Basic Economics : Market Forces of Demand and Supply 

 
Our first topic is on the market forces of demand and supply, the concept of elasticity as applied 
to these forces, and their relationship with government policies. These topics are further 
explained in the succeeding bullet points, along with exercises for the students. The exercises 
will serve as the first quiz of the students. Please refrain from copying the answers from your 
classmates as that will impede full learning of the lesson. 
 
Notes on Demand and Supply 
 
1. Demand​ is defined as the amount of goods and/or services a consumer is willing and 
able to purchase. Demand is inversely proportional to price. This means that when 
prices soar, demand decreases; when prices descend, demand increases. Note however 
that there are other factors that may compound consumer behavior relative to creating a 
demand for a certain good and/or service. They are as follows: 
a. Income is directly proportional with demand. A consumer with increasing 
income w ​ ould have increasing purchasing power, and would most likely increase 
their demands. On the inverse, a decreasing income means lower purchasing 
power, and therefore decreasing demands. We pertain to two types of goods: 
demand for normal goods are directly proportional with income—if income 
increases, so is the demand for normal goods; the inverse is true for inferior 
goods—if income increases, the demand for inferior goods decreases, and vice 
versa.  
b. Prices of related goods​ – demand has two relationships with the prices of 
related goods. If we look at complementary goods, meaning goods that go 
together (e.g. butter and bread, milk and coffee), an increasing demand for 
Demand A means an increasing demand too for Demand B, and vice versa. But if 
we look at substitute goods, meaning goods that may alternate each other (e.g. 
pizza or burger, fresh milk or soya milk, white sugar or brown sugar), an 
increasing demand for Demand A means a decreasing demand for Demand B, 
and vice versa.  
c. Tastes​ – economic choices are dictated by human behavior and preferences. So 
when people have varying tastes, so is their demand for a certain good and/or 
service. There’s also the element of expectations. This again is dependent on 
human behavior and their anticipation of preferences.  
 
2. Supply​, on the other hand, i​ s defined as the amount of goods and/or services a 
producer is willing and able to sell.​ Supply is directly proportional with price. This 
means that when prices increase, supply also increases; and if prices decrease, so do 
supply. Similar with demand, there are other factors that affect supply. They are as 
follows: 
a. Input prices​ -- these pertain to the amount necessary to produce a certain good 
and/or service. This include labor and wages, rent for land and equipment, and 
 raw materials. If input prices increase, the cost of producing the good and/or 
service also increases, so supply decreases. But if input prices decrease, then 
supply increases. 
b. Technology​ reduces firms’ costs for producing a certain good as it provides 
efficiency. So when a company increases its technology, then supply also 
increases; but when it lacks technology, then supply is negatively affected too.  
c. Expectations​ also play a role in determining supply in the market. Sellers also 
speculate and/or predict future economic activities of consumers, and so this 
affects the amount of goods they supply—a new trend or holidays, as well as 
disasters or calamities are examples of events that sellers try to incorporate in 
their expectations. 
 
3. Demand and supply are market forces that dictate the price of a certain good and/or 
service available in the market.​ Note that this is still independent from the concept of 
government intervention (e.g. regulatory policies, taxes, etc.) or additional decisions 
and/or strategies businesses may employ.  
 
Notes on Elasticity 
 
4. Price responds to consumer demand. T ​ he same is also true for demand, it responds to 
price changes. This is called p ​ rice elasticity of demand.​ E
​ lasticity​ in general is defined 
as the “​ responsiveness of quantity demanded or quantity supplied to one of its 
determinants.”​ There are different types of elasticity relative to demand: 
a. Price elasticity of demand is computed as percentage change in quantity 
demanded divided by the percentage change in price. A midpoint method is 
used for a better understanding of elasticity:  
 
PED = (Q2 – Q1) / [(Q2 + Q1) / 2]  
------------------------------  
(P2 – P1) / [(P2 + P1) /2] 
 
b. If elasticity is > 1 or 0, demand is elastic; if equal to 1 it is unit elastic; and if is < 1 
then demand is inelastic.  
 
5. Income elasticity of demand is computed as percentage change in quantity demanded 
divided by the percentage change in income.  
6. Cross price elasticity of demand is computed as percentage change in quantity 
demanded of the first good divided by the percentage change in the price of the second 
good.  
7. Computing revenue is related to understanding the price elasticity of demand. Total 
revenue ​is computed by multiplying price with quantity (P X Q = Revenue). 
 
 
Notes on Analyzing Curves / Graphs 
8. When analyzing demand and supply, one has to look into three (3) movements: 
a. Which curve moved / shifted? i.e. demand, supply, or both  
b. What is the direction of the movement / shift? i.e. shift: left or right parallel to the 
original line; movement along the curve: was the line steeper or broader?  
c. Where is the equilibrium point? 
 
Problems and Applications 
Write your answers in a yellow paper with your name and section on the upper lefthand corner. 
Submit the completed answers in our next meeting. 
 
Problem 1:​ Explain each of the following statements using supply and demand diagrams: 
● When a typhoon hits the Cordilleras, the price of vegetables increases throughout 
Luzon.  
● The coastal towns in Pangasinan declared red tide. What happens to the supply and 
prices of bangus in the market?  
 
Problem 2:​ In 2012, foreign companies continued increasing investments in the Philippines. 
The result are more jobs for Filipinos in the form of call centers and business process 
outsourced (BPO) firms. Explain how this affected demand for Starbucks drinks and 
smartphones relative to price and income.  
 
Problem 3:​ Suppose that the price of concert tickets for BTS in Manila are determined by 
market forces. Currently, we have the following demand and supply schedule: 
 
PRICE  QTY DEMANDED  QTY SUPPLIED 

2,500  15,000  5,000 

4,500  10,000  5,000 

7,000  8,000  5,000 

9,000  3,000  5,000 

11,500  1,000  5,000 

 
● Draw the demand and supply curves. What is unusual with the supply curve? Why 
might this be true?  
● What is the equilibrium price and quantity of tickets?  
● BTS became more famous given their recent Grammy’s guesting. A second day of 
concert was scheduled in Cebu. The price and demand for Cebu is as follows:  
 
PRICE  QTY DEMANDED 
 2,500  10,000 

4,500  8,000 

7,000  5,000 

9,000  1,500 

11,500  1,000 
 
● Add the old and new demand schedules to determine the total demand for concert 
tickets in the Philippines. What is the new equilibrium price and quantity. e. Using the 
concept of elasticity, compute the price elasticity of total demand. Follow the midpoint 
method to compute for the price elasticity.  
● With the results, is the price elastic or inelastic? Illustrate through a graph.  
 
Problem 4:​ Consider the market for plastic straws. For each of the events listed here, identify 
which of the determinants of demand or supply are affected. Also indicate whether demand or 
supply is increased or decreased. Then show the effect on the price and quantity of plastic 
straws.  
● There are now more milk tea and coffee shops in major urban areas.  
● People have started using metal straws.  
● Recent studies have shown that plastics continue to be the number one pollutant in the 
oceans and seas.  
 
Problem 5:​ In 2012, consider how computer engineers and developers mastered the creation of 
smartphone applications. How has this improvement in technology affected office 
communications, transportation, and food selection? Explain each briefly.  
 
Problem 6:​ For each of the following pairs of goods, which would you expect to have more 
elastic demand and why? 
● Required textbooks or romance novels  
● Raincoats or furcoats in July  
● OPM vinyl records or OPM Spotify records 
 
Problem 7:​ For each of the following pairs of goods, which would you expect to have more 
elastic supply and why? 
● Beachfront resorts or swimming pools  
● Pharmaceutical drugs or skin whitening capsules  
● Daily broadsheets or fashion magazines  
 
Problem 8:​ What is elasticity? How does elasticity relate with the market forces of demand and 
supply? How does it enhance our understanding of how market forces work?