Chapter 2

MICROECONOMICS
Demand, Supply, and Market Equilibrium

I. Introduction:

Demand is a very familiar word that is misunderstood. Many of the people

believe that demand is what you want or wish for. If that were the accurate description
of demand, then everybody will be enjoying all the goods and services they all want.
Certainly, it does not apply to the description of scarcity. However, there are also people
who would say that demand is what they actually get. Example, if there are three ripe
mangoes on the table, that must be consider demand. In this case, they consider
demand as the actual amount or quantity. In this scenario, demand is neither what we
want nor what actually get. Since the word is always use outside economics, then the
term has taken on many different meanings, No wonder when the term demand is used
in economic situations, it is often misunderstood.

II. Intended Learning Outcomes:

1. Explain the Law of demand and its related terms and concepts
2. Identify the determinants of demand
3. Interpret the demand behaviour of consumers brought about by the
changes in the prices of commodities.
4. Describe the behaviour of consumers as affected by the changes in the
non-price determinants of demand
5. Plot the demand curves of demand schedule with shifts
6. Demonstrates teamwork in group activities to solve a problem.

III. Learning Topic Contents

Basic Concept of Demand

Demand is a list or schedule of all alternative quantities of a particular good

that a buyer would be willing and able to buy at a given price, time, and place, all other
things held constant.

Several observations that should be considered:

 1. Demand is studied at a point in time when all other factors are frozen; frozen in
the sense that there were no times to change.
2. Demand reflects both willingness and ability. A buyer may have much money but
may not be willing to buy the good or the buyer may have the willingness to have
it but have no sufficient money to buy for it. Therefore, the buyer must have the
willingness to buy for it and ability to pay the price.
3. Only buyers are represented by demand and not the sellers. If the buyer or
consumer is willing and able to purchase the good, then there is demand.
Demand solely focuses on the decisions of the buyer and not the seller.

Demand can be analyzed in different ways. However, the common way of

analyzing demand is through a) demand schedule, b) demand curve, and c)
demand function.

a) Demand schedule - is a table or list of the prices and the corresponding

quantities demanded of a particular good or service.

Table 1: Demand schedule for Commodity X:

Hypothetical Demand Schedule

For X per week

Price of X (per kilo) Quantity Demanded (in kilos)
P45 100
40 150
35 200
30 250
25 300
20 350

b) Demand Curve is a graphical presentation of a demand schedule that

measures price on the vertical axis and quantity demanded on the
horizontal axis.
 50
40

Prices/kilo
30
20
10
0

100

150

200

250

300

350
Qty.

Figure 1: Demand for Curve for Commodity X:

The Law of Demand

The Law of Demand is simply understood to be that “when the price increases,
the quantity demanded of the product decreases, but as price decreases, the quantity
purchased will increase, other things held constant” (Fajardo, 1997). Such theory is only
true if the assumption of ceteris paribus is applied. It means “all other things equal or
constant”. The law of demand is only valid if the determinants of demand are held
constant. That is there is no change in income, population, tastes and preferences, etc.
According to Fajardo (2001), an individual tends to buy more units of goods when
the price is lower, and he decreases his purchases when prices increase.

Quantity demanded tends to fall as price rises for two reasons:

1. Substitution effect- the effect of a price change on the quantity demanded

due to exclusively to the fact that its relative price has changed.
2. Income effect – the effect of a price change on the quantity demanded due
exclusively to the fact that the consumer’s real income or purchasing power
has changed.

Factors Affecting in Demand

1. Price factor
a. price of the product itself

2. Non-Price factors
a. consumers’ income
b. consumers’ taste and preferences
c. number of consumers
 d. price of related goods
e. consumers’ expectations
f. introduction of new product
g. marketing strategy
h. fashions
i. climate/weather
j. festive seasons

Change in Quantity Demanded and Change in Demand

A movement along a given curve represents a change in quantity taken

resulting from a change in price of the good itself. This explains the idea of Change in
Quantity Demanded.

On the other hand, when any of the factors in a given state of demand are
change, the demand curve itself will change and we call it – Change in Demand.

Salient Characteristics in the Change in Quantity Demanded

1. This is caused by a change in the commodity’s own price alone, ceteris paribus.
2. There is only one movement along the demand curve and not a shift of it.
3. Sometimes, the word expansion of demand will be used to show an increase in
the amount demanded. A contraction of demand would refer to a fall in the
quantity demanded.

Figure 2. A
The figure above shows that when the price decreases, the quantity
demanded increases. In this case, we are moving along a demand curve, the
demand does not change, but the quantity demanded does.

Salient Characteristics in the Change in Demand

1. This is caused by non-price factors and not by price of the commodity.

 2. There is a shift in the demand curve either to the right or to the left.
3. To indicate the changes in demand, the words used are increase (right direction)
and decrease (left direction).

Figure 3.B

The figure above shows both an increase and decrease in demand. Shifting of
demand curve to the right means increase in demand while shifting of demand
curve to the left means decrease in demand.

c) Demand Function or Equation

Demand can be also analyzed mathematically through a demand
function. According Avila-Bato, Malveda, and Viray (2016), a demand
function also shows the relationship between demand for a commodity and
the factors that influence this demand. These factors are: the price of the
commodity itself, income of consumers, price of related goods, etc)

Mathematically, demand function can be expressed as:

QD = f (product’s own price, income of consumers, price of related goods, etc)

Therefore, we can come up with a demand equation as:

Qd= a - bP

Where: Qd = quantity demanded at a particular price

a = represent the y-intercept, in this case the value of quantity
demanded when price is equal to zero.
b = slope or the rate of change between variables of price and
quantity demanded.
P = price of the good at a particular period
The minus sign (-) in the demand equation also represents the inverse
relationship between price and the quantity demanded in the Law of Demand.
IV. SELF- LEARNING ACTIVITIES

Part I. Answer the following briefly:

1. State the Law of Demand?

2. Describe the factors considered by buyers in buying a particular commodity or
product?
3. Which of these factors is considered the most important among buyers? Why?

Part II. Consider the demand schedule below.

Demand schedule for onions in one week

Condition Price Quantity demanded

A 60 100
B 50 200
C 40 300
D 30 400
E 20 500
F 10 600

Answer the following:

1. How many kilos of onions are bought at Php 10.00/kilo? At Php
30.00/kilo?
2. Why do you think that more onions are purchased at lower price than at
higher price?
3. Explain the relationship between price and the quantity of onions
purchased?

Part III. Discuss the movements of demand curves relative to the forces
that affect them.

1. What are the reasons why demand curve increase or decrease?

V. REFERENCES

Avila-Bato, Malveda,&Viray (2016). Microeconomics:Simplified (2016). Anvil Publishing,

Inc. Mandaluyong City, Philippines

Marcelino, Viray, Avila-Bat0.& Bautista (2010), Principles of Economics with Taxation

and Agrarian Reform .National Bookstore, Mandaluyong City, Philippines

Azarcon, E. Et al. (2008) Principles of Economics with Taxation and Agrarian

reform.Valencia Educational Supply, Baguio City.

Costales,A, et. Al (2000). Economics: Principles and applications. JMC Press Inc.
Quezon City

Fajardo, F. (2001).Agricultural Economics. 4th edition, Rex Bookstore Inc. Sampaloc,

Manila

Fajardo, F. (1997).Microeconmics. Rex Bookstore company, Manila,Philippines

https://www.bing.com/images/.com.ph.