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Benilde Center for Global Competence

City of Olongapo
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Module 2
Applied Economics
1st Semester, 2020-2021

 Market Demand, Market Supply, Market Equilibrium

RUBEN G. GADUANG
Instructor

Quick Review of what MARKET is …

 A market is an interaction between buyers and sellers of trading or exchange. You are
very familiar with goods market where the consumer buys and the supplier sells. There is
another market that will soon be of interest to you and this is the labor market where workers
look for jobs and offer their services and where employers look for workers to hire. The not-so-
familiar one to you now is the financial market which includes the stock market where securities
of corporations are traded.
There are two important concepts in a Market Economy – demand and supply.
Consumers demand goods and services that maximize their utility (satisfaction) and producers
supply goods and services that maximize their profit.
The market is important for the reason that excess goods can be disposed to those who
need them. This interaction leads to an agreement between buyers and sellers on volume
(quantity) and price. The agreed price between the two is the market price or the price for all.

Learning Objectives
1. Explain the law of demand.
2. Interpret a demand schedule and demand curve.

Lesson 1.1 MARKET DEMAND

When studying demand, you should think like a consumer or a demander. Demand is a
relation showing the quantities of a good that consumers are willing and able to buy at each price
on a given period of time, other things constant (‘ceteris paribus’). Notice the emphasis on
willing and able. You may be able to buy your favorite ice cream flavor of Cookies and Cream
for the price Php250.00 but you may not be willing to buy another flavor that doesn’t interest
you enough because your favorite flavor is out of stock. Also, notice the emphasis on a given
period of time which refers to the amount you purchase at each price on a specific period – a day,
a week, a month.
Consumer demand and consumer wants are not the same thing. You may want to buy
your favorite jeans but the price tag of Php2,500.00 is likely too high for you to pay. Nor,
consumer demand the same as consumer need. You may not be comfortable wearing your old
pair of rubber shoes and need a new one, but, if the price is Php2,500.00, you may decide to use
your old shoes for now until the price drops then you become willing and able to buy a new one.
Demand can be expressed as a demand schedule and as a demand curve. Demand
schedule lists prices along with the quantity demanded at each price.
Demand curve is a graphical illustration of the demand schedule, with the Price (P) measured on
the vertical axis (Y) and the Quantity demanded (Qd) on the horizontal axis (X).

The demand curve slopes downward from left to right reflecting the relation between
Price (P) and Quantity demanded (Qd). The relation between P and Qd becomes an economic
law – the law of demand. The law states that quantity demanded varies inversely or negatively
with price, other things constant. The assumption ‘ceteris paribus’ (other things constant) is used
to show that there is an inverse relationship between the price of a good and the quantity
demanded for that good. Thus, the higher the price, the smaller the quantity demanded; the
lower the price, the greater the quantity demanded.
What explains the law of demand? Why does the quantity demanded increase when the
price falls? The negative slope of the demand curve is due to income and substitution effects.
The first reason is income effect. Suppose your income from a Saturday extra job is
Php360.00 and intend to buy 9 kilos of Long Grain rice at Php40.00/kilo. What if the price falls
to Php35.00/kilo, you can now buy 10 kilos and still have Php50.00 left to buy other goods.
Thus, the income effect of a lower price increases your real income or purchasing power,
thereby, increases your ability to buy one more kilo of rice and other goods.
The second reason is substitution effect. Your favorite breakfast ‘pandesal’ is tastier with
cheese or its other substitutes (butter, coco jam, etc.) as a sandwich spread. Suppose the price of
cheese declines while the price of other substitute spread remains constant, cheese becomes
‘relatively’ cheaper and consumers are willing to buy more cheese when its ‘relative’ price falls.
On the other hand, an increase in the price of cheese, other things constant, increases its relative
price. Consumers will now turn to other spread to substitute for the now higher-priced cheese.
There are non-price determinants of demand that can cause a downward (shift to the left)
change which signifies a decrease in demand . . .
 or an upward (shift to the right) change which signifies an increase in demand.

The non-price factors of demand are as follows:

1. Income. As income increases, the capacity to buy more of a particular increases
even if the price remains the same. The same is true when income decreases.
2. Taste. The taste of a product causes the consumer to buy more of the product
even if its price doesn’t change.
3. Expectations. A consumer looks at future changes in the price of a good or in
income. For instance, when motorists are informed about an increase in the price
of gasoline, they tend to fill up their tanks before the increase is implemented, the
demand for gasoline will shift upward. The same happens when a price rollback
is expected, motorists tend to delay their purchases and wait for prices to
decrease.
4. Prices of related goods as substitutes or complements. Substitute goods are those
that are used in place of each other like butter and margarine, sugar and artificial
sweeteners. In the case of substitute goods, an increase in the demand for one
good leads to the decrease in the demand for the other. So, if the price of a good
increases, the demand for that good decreases while the demand for its substitute
increases. Complementary goods are those that are used together such as cell
phone and sim, coffee and creamer. For complementary goods, an increase in the
demand for a good will increase the demand for its complement. If the price of a
good increases, the demand for it decreases and the demand for its complement
likewise decreases.
5. Population or the number of consumers. The people makes up the group of
consumers who will buy the product. Higher population, more people as
consumers, higher will be the demand for the good. Increase in population is a
rightward shift of the demand. On the other hand, a decrease in population due to
migration, wars, epidemics will cause leftward shift of the demand curve.

Finally, you should distinguish between demand and quantity demanded. Demand refers
to the entire demand schedule and demand curve. The demand for a product is not a specific
quantity but the entire relation between price and quantity demanded. Quantity demanded refers
to a specific amount of the good at a particular price on the demand schedule and the demand
curve. It also important to distinguish between individual and market demands. Individual
demand refers to the demand of an individual consumer such as you. Market demand is the sum
of the individual demands of all consumers in the market. The market demand curve shows the
total quantities demanded per period of time by all consumers at various prices.

Assessment (Lesson 1.1)

Think Critically. Write a two-paragraph explanation of each on a separate sheet of bond
paper. Make sure your handwriting is readable.
1. Children of poor families need formal education. Is this considered demand?
Why or why not?
2. A reduction in the price of tickets to a concert resulted in a sell-out crowd. How
would you explain the income effect of a price change?
3. The first television sets were manufactured and became available to consumers in
the late 1940s. Many people wanted to buy one but still very few sets were sold
at first. Explain why people’s desire to own TV sets did not result in a great
demand for the product.

Learning Objectives
1. Explain the law of supply.
2. Analyze market supply.

Lesson 1.2 MARKET SUPPLY

Think as a consumer when you study demand; think as a producer when studying supply.
You may say that you are more of a natural consumer but you may not realize that you know
more about producers because they have been around all your life – Jollibee, McDonald,
Facebook, Samsung, Petron, Toyota, local businesses, and many, many more.
In demand, the assumption is that consumers try to maximize utility (satisfaction); the
assumption in supply is that producers try to maximize profit. We now look at the side of the
supplier.
Supply indicates how much of a good producers are willing and able to offer for sale per
period at each price, other things constant. The supply schedule is a list showing the different
quantities the seller is willing to sell at various prices.
 The supply curve slopes upward from left to right indicating the direct relationship
between the price of the good and the quantity supplied of that good. As can be seen, the higher
the price, the higher the quantity supplied.

After observing the behavior of price and quantity supplied, we can now state the law of
supply. Using the same assumption of ‘ceteris paribus’ (other things constant), the Law of
Supply states that the quantity supplied is directly or positively related to its price. As the price
increases, the quantity supplied of that good or product also increases since the seller will take
this opportunity to increase income or profit. Profit equals total revenue minus total cost
(Profit=Total Revenue - Total Cost). Remember that total revenue equals the price times the
quantity sold at that price. Total cost includes all the cost in producing goods and services
including the opportunity cost.
In real life, supply is not only influenced by price but by other non-price determinants
such as the following:
1. Cost of production. This refers to the expenses incurred to produce a specific
good. An increase in cost will surely result in lower supply since the producer
will spend more in order to produce the same quantity of output.
2. Technology. The use of improved technology will result in the increase of supply
of that good.
3. Availability of raw materials and resources. Since more resources are used to
produce a bigger amount of that good, then supply increases.

These determinants can cause a shift of the supply curve to the right to reflect an increase
 or to the left to reflect a decrease.

As with demand, you should distinguish between supply and quantity supplied. The term
supply refers to the entire relation between supply and quantity supplied as shown by the supply
schedule and supply curve. Whereas, quantity supplied refers to the amount offered for sale at a
specific price as shown by a point on a given supply curve.
Equally important is for you to distinguish between individual supply and market supply.
Individual supply is the supply from a single producer. On the other hand, market supply is the
supply from all producers in the market for that good.

Assessment (Lesson 1.2)

Think Critically. Write a two-paragraph explanation of each on a separate sheet of bond
paper. Make sure your handwriting is readable.

1. In what ways do the motives/intentions of an All-you-can-eat Restaurant owner

differ from the motives/intentions of customers who dine in the restaurant.
2. Why should the quantity of jackets increase when there is an increase in the price
of these jackets?
3. Mang Andoy, a farmer, grows corn on his 5-hectare land. He sold his corn in
May for Php3,000.00 per sack. The next season, he notices that the price of
cassava has gone up 50% and corn has remained the same. What might happen to
the supply curve for corn? Explain your answer.

Learning Objective
1. Understand how markets reach equilibrium.

Lesson 1.3 MARKET EQUILIBRIUM

This part of the lesson will show how the forces of demand and supply operate together.
Recall that markets allow you to buy or sell for a price. Price is the amount you pay if you buy a
good or the amount you receive if you sell it. As a buyer or consumer you would like lower
prices. As a seller or supplier you would like higher prices. You have two differing views about
the price of goods. How can these views be reconciled or sorted out? The market forces resolve
the differences.
When the quantity that consumers are willing and able to buy equals the quantity that
sellers are willing and able to sell for a price, that market reaches market equilibrium. Thus,
equilibrium is a state of balance when demand equals supply. Equality, in this instance, is an
implied agreement between how much buyers are willing to transact. The supply and demand
schedule and curves below shows that the price at which demand and supply are equal is the
equilibrium price. The market equilibrium is attained at the point of intersection of the demand
and supply curves.

But how does a particular market reach equilibrium? You have to consider and
understand the market forces of demand and supply.

The table above shows the market for talcum powder. What if the price is 400? At that
price, producers will supply 50,000 but consumers demand only 28,000, resulting in an excess
quantity supplied or a surplus of 22,000 talcum powder. Suppliers will eliminate the surplus by
putting pressure on the price to fall or decrease. Thus, a surplus forces the price down.
What if the price is 200? At that price, consumers demand 55,000 but producers
supply only 28,000 resulting in an excess in quantity demanded or a shortage of 27,000 talcum
powder. Consumers now compete to buy the product. Competition puts pressure for a higher
price. As the price rises, producers will increase the quantity supplied and consumers reduce
their quantity demanded. Thus, shortage forces the price up. The market curves are illustrated
below.

Let us make sense about the lesson. The market finds equilibrium through independent
and voluntary actions of thousands and even millions of buyers and sellers. The market is
personal because each consumer and each supplier makes decisions about how much to buy or
sell at a given price. On the other hand, the market is impersonal because it does not require
formal and conscious communication. The price does all the talking. The independent decision
of many individual buyers and many individual sellers cause the price to reach equilibrium in
competitive markets.

Assessment (Lesson 1.3)

Think Critically. Write a two-paragraph explanation on a separate sheet of bond paper.
Make sure your handwriting is readable.
1. Scientists, through genetic engineering, have created tomatoes that are resistant to
many diseases. Time passed by and this scientific breakthrough caused the
equilibrium price to fall. Explain why this happened.