve either rightward or leftward.
Decrease in income: shift to the left
Greater taste/preference: shift to the right 9. Non-price determinants in supply:
Less taste/preference: shift to the left a. Competition (number of sellers)
Increase in population: shift to the right b. Technology
Decrease in population: shift to the left c. Cost of inputs
Greater speculation: shift to the right d. Producers’ expectations of future prices
Less speculation: shift to the left e. Legal provisions (tax laws, deregulation laws)
f. Other factors (natural phenomena;
SUPPLY SCHEDULE AND SUPPLY CURVE profitability of other goods that may be
produced)
Supply Concepts
Changes in Supply and Shifts of the Supply Curve
1. Aggregate supply – the totality of a group of
producer’s supply. The rightward shift of the supply curve is the effect
on an increase in supply caused by a change in the non-
2. Supply – refers to the behavior of suppliers (or price factor. In the same manner, a leftward shift of the
producers) on their willingness and ability to make supply curve will reflect the decrease in supply.
goods available at given prices. It also refers to the
goods and services that a seller is strongly willing Increase in the number of sellers: shift to the right
and able to sell. Decrease in the number of sellers: shift to the left
Decrease in the cost of production: shift to the right
3. Quantity supplied – refers to the actual number of Goals of the firm: it depends
goods and services a seller is willing and able to
sell at a certain price level. EQUILIBRIUM

4. Supply function – shows how quantity supplied is Market Equilibrium – prevails when economic forces
dependent on its determinants. balance so that economic variables neither increase nor
decrease.
5. Supply Schedule – a table that shows the quantity
supplied of a good at given various prices. Equilibrium Price – attained when buyers and sellers
agree on the same price. At this point, it is expected that
6. Supply Curve – graphical illustration of a supply the agreeable price for both buyers and sellers are the
schedule. Each point on the curve refers to a same.
specific quantity that will be supplied at a given
price. Equilibrium Quantity – the aggregate amount bought and
sold at the equilibrium price. It is attained when quantity
7. Law of Supply supplied is just equal to the quantity demanded.
 Quantity supplied becomes greater as price
rises, other things constant; quantity supplied

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ECON 2 PRINCIPLES OF ECONOMICS 2

Normally, the coefficient of price elasticity has a


negative sign because of the inverse relationship
ELASTICITIES OF DEMAND AND SUPPLY between price and quantity demanded.
Income Elasticity of Demand (eY) – it is the measure of
Elasticity (e) the responsiveness of demand to a change in consumer
 It is the measure of proportional responsiveness of income. It expresses the percentage change in demand
one variable with respect to changes in another compared to a percentage change in income.
 A study of the responsiveness of demand or supply
to price changes (Q 2−Q 1 )÷( Q 2+Q1 )
eY =
(Y 2−Y 1 )÷( Y 2+Y 1)
Terms of Degrees of Elasticity of Demand and Supply

1. Elastic Q2 – new quantity demanded


 Demand or supply may be described as elastic Q1 – original quantity demanded
when a change in a determinant leads to a Y2 – new income
proportionately greater change in the quantity Y1 – original income
of demand or supply
 More revenues or income can be obtained at The coefficient of income elasticity may have a
positive or negative sign. For normal goods, where
lower prices of goods
demand increases with an increase in volume, the value
 The computed e is numerically greater than
is positive. But in the case of inferior products, the
one (e>1)
demand decreases when income rises and the value is
negative.
2. Inelastic
 Demand or supply may be described as
Price Elasticity of Supply (e S) – it is the measure of the
inelastic when a change in a determinant leads relative responsiveness of quantity supplied to changes
to a proportionately lesser change in the in price.
quantity of demand or supply
 More revenues or income can be obtained at
higher prices of goods
(QS2−QS1 )÷(QS2 +QS 1 )
eS =
 The computed e is numerically less than one ( P2−P1 )÷( P2 + P1 )
(e<1)
QS2 – new quantity supplied
3. Unitary Elastic QS1 – original quantity supplied
 Demand or supply may be described as unitary P2 – new price
elastic when a change in a determinant leads P1 – original price
to a proportionately equal change in the
quantity of demand or supply Values of supply elasticity may also be greater than 1
 Revenues generated remain constant in spite (elastic supply), less than 1 (inelastic supply), or equal to
of the numerous price changes that occur in 1 (unitary elastic supply).
the economy
 The computed e is numerically equivalent to TERMS TO REMEMBER
one (e=1)
Equilibrium: condition of balance or equality
Price Elasticity of Demand (eP) – it is the measure of Market: a place where buyers and sellers interact
the responsiveness of demand to changes in the price of and engage in exchange
good. Movement along the curve: a change from one
point to another on the same curve
(Q2−Q1 )÷(Q 2+Q1 ) Nonprice factors: also known as parameters; are
eP = factors other than price that also affect demand or
(P2−P1 )÷( P 2+ P1 ) supply
Price ceiling: is the maximum limit at which the
Q2 – new quantity demanded price of a commodity is set
Q1 – original quantity demanded Price floor: a minimum limit beyond which the price
P2 – new price of a commodity is not allowed to fall.
P1 – original price

INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN LESSON 5 PAGE 3


ECON 2 PRINCIPLES OF ECONOMICS 2

Shift of the curve: a change in the entire curve


caused by a change in the entire demand or supply
schedule
Surplus: an excess of supply over the demand for a
good

INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN LESSON 5 PAGE 4

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