Introduction to Microeconomics

AQUILES RAMOS DEJALDE, LPT, PhD.

Associate Professor 1
Demand, Supply and Market Equilibrium
 Demand
 Refers to the number or amount of goods and services desired by the
consumers at various prices in a particular period of time.
o Quantity demanded
 The amount of goods and services consumers are willing and able to
buy/purchase at a given price, place, and period of time.
 Demand, therefore, implies 3 things:

 1. Desire to possess a thing (good or service)

 2. The ability to pay for it or means of purchasing it (price)
 3. Willingness in utilizing it.
 Law of Demand
 States that as price increases, quantity demanded decreases; and as
price decreases; quantity demanded increases, if other factors
remain constant (ceteris paribus).
Note: the law of demand deals with the functional relationships
between price and the quantity demanded.
 The word “law” refers to the regularity in all markets.
 Validity of the Law of Demand
 The law of demand is only true ceteris paribus.
 For example if the price of iPad decreases by 50% from its original
price, then the quantity demanded for such item increases.
 This is only true if other variables remain constant such as consumers’
income. Suppose that the income of the consumer deceases by around
75%, the quantity demanded for such product will fall even though the
price decreases because the consumer has less purchasing power by the
decline of income.
 Justification for the Law of Demand
1. Income Effect. When the price of goods decreases, the consumers
can afford to buy more of it or vice versa.
2. Substitution Effect. It is expected that consumers tend to buy
goods with a lower price. Hence, in case that the price of goods
that consumers buy increases, they look for substitute with a
lower price.
 Determinants of Demands
 Determinants of demand are those that actually influence the
quantity of demand. Aside from the price that influences the quantity
demanded, there are also other factors that should be given
consideration. These are referred to as non-price determinants.
 1. Consumers’ Income. A change in income will cause a change in
demand. The direction in which the demand will change in response
to a change in income depends on the following types of goods.
o Normal Good. Refers to a good for which demand at every price
increases when income rises or vice versa.
• Example would be goods that are considered as part of our
basic necessities such as rice, utilities (electricity
and water), medical and dental services.
o Inferior Good. Refers to a good for which demand falls when
income rises and vice versa. Public transportation is an example. As
an income of passengers increases, they tend to reduce their
consumption for the public utility vehicle, instead drive their own
car.
 2. 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.
 3. Prices of Related Products. The demand for any particular good
will be affected by changes in the prices of related goods. The
direction in which the demand will change in response to a change in
prices of related products depends on the following relationships of
products:
o a. Substitute Products. Are goods that can be used in place of other
goods. They are related in such a way that a increase in the price of
one good causes an increase in the demand for the other good or vice
versa.
o b. Complementary Products. Are goods that go together or cannot be
used without the other. They are related in such a way that an
increase in the price of one good will cause a decrease in the demand
for the other good.
 4. Consumers’ Tastes and Preferences. Consumers taste and
preferences are major factors in determining the demand for any
product. For example, Filipinos are becoming more health conscious
and as a result, the demand for herbal supplement has increased
substantially.
 5. Population. An increase in the population means more demand for
good and services.
Methods of Demand Analysis
1. Demand Schedule-shows the tabular representation of the relationship between the quantity of a good
demanded and the price of that good. Other factor mat may affect the quantity demanded such as the
price of other goods, are held constant.
Demand Schedule for Sports Utility Vehicle
Points Price (in Millions) Quantity Demanded
• Table shows the various prices and quantities for the demand for rice
per month. For instance, at a given price of P35 the buyer is willing to
purchase only 8 kilos of rice (situation A) however at price of P11, he is
willing to buy 45 kilos of rice (situation E)
• The price goes up (down) the quantity of rice being purchased by the
consumer goes down (up). This implies that quantity demanded is
inversely related with price. This means, consumers are not willing to
purchase more rice at higher price but will purchase more if price are
low.
• Given that there is no change in the amount of income of the buyer’s
they can only purchase limited number goods (kilos of rice). The
lower the price a good the more the buyer can buy. The higher the price
the lesser the number of that the buyer can buy because they are only
purchasing the amount of good that they limited income accommodates.
2. Demand Curve-graphical presentation showing the relationship
between price and quantities demanded per time period.
• The Y-axis represents the price (P) while the X-axis represents the
quantity demanded (QD). The demand curve is negatively sloped or
downward sloping. The (negative) slope measures the change in
quantity demanded for a unit change in price.
• Demand curve has negative slope thus it slope downward from left to
right. The downward slope indicates the inverse relationship between
the price and quantity demanded
• Demand curve slopes downwards because:

a. As the price of the product falls, consumers will have a savings

and this savings will be used to buy additional quantity.
b. As the price of the product falls, this serves to increase their real
income allowing them to buy more products.