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SACRED HEART SCHOOL – ATENEO de CEBU

H. Abellana St., Canduman, Mandaue City

GRADE 9 &10: ECONOMICS

NOTES ON
ANALYSIS OF DEMAND& SUPPLY
I. Introduction
What is a market?

 A market exists wherever and whenever an exchange takes place.

 A market can be at any set of points between the buyers and the sellers need
not be a definite geographic area. An example is the demand for college
professors which is not ordinarily found in any designated place or area.
 There are generally two types of markets: a goods market and a factors market.
In a goods market (also called products market), finished products are bought
and sold. In contrast, a factors market (also called resource market) is where
the inputs to production such as land, labor and capital are bought and sold.

How are prices determined in the market?

 Price is the monetary value per physical unit of a product. Examples are Php
45.00/kg or Php 169.00/m.
 The interaction of buyers and sellers, as reflected in their demand and supply
respectively, determines market outcomes. Thus, both sides of the market, the
buyers and the sellers together, determine how many goods are sold and at
what price. Before we can analyze how the market works, we must firs have a
good understanding of its foundations –demand and supply.
 In the past, attempts were made to determine the price of the commodities. Let
us examine the following traditional theories:
A. Labor theory of value. (Cost of Production theory) This was applied in
the traditional economy where barter system was used. To exchange the
product, the bases were the time spent in producing and its difficulty to
produce. The more time it takes to produce a certain product in the past,
the higher is its value to exchange the commodity.
B. Utility theory – The basis for pricing the commodity is the degree of
satisfaction derived as the buyer uses the product. The more satisfaction
derived from the product, the higher is its value.

Utility- refers to the usefulness of the goods.

Utils – are the hypothetical measure of satisfaction.
Cardinal utility theorists – are theorists who believe that the degree of
satisfaction though relative can be measured by assigning utils.
Therefore, the higher the utils (numbers) assigned to the product as you
use them, the greater the degrees of satisfaction derived.
Ordinal utility theorists – do not believe that the degree of satisfaction can
be measured but rather can be ranked. Examples are first, second and
third priority.

Law of Marginal Utility

It states that as more and more of the same product is consumed, the total
satisfaction or TOTAL UTILITY (TU) increases at a diminishing rate and decreases after
reaching the saturation point. Such behavior of the TU curve can be explained by the
Marginal Utility (MU) that diminishes as you continue to consume more and more of
the same product in a given period of time. MU refers to the additional degree of
satisfaction derived as more and more of the same product is consumed over a definite
period of time.

Let us examine the graphed data:

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Number of Serving Utils /Serving Total Utility

1st 10 10
2nd 6 16
3rd 4 20
4th 2 22
5th 1 23
Graph on on
Graph Marginal Utility
Total Utility

25
12
10
Total UtilityUtility

20
8
156
Marginal

4
10
2

50
1 2 3 4 5
0
Number of Servings
1 2 3 4 5

Number of Servings

The two graphs explain the behavior of the curve in relation to the behavior of
the MU curve as stated in the Law of Marginal Utility.

An example of this is when we eat chocolate cake by piece, as if we can finish

the entire cake. As we continue to finish a cut, we still would like to eat more.
Though we are satisfied, the additional satisfaction diminishes until we reach the
point of satiation when we can no longer finish it or would not want even a bite of the
cake. This is true with any product that you consume over a given period of time.

Demand

Demand in economics does not simply mean wanting or needing something.

Demand refers to the willingness and ability of the buyers to purchase a specific good
at different possible prices over a definite place and time.

Law of Demand

There is an inverse relationship between price and quantity demanded. It

means that buyers are willing and able to buy more quantities of a given product if the
price is low; while less quantities are demanded if the price is high. Therefore, the
higher the price, the lesser the quantity demanded and the lower the price, the greater
the quantity demanded, ceteris paribus. (Ceteris paribus, the assumption that
nothing else changes, as used here means that the other factors that may affect
demand such as income and tastes are held constant such that quantity demanded
responds purely t changes in price.)

The law of demand is clearly portrayed in a demand schedule. Let us examine

the following demand schedule or curve.
Demand Schedule or Demand Curve
The demand schedule is a schedule of various quantities of a given product that
the buyers are willing and able to buy at different possible prices over a given place
and time (if all else are held constant).
It does not say what the price is, it only shows what amounts (QD or Quantity
Demanded) could be bought at different possible prices (if all else are held constant).
DEMAND SCHEDULE FOR RICE
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Price per Kg Quantity Demanded (QD) per Kg

Php 30.00 1

Php 25.00 2

Php 20.00 3

Php 18.00 5

Php 16.00 7

Php 15.00 8

Based on the above schedule, as the price of rice per kilogram increases the
amount of rice that buyers are willing and able to buy decreases like from the price of
Php 20.00/kg. QD is 3 kg. Then if it is Php 30.00/kg., 1 kg. of rice is the amount the
buyer is willing and able to buy. As the price increases, the greater the quantity
demanded as shown in the above example.

Demand Curve / Demand Schedule

Legend: P = Price QD= Quantity Demanded
Demand Curve or Demand Schedule

35
30
25
Price (P)

20
15
10
5
0
1 2 3 5 7 8
Quantity Demanded or (QD)

The moment we graph the above date, we will arrive at the demand curve. The
law of demand is also applied in the demand curve, so you can make use of your right
hand to show the demand curve, which shows the inverse relation between price and
quantity demanded.

Law of Demand P (↑), QD (↓); and as P(↓), QD

(↑), assuming all these are held constant.

The demand for items are said to have a

downward sloping curve. This is due to what we
call the income and substitution effects.

Determinants of Demand

1. Consumers’ taste and preferences. The producers take into consideration the
taste and choices of the buyers. They are responding a lot to determine the taste and
preferences of the consumers through survey, taste test, and interview. The producers
produce goods that suit the taste and preferences of the consumers.
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2. Change in income of the buyers. Income determines consumption. It affects the

ability of the buyers to pay. The higher the income, the buyers are more capable to
buy the things that they want. If there is an increase in income like job promotion
which has a monetary remuneration, the person will have greater chances to buy what
he wants. He can now afford to buy the things that he cannot afford to buy before.
3. Quality and quantity of population. Quantity of population refers to the number
or size of the population. The greater the size of the population, the greater the
demand for the product. More people means more needs and wants to be met.
Quality of population refers to the kind of population who can be classified into:
a. Age –whether it is young, teenager or an adult population who can affect the taste
and preferences.
b. Gender of the population – whether there are more males than females, especially if
your product is for a specific age and gender it is safer to produce unisex products.
c. Economic status – to determine whether there are morerich than poor or vice versa,
especially if the price is high that not everybody can afford to pay for it.
4. Change in one’s expectation. Floods, earthquakes, volcanic eruption, typhoon,
and other natural calamities can leas to shortage of food supply and other agricultural
products. Due to expectations that there will be a shortage, more people will buy more
and stock more products leading to PANIC BUYING. Another example is when they
are expecting an increase in the price of gasoline, long lines in almost all the gasoline
stations can be observed.
5. Necessity. If the products are necessities which are important to meet our daily
needs, though price may change, we continue to buy them. But if the prices of luxury
products increase, we are not very much affected since we do not have to buy them
very often.
6. Change in the prices of related goods. Related commodities are in the form of
substitutes and complements.Substitutes are products that take the place of other
products. It only means that they have the same characteristics and function. So, if
the price of your substitutes increases, you will not buy it but rather buy your
preferred brand. But if the price of substitute decreases, you will take advantage of its
price by buying the substitute instead of your preferred brand product. Complements,
on the other hand, are products that go with another product. Examples shampoo
and hair conditioner, toothpaste and toothbrush. An increase in the price of
complements will lead to a decrease in its demand thereby decreasing the demand for
the product as well. You must remember that the product is useless without the
complement and vice versa. Whatever the effect of the change in price to the
complement will be, so will the effect on the product.
7. Intensity of desires of the buyers. Desires of the buyers are intensified through
advertisements and promotions while black propaganda can weaken one’s desire.
If any of the above conditions takes place, the demand curve or demand
schedule will totally shift either to the left or right of the original demand
schedule:
Figure A:
P P

D1 D2

D1

D2

D=Movement to the left from D1 to D2 Movement to the right from D1 to D2

impliesdecrease in demand or ∆D↓ implies increase in demand or ∆D↑

GRAPH ON THE CHANGES IN THE QUANTITY DEMANDED

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Figure B:
P

P1 A

P2 B

P2 C

QD

Q 11 Q2 Q3

Legend:
∆ = Delta means Change
∆D = Change in Demand
∆QD = Change in Quantity Demanded
∆P = Change in Price
QD = Quantity Demanded
Movement: change in demand shows the movement of the entire demand curve
from D1 to D2 as shown in Figure A while change in quantity demanded shows the
movement of points along or within the demand curve as shown in Figure B, where
point A moves to point B and point C.
Cause: the reason for the change in demand was due to the change of the demand
schedule as influenced by the determinants of demand while the reason for the change
in QD was due to the increase or decrease in price.

THE BEHAVIOR OF THE OF THE SUPPLY SCHEDULE OR CURVE

I. Introduction
Another aspect of the market system is the analysis of supply. Supply is
the amount of goods and services which sellers are willing to sell or supply in
the market at various alternative prices at a given point time. Supply refers to
the willingness and ability of the sellers to offer for sale various quantities of a
given product in a given place and time while other factors are held constant.
These factors affect the willingness to supply or the quantity supplied (QS) by
the sellers.
The willingness to supply a commodity in the market is largely influenced
by the price of the commodity. There is a positive, or direct, relationship between the
prices of a commodity and the quantity it supplied. Fishermen will go out to the sea to
fish, and market vendors will sell the fish if they consider the price faire. Farmers will
cultivate their land and plant food crops if prices are attractive enough to make
farming economically attractive. A high price, therefore, is an incentive for sellers to
put their commodities in the market, while a low price is a disincentive for production.
The price ceiling imposed by the government discourages producers to produce.

II. SUPPLY SCHEDULE

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It shows the schedule of various quantities of a given product that the sellers are
willing and able to sell at different possible prices over a given place and time while
other factors are held constant. A supply curve or schedule is a graphical
representation of the relationship between the amount which sellers are willing to
supply the market with a particular commodity of various prices, other things being
constant.
Table 1
Price Per Kilo QS (Kilo)
Php 15 10
Php 13 8
Php 12 5
Php 10 3
Php 9 2
Php 1

Graphical Representation of Table 1

P
15
14
13
12
11
10
9
8
1 2 3 4 5 6 7 8 9 10 QS

III. LAW OF SUPPLY

It states that there is a direct relationship between price and quantity supplied.
So that the higher the price, the sellers are more willing to sell greater quantities
of their products. If the price is low, they are less willing to sell their products by
offering less quantity. The price is directly proportional to the quantity supplied.

Difference between change in supply and change in quantity supplied:

(Figures A)

P P S2S1

S1

S2

S = movement to the right from S1 to S2, S = movement to the left from

S1 to S2,implies increase in supply implies decrease in supply

(Figure B)
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Legend: Δ = delta means change

S ΔS = change in supply

P2 ΔQS = change in quantity supplied

P1

Q1 Q2

Movement: Figure B shows change in quantity supplied because the movement

is within the supply schedule while Figures A show change in supply since there were
movements of the entire schedules.

IV. Determinants of Supply

1. Development in Technology. It can lower the cost of production and will increase
supply. This will make production faster, easier and cheaper.
2. Availability of raw materials. If the raw materials are abundant, then supply
increases. If it is scarce, supply decreases.
3. Change in the cost of production. The production of a good or a service has a
corresponding equivalent in cost. If cost of production increases and price is
controlled, there is a great possibility of a decrease in supply.
4. Importation of products. Importing products from other countries can increase
supply.
5. Expectation of price fluctuation. Fluctuation refers to a sudden increase or
decrease in price. If a seller is expecting price increase of his product next month,
he can prepare for the increase by producing more and limiting his sales and sell
when the price is already high.
6. Storage cost. If the products can be stored, additional cot is incurred for storing
the products. Sellers are influenced by the storage cost, so that when its rental
increases, they have to limit their production and supply to limit the space
occupied by the product.
7. Perishability of the product for sale. Perishability refers to how long the product
will last. Therefore, the seller must first determine the life span of the product and
how much he can sell within the life span in order to avoid the stage of spoilage.
Thus, perishability tends to limit the supply.
8. Change in the number of producers. The more producers there are in an industry,
the greater the production thereby increasing supply.
9. Productivity of the available inputs. The more productive the inputs are, the
greater the production thus increasing supply.

MARKET EQUILIBRIUM

Equilibrium is a state in which the suppliers are in agreement with the buyers on the
price and quantity of goods to be bought and sold. The attainment of the state of
equilibrium is based on the existence of competition between buyers, on one hand,
and sellers on the other. Consumers must compete among themselves by bidding the
price up if the commodity being traded is scarce. Similarly, sellers will offer a lower
price to increase share of a crowded market for a commodity.

Let’s examine the graphsS

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S P2 A B

E P1 E

P1

D P0 F

QD
Graph 1 Showing Equilibrium Point
Q 0 Q2 Q1 Q22 Q00
(E)
Graph 2 Shows the direction of Demand and
Supply to attain Equilibrium

Effects of the movement of Demand & Supply to Price

Legend: D = Demand k = Constant

S = Supply ↑ / ↓ = increase / decrease
Q = Quantity > / < = greater than / less than
P = Price
Ex.

1. ↑D, Sk = P↑, Q↑ 2. ↑S, Dk = P↓, Q↑

P2 D1 D2SkDk S1
P1 S2
P1 P2

Q1 Q2 Q1 Q2

3. ↑D > ↑S = P↑, Q↑ 4. ↑D = ↑S, Pk, Q↑

S1
D2 S1D1 D2
S2S2
P2 D1 Pk
P1

Q1 Q2 Q1 Q2
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Equilibrium Price – the equilibrium price is dictated by the interaction of the demand and supply. It is the
point (in a graph) where demand line (or curve) is intersecting with the supply line (or curve).

EX.

Suppose the market demand for Good X is given by the equation Qd=1000-20P, and the
market supply is given by the equation Qs=500 + 30P. Find the equilibrium price for Good
X by equating Qd& Qs.

Equation:

Equilibrium : D (Demand) – P (Price) = S (Supply) + P (Price)

Qd = Qs

1000-20P = 500 + 30P

1000 – 500 = 20P +30P

500 = 50P

P = 10

Rechecking: to find the equilibrium quantity

1000 – 20 (10) = 500 + 30 (10)

800 = 800

Surplus/Shortage Condition

Surplus – it takes place when the quantity supplied is greater than the quantity
demanded. The pressure to price is DOWNWARD.

Shortage – it takes place when the quantity demanded is greater than the quantity
supplied. The pressure to price is UPWARD

Equation:

Quantity Supplied (QS) – Quantity Demanded = if the result is negative (-), it means
that there is shortage and if the result is positive (+), it means that there is shortage.

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