4/11/2013

Demand & Supply

EC 102. Basic Economics,
•Price
Agrarian Reform, and Taxation
- terms at which consumers and producers
exchange commodities
Lecture 3 - means by which resources are allocated
(through the market)
Demand & Supply 1

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Demand & Supply Demand & Supply

•Demand
- refers to be the amount of a good Demand Schedule for P
consumers (hh) buy at certain price levels Coffee (House Blend) 120 .A
Case Price Cups 115 .B
(and conditions) .C
(Php) Bought 110
a. the higher the price of something (cet.
A 120 2
par.), the lower the amount of that thing B 115 3
80 .D
that hh are willing to buy 75 .E
C 110 4
b. the lower the price of something, the D 80 6
more of it is bought E 75 7
2 3 4 6 7 Q
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Demand & Supply Demand & Supply

•Price and Quantity Demanded are inversely
related

Law of the Downward Sloping Demand
Curve:
“When the price of a good increases (cet.
par.), buyers tend to buy less of the good.
When the price of a good decreases (cet.
par), quantity demanded increases.”
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• Why does the Demand Curve Slope
Downward?
a. Substitution Effect
- as the price of a good increases, people may
substitute a similar good for it (thus
decreasing quantity demanded)
b. Income effect
- as the price of a good increases, one
becomes “poorer” (real income decrease) and
can only demand less of the good than usual
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Demand & Supply Demand & Supply

• Market Demand • Market Demand
- sum of all quantities demanded by all P
consumers in a market at every price level 110
Example: 1 good (cupcake) & 2 consumers (A,B)
90
Price of Consumer A Consumer B Market Market
Cupcake Demand 75 Demand
110 1 2 3
90 3 4 7 50
75 5 6 11
Consumer B
50 8 10 18 30
Consumer A
30 11 14 25 Q
1 2 3 4 5 6 7 8 10 11 14 18 25

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Demand & Supply
• Factors Affecting the Demand Curve
1. Average income
- as incomes rise, consumers tend to buy more
goods
- as incomes decrease, consumers also tend to
buy less
2. Market size
- bigger population, more demand
- lower population, smaller demand
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Demand & Supply
• Factors Affecting the Demand Curve
3. Availability of related goods
b. complimentary good
– good consumed along with another
good
- if a good’s complement becomes cheap,
demand for that good may rise
- if a good’s complement becomes more
expensive, demand for that good may
drop
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Demand & Supply
• Factors Affecting the Demand Curve
3. Availability of related goods
a. substitute good
– performs the same function of a certain
good
- if a good’s substitute becomes cheaper,
the demand for that good drops
- if a good becomes cheaper (relative to its
substitute), the demand for that good rises
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Demand & Supply
• Factors Affecting the Demand Curve
4. Tastes and preferences
- subjective elements that affect demand
(either physiological, psychological, traditional
or cultural reasons or a combination of the
above)
5. Special Factors/Influences
- climate, geographical location, unanticipated
events
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Demand & Supply Demand & Supply

• Demand Curve Shifts (Examples)
• Demand Curve Shifts What happens to the Demand Curve for
- any (or a combination) of the factors Bananas in the Philippines if more children are
mentioned born in the Philippines everyday?
- Positive Effect shifts the Demand Curve to P
the Right
- Negative Effect shifts the Demand Curve to
the Left
D2
D1
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Demand & Supply Demand & Supply

• Demand Curve Shifts (Examples) • Demand Curve Shifts (Examples)
What happens to the Demand Curve for What happens to the Demand Curve for
Bananas in the Philippines if too much Bananas in the Philippines if potassium
bananas is found to be bad for the heart? supplements become more expensive?
P P

D2
D2 D1 D1
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Demand & Supply Demand & Supply

• Demand Curve Shifts (Examples) • Demand Curve Shifts (Examples)
What happens to the Demand Curve for What happens to the Demand Curve for
Bananas in the Philippines if a large number of Bananas in the Philippines if the price of
Filipinos suffer a 50% slash in income? bananas drop from Php 35/kilo to Php28/kilo?
P P
•The Demand Curve does
35 not change.
•Only a movement along
the demand curve happens.
28
D2 D1 D1
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Demand & Supply

• Demand Curve Shifts vs. Movement Along the
Demand Curve

- A movement along the Demand Curve is

caused by a change in the good’s own price.

- A Demand Curve shift is caused by a factor

other than a change in the good’s own price.

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