2 Demand and Supply

DEMAND AND SUPPLY

ATTY. EARL LOUIE M. MASACAYAN, LL.M., DBA (CAND.)

DEMAND AND SUPPLY
• Price – is the value of a product or

service. It is expressed in terms of
monetary unit like a peso or a dollar. The
price system is very important in the
economy. It determines the allocation of
goods and services among the members
of society. This simply means that goods
and services are being acquired by the
people by paying them with their money.
DEMAND AND LAW OF DEMAND
• Demand – is the schedule of various
quantities of commodities which buyers are
willing and able to purchase at a given
price, time and place. Demand is
determined by factors such as:
• 1. Income
2. Population
3. Taste and Preferences
4. Price Expectations
5. Prices of related goods
• Law of Demand
As price increases, quantity demanded decreases, and as price decreases, quantity
demanded increases..
• Reasons:
1. Income Effect – at lower prices an individual has greater purchasing power. This
means he can buy more goods and services, but with higher prices they cannot.
2. Substitution Effect – consumers tend to buy goods at lower prices. When the
price of product they are buying increases, they look for substitute whose prices
are lower.
P
Relationship between price

and quantity demanded
QD
0 1 2 3
DIRECT RELATIONSHIP BETWEEN PRICE AND
QUANTITY DEMANDED (DEMAND SCHEDULE)
PRICE QUANTITY DEMANDED

1 5
2 4
3 3
4 2
5 1
VALIDITY OF THE LAW OF DEMAND
• Is the law of demand valid at all times?
• When is the law of demand valid?
• Such theory is only true if the assumption
of ceteris paribus is applied. It means “all
other things equal or constant”. The law of
demand is correct if the determinants of
demand are held constant; that is there
are no changes in income, taste or
population.
VALIDITY OF THE LAW OF DEMAND
• For example, if the price of iPad decreases
by 50% from the original price, then the
quantity demanded for such item increases.
This is only true if other variables remain
constant such as consumer’s income.
Suppose that the income of the consumer
decreased by 75%, the quantity demanded
for such product will fall even though the
price decreases because of less
purchasing power brought by the income
decline.
DETERMINANTS OF DEMAND
• These are those that actually influence the
quantity of demand.
• Price influences the quantity demanded is
as stated in the law of demand.
• However, there are other factors aside
from price that should be given
consideration and they are called non-
price determinants.
(NON-PRICE) DETERMINANTS OF
DEMAND
• Consumer’s income. – A change of income will
cause change of demand. The direction in
which the demand will change in response to a
change in income depends on the following
type of good:
1. Normal Good - the demand at every price
increases as the income increases
Examples: electricity, water, rice, medical
2. Inferior Good - demand falls as the income
increases
Example: transpiration (public vs. own car)
DEMAND
• Consumer’s Expectation of Future Prices
- When the there is a projected increase of price
of a good, the tendency is the buy more of the
that kind of good immediately (panic buying) to
maximize purchasing power of their money and
vice versa.
Example: price of gasoline. If there is an
expectation of an increase in the price of the
gasoline, there will be panic buying of gasoline.
However if there is a projected decrease, the
demand for gasoline decreases.
DEMAND
• Prices of Related Products – The demand will
change in response to a change in prices of
related products depends on the following
relationship of products:
1. Substitute products – goods that can be
used in place of other goods.
Example: Car conversion (LPG to gasoline)
2. Complementary products – goods that go
together or cannot be used without the
other.
Example: air fair and hotel
DEMAND
• Consumer’s Tastes and Preference –As
preference and taste affected by religion,
culture, traditions and age became inclined for
a certain product, demand will certainly
increase for that product and vice versa.
Example: Filipino’s became health conscious so
the demand for herbal supplements increased.
• Population – increase in population means

more demand for goods and services.
CHANGES IN DEMAND VS. CHANGES IN
QUANTITY DEMANDED
• Changes in Demand refer to changes in the
non-price determinants of demand like income,
population, price expectation and so forth.
• Changes in Quantity Demanded indicate the
movement from one point to another point (from
one price-quantity combination to another price-
quantity combination on a fixed demand curve).
This means the demand curve does not change
in position like that of the demand curve in the
changes in demand. This is brought by the
change in price.
Changes in quantity
demanded
2
PRICE
1 QD
2 UNITS
PRICE Changes in demand
D1 D D
2 3 Q
UNITS D
Supply and the Law of Supply
• Supply is the schedule of various quantities of commodities which producers are
willing and able to produce and offer at a given price.
• Determinants of Supply:
1. Technology 6. Taxes and subsidies
2. Cost of production
3. Number of sellers
4. Price expectations
5. Prices of other goods
Supply and the Law of Supply
• Law of Supply:
As price increases, quantity supply increases and as price decreases, quantity supply
also decreases.
• There is a direct relationship between price and quantity supplied. Producers and
sellers are willing and able to produce and offer more goods at a higher price than at
a lower price. When price is high, both sellers and producers can make more profits
VALIDITY OF THE LAW OF SUPPLY
• The law of supply is correct if we apply the

assumption of ceteris paribus. This means the
law of supply is valid if the determinants of
supply remain constant.
• Illustration: A B C
a) Market price – 23 23 28
Production Cost – 13 21 23
Profit – 10 2 5
Relationship between price
PRICE
and quantity supply
s
2
1
1 2 3
Q UNITS
DIRECT RELATIONSHIP BETWEEN PRICE
AND QUANTITY SUPPLIED (SUPPLY
SCHEDULE)
Price Quantity Supplied
1 1
2 2
3 3
4 4
5 5
DETERMINANTS OF SUPPLY
• Change in Technology - State-of-the-art
technology that uses high-tech machines
increases the quantity supply of goods and
services which causes the reduction of
production cost.
Example: Mass production is not possible
without specialized machinery to produce high
volumes of standardized products such as cars,
consumer products, and computers.
• Cost of Inputs Used - An increase in the price
of an input or the cost of production decreases
the quantity of supply because the profitability
of a certain business decreases.
Example: Competitive prices of Chinese
products can be attributed to a very low labor
cost. A Chinese worker is willing to accept
wage rate of only one dollar per day.
• Expectation of Future Price – When producers
expect higher prices in the future commodities,
the tendency is to keep their goods and release
them when the prices rises. Inversely, supply
for such goods decreases if the producers
expect prices to decline in the future.
Example: During natural calamities such as
strong typhoons, we experience an immediate
increase in the prices of basic commodities
such as rice due to unscrupulous traders who
hold the supply of rice anticipating that event.
• Prices of Related Products – Changes in the
price of goods have significant effect in the
supply of such goods.
Example: An increase in the price of pork
may likely encourage poultry raisers to shift into
hog farming if this gives them more profit.
• 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.
Example: Board or Bar examinations are
required for medical doctors and engineers,
lawyers and other professionals to practice their
respective fields. No doubt, this reduces the
supply of professional services in the
Philippines.
• Government Subsidies – These reduces the
cost of production which encourage more
supply like in Japan that agricultural is
subsidized that increases the supply of
agricultural commodities in that country.
• Number of Firms or Sellers in the Market – An

increase of number of firms in the market leads
to an increase in supply of goods and services.
Example: more imported car dealers, more
supply of imported cars like Ford and Toyota.
CHANGES IN SUPPLY VS. CHANGES
IN QUANTITY SUPPLY
• Changes in supply pertain to changes in the
determinants of supply. An increase in supply
shifts the supply curve to the right while a
decrease in supply shifts the supply curve to the
left.
• Changes in quantity supplied show the
movements from one point to another point on a
constant supply curve. Change in the quantity
supplied is brought about by the change in price
S S
PRICE
1 2
S
3
Changes in supply
Q
S
UNITS
S
PRICE
2
Changes in
1 quantity supplied
1 2 Q
S
UNITS
THE LAW OF SUPPLY AND DEMAND
(AND THE CONCEPT OF EQUILIBRIUM PRICE)
• When supply is greater than demand, price

decreases. When demand is greater than
supply, price increases. When supply is equal
to demand, price remains constant.
• This is the market price or equilibrium price. It
means both sellers and buyers have mutual
agreement. That is, producers are able and
willing to offer the same quantity of goods
which buyers are willing and able to purchase it
at a given price.
DETERMINATION OF MARKET EQUILIBRIUM
• Demand and Supply Schedule
Price Quantity Demanded Supply Demanded

1 5 1
2 4 2
3 3 3
4 2 4
5 1 5
• The Equilibrium Prize is 3
• Demand and Supply Curve
equilibrium
3
PRICE
1 2 3 UNITS
The Equilibrium Prize is 3
• Market Equilibrium (Mathematical Approach)

INTERFERENCE IN THE MARKET
(PRICE CONTROL)
• Price Ceilings and Price Floors
1.Price Ceiling – maximum price a good and
service is bought or sold.
• Example: Republic Act 9653 – No price
rental increase is allowed within one year
and only 7% increase is allowed after a
year.
2.Price Floor – minimum price imposed by the
government.
• Minimum wage law
SHORTAGES AND SURPLUS
AS RESULT OF PRICE CONTROL
1. Shortages are likely to occur if government

tries to restrict firms in charging higher prices
through price ceilings. When the maximum
price that can be imposed remains below the
equilibrium price in the market, there will be
lingering shortage; sellers will be reluctant to
supply as much as buyers would want or
purchase.
SHORTAGES AND SURPLUS
AS RESULT OF PRICE CONTROL
2. On the other hand, if the government will

impose price floors, surplus will be created in
the market. When the price is above
equilibrium, producers will be willing to supply
more goods and services than what buyers are
willing to purchase. In a market for agricultural
commodities, the government buys the surplus
output of farmers; but buying the commodities
above equilibrium price result to higher costs
on the part of the consumers.
surplus
PRICE
equilibrium
3
1
shortage
1 2 3 UNITS

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DEMAND AND SUPPLY

ATTY. EARL LOUIE M. MASACAYAN, LL.M., DBA (CAND.)

• Price – is the value of a product or

Relationship between price

PRICE QUANTITY DEMANDED

• Population – increase in population means

• The law of supply is correct if we apply the

• Number of Firms or Sellers in the Market – An

• When supply is greater than demand, price

Price Quantity Demanded Supply Demanded

• Market Equilibrium (Mathematical Approach)

1. Shortages are likely to occur if government

2. On the other hand, if the government will

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