Basic Analysis of

Demand and Supply

Market
• A market is where buyers or sellers meet. It is the place where
they both trade or exchange goods or services– in other words,
it is where their transactions take place.

• a group of buyers and sellers of a particular good or service

• Gas station, malls, palengke, Philippine Stock Exchange, online

markets, Roxas Night Market
Demand
• Pertains to the quantity of good or services that people
are ready to buy/purchase at given prices within a given
time period, when other factors besides price are held
constant (ceteris paribus)

• The quantity of a good or service that buyers are willing

to buy given its price
Demand
• Demand therefore implies three things:

1. Desire to possess a thing;

2. The ability to pay for it; and
3. Willingness to utilize it
Law of Demand
• states that, all other things being equal, the
quantity demanded falls when the price rises, and
the quantity demanded rises when the price falls.

P QD P QD
There is a negative or inverse relationship between price and
quantity demanded
A table that shows the relationship of
Demand prices and the specific quantities
Schedule demanded are each of these prices

A graphical representation showing the

Demand
relationship between price and
Curve quantities demanded per time period
Demand
Schedule

Demand
Curve
Demand Curve

The demand curve has a negative slope,

consistent with the law of demand.
© [Link] p. 8
Get the individual demand of person 3 and the market demand of the given
demand schedule.
Change in Quantity
Demanded vs. Change in
Demand
Change in Quantity Demanded
• a movement along the demand curve that shows a
change in the quantity of the product purchased in
response to a change in price.

There is only a change in

quantity demanded as a
response to change in
price but NO shift in the
demand curve.
Change in Demand
• A shift of the demand curve to the right ( an increased in
demand) or to the left ( a decreased in demand)
Change in quantity
Change in price of a demanded (movement
good or service leads to along a demand
curve).

Change in income, Change in demand

preferences, or prices of
other goods or services leads (shift of a demand
to curve).
Shift in the Demand Curve

This demand curve has shifted to the right. Quantity

demanded is now higher at any given price.
© [Link] p. 15
Factors that Shift the Demand
Curve
1. Taste or preference
2. Changing Incomes
3. Occasional or Seasonal Products
4. Population Changes
5. Substitute Goods
6. Expectations of Future Price
Taste and
It pertains
Taste to the personal likes and dislikes
or Preference
Preferences of consumers for certain goods and
services.

Increasing incomes of households raise the

Changing demand for certain goods or services and
incomes
vice versa.

Normal good- a good that people demand more of as their

income rises. Ex. Car, rice, new clothes
Inferior good- a good that people demand less of as their
income rises. Ex. Used clothing, second-hand products
The various events or seasons in given year also result to a
Occasional or
movement of the demand curve, with reference to a
Seasonal
particular goods. For example: Christmas Day, Valentines
Products
Day

Population More people simply mean that more goods

Change or services are to be demanded
Price of other Taste orarePreference
Substitutes- goods that can replace each other in
goods consumption. E.g. chicken and fish
(substitute or Complements are goods that are used in conjunction
complements)
with each other, for example DVD player and DVDs

If buyers expect the price of a good or service to

Expectations of
rise in the future, it may cause the current demand
Future Prices
to increase.
Validity of Law
• The law of demand if only true and correct if the
ceteris paribus assumption if followed. Ceteris
paribus means all other things equal. This means
that the factors of production are held constant or
unchanged in applying the law of demand.
Quiz Part I
For each of the following scenarios, determine if there is an increase
or a decrease in demand for the good in italics.

1. The price of oranges increases.

2. The cost of producing tires increases.
3. Samantha Brown, who is crazy about air travel, gets fired from her
job.
4. A local community has an unusually wet spring and a subsequent
problem with mosquitos, which can be deterred with citronella.
5. Many motorcycle enthusiasts enjoy riding helmets. The price of
new motorcycles rises.
Part II
All other things unchanged, what happens to
the demand curve for DVD rentals if there is
(a) an increase in the price of movie theater
tickets,
(b) a decrease in family income,
(c) an increase in the price of DVD rentals?
Part III
• Make up an example of a monthly demand
schedule for coke and graph the implied demand
curve. Give an example of something that would
shift this demand curve, and briefly explain your
reasoning. Would a change in the price of coke
shift this demand curve?
Supply
Supply
• The quantity of goods or services that firms/sellers are
ready and willing to sell at a given price within a period
of time, other factors being held constant.

• It is the quantity of goods and services that firm/seller is

willing to sell at a given time.
Law of Supply
• states that all other things being equal, the quantity
supplied of a good rises when the price of the good
rises, and falls when the price of the good falls.

P QS P QS
There is a positive or direct relationship between price and
quantity supplied.
Supply Schedule for Shirts
400
Quantity 350
Price
Supplied
300
100 3 dozens 250
200
150 5 dozens
150

250 8 dozens 100

0 1 2 3 4 5 6 7 8 9 10
400 10 dozens
Supply Curve

The supply curve has a positive slope, consistent with

the law of supply.
© [Link] p. 30
a table that shows the relationship
Supply between the price of a good and
Schedule the quantity supplied

a graph of the relationship between

Supply Curve the price of a good and the quantity
supplied
Supply
Supply Curve
Schedule
Graph the individual supply and market supply of the given supply
schedule (Focus on the price of $2.00)
Change in Quantity
Supplied vs. Change
in Supply
Change in Quantity Supplied
• The change in quantity supplied brought about by a
change in price.

Reminder!
Change in price cannot
cause a shift in the
supply curve.
Change in Supply
• When factors other than price cause supply curves to
shift either right or left.
Shift in the Supply Curve

For an given rental price, quantity supplied is now lower

than before.
© [Link] p. 38
Factors Affecting Supply Curve To
Shift
1. Cost of Inputs
2. Technology
3. Government Policy
4. Future Expectations
5. Number of Sellers
Cost of Production
• A change in the cost of inputs can cause a change in
supply. Supply might increase because of a decrease in
the cost of inputs, such as labor or packaging.

• for example, if a coffee shop is able to purchase coffee

beans at a significantly reduced price, it will want to
supply more coffee.
Technology
• New technology tends to shift the supply curve to the
right. The introduction of a new machine, chemical, or
industrial process can affect supply by lowering the cost
of production or by increasing productivity.

• For example, if a new espresso machine works twice as

fast as the old technology, Starbucks could serve its
customers more quickly, reduce long lines, and increase
the number of sales it makes.
Government Policy
• Removing quotas and tariffs on imported products also
affect supply. Lower trade restrictions and lower quotas or
tariffs, thereby adding more supply of goods in the market.

• In general, increased—or tighter—government regulations

restrict supply, causing the supply curve to shift to the left.
Relaxed regulations allow producers to lower the cost of
production, which results in a shift of the supply curve to
the right.
Future Expectations
• If sellers anticipate a rise in prices, they may choose to
hold back the current supply to take advantage of the
future increase in price, thus decreasing market supply.

• For example, if a firm expects the price of ice cream to

rise in the future, it will put some of its current
production into storage and supply less to the market
today.
Number of Sellers/ Firms
• The number of sellers has a direct impact on the supply.
Simply put, the more sellers there are in the market, the
greater the supply of goods and services.

• Example: during Christmas season, more tiangge

stores sell t-shirts and RTWs resulting to an increase in
the available supply of shirts and RTWs in the market.
Validity of Law
• The law of supply if only true and correct if the
ceteris paribus assumption if followed. Ceteris
paribus means all other things equal. This means
that the factors of production are held constant or
unchanged in applying the law of supply.
Quiz
1. A leftward shift in supply could be caused
by

a. An improvement in productive technology

b. A decrease in income
c. Some firms leaving the industry
d. A fall in the price of inputs to the industry
2. All of the following factors will affect the
supply of shoes EXCEPT one. Which will NOT
affect the supply of shoes?
a. Higher wages for shoe factory workers
b. Higher prices for leather
c. A technological improvement that reduces
waste of leather and other raw materials in
shoe production
d. An increase in consumer income
Part II
• If all other things are unchanged, what happens to the
supply curve for books if there is
(a)an increase in wages paid to bookstore clerks,
(b)an increase in the price of books, or
(c)an increase in the number of bookstores?
PART 1
5 points

1. Which of the following will cause the supply curve of chocolate ice
cream shift to the left?
a. A medical report finding that consuming chocolate prevents cancer
b. A decrease in the price of chocolate ice cream
c. An increase in the price of chocolate powder
d. An increase in the price of whipped cream, a complementary good
Part II
For each of the following scenarios, determine if
there is an increase or a decrease in supply for the
good in italics.
a. The price of TV increases.
b. Growers of tomatoes experience an unusually good growing
season.
c. New medical evidence reports that consumption of organic
products reduces the incidence of cancer.
d. The wages of low-skill workers, a resource used to help
produce clothing, increase.
e. The price of movie tickets, a substitute for video rentals,
goes up.
Part IV
Make up an example of a monthly supply schedule
for cellphone and graph the implied supply curve. Give
an example of something that would shift this supply
curve, and briefly explain your reasoning. Would a
change in the price of phone shift this supply curve?
Which of the following will increase the demand
for ice cream?
a. A decrease in the price of the butterfat used to
make ice cream
b. A decrease in the price of ice cream
c. An increase in the price of the milk used to
make ice cream
d. An increase in the price of frozen yogurt, a
substitute for ice cream
All the following shift the demand curve for
automobiles to the right except:

a. the local factory gives a big raise to its

employees.
b. a brand new automobile dealership opens in
town.
c. the price of gasoline falls.
c. None of the Above
Market Equilibrium
Market Equilibrium
• Equilibrium is the state of balance when the demand is
equal to supply.
• The equality means that the quantity that sellers are
willing to sell is also the quantity that buyers are willing
to buy for a price.
Market Equilibrium
• Equilibrium price is the price at which the quantity
supplied is equal to the quantity demanded. This
is also known as the market clearing price.

• Equilibrium quantity is the amount at which the

• quantity supplied is equal to the quantity
demanded.
Equilibrium

Equilibrium occurs at a price of $3 and a quantity of 30

units.
Market Disequilibrium
• SURPLUS- a condition in the market where the
quantity supplied is more than the quantity
demanded.

• SHORTAGE- a condition in the market in which

demand is higher than supply.
Surplus
Price of
notebook There is a surplus of a
Supply good when the quantity
35
supplied exceeds the
30
Surplus quantity demanded.
25 Surpluses occur when
20
the price is above its
E
equilibrium level.
15

10

5 Demand

0 2 4 8 10 14 18 22
Quantity of notebooks
(in million)
Quantity Quantit
demanded y
supplie
d
Shortage
Price of
notebook There is a shortage of a
good when the quantity
Supply
35 demanded exceeds the
30
quantity supplied.
Shortages occur when
25
the price is below its
20
equilibrium level.
15 E

10
Shortage
5 Demand

0 2 6 8 12 16 20 24
Quantity of notebooks in
million
Quantit Quantity
y demanded
supplied
Price Controls
• PRICE FLOOR- is the legal minimum price imposed by
the government. This is undertaker if a surplus in the
economy persist.

• PRICE CEILING- is the legal maximum price imposed

by the government. It is utilized by the government if
there is a persistent shortage of goods.
Price Floor

A price floor is set at 4 resulting in a surplus of 20

units.
Price Ceiling

A price ceiling is set at 2 resulting in a shortage of 20

units.
© [Link] p. 67
When the two phenomena
are combined, we can see
that quantity will certainly
rise, but that the change
in price is ambiguous. If the
demand shift is stronger than
the supply shift, the price will
rise. However, if the demand
shift is weaker than the
supply shift, the price will fall
The change in equilibrium
price is clear: it would
increase. But the change in
equilibrium quantity is
ambiguous and would
depend upon which shift,
demand or supply, is
stronger.
Part I
Using supply-and-demand diagrams, show the effect of
the following events on the market for sweatshirts.
a. A typhoon in Batanes damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate
attire.
d. New knitting machines are invented.
a. A hurricane in Batanes damages
the cotton crop.
The price of leather jackets falls.
All colleges require morning exercise
in appropriate attire.
New knitting machines are invented.
• On the appropriate diagram, show what happens to the market for
• pizza if the price of tomatoes rises. • On a separate diagram, show
what happens to
• the market for pizza if the price of hamburgers falls.
Go through these examples of events that would shift either the demand or
supply of #2 lead pencils:
1. an increase in the income of consumers
2. an increase in the use of standardized exams (using opscan forms)
3. a decrease in the price of graphite (used in the production of pencils)
4. a decrease in the price of ink pens
5. the start of a school year
6. new technology that lowers the cost of producing pencils.