CHAPTER 3

ELEMENTS OF DEMAND AND SUPPLY

 You can make even a parrot into a learned
economist – all it must learned are the two
words: “supply” and “demand”
- anonymous
 KEY TERMS

• Complementary product • Price floor

• Demand • Quantity demanded
• Demand curve • Quantity supplied
• Demand function • Shortage
• Demand schedule • Substitute product
• Inferior product • Supply
• Law of demand • Supply curve
• Law of supply • Supply function
• Market equilibrium • Supply schedule
• Normal good • surplus
• Price celling
 DEMAND

demand for goods and services are not just a

psychological occurrence that implies simply a pure
“want” or “desire”.
 LAW OF DEMAND

The law of demand states that as price increases,

quantity demanded decreases; and as price
decreases, quantity demanded increases, if other
factors remain constant ( ceteris paribus).
VALIDITY OF THE LAW F DEMAND

the law of demand is only true ceteris paribus. For

example, if the price of iPad decreases by 50% from its
original price, then the quality demanded for such
item increases.
 JUSTIFICATION FOR THE LAW OF
DEMAND
• Income effect – when the price of goods
decreases, the consumer can afford to buy more of
it or vice versa
• Substitution effect – it is expected that consumers
tend to buy goods with a lower price
 DETERMINANTS OF DEMAND

1. Consumers’ Income - a change in income will

cause a change in demand
A. Normal Good – refers to a good for which demand
at every price increases when income rises or vice
versa.
B. Inferior Good - refers to a good for which demand
falls when income rises and vice versa.
2. Consumers’ Expectation of Future Prices – the
quantity of a good demanded within any period
depends not only on prices in that period but also on
prices expected in future periods.
 3. Prices of Related Products – the demand for any
particular good will be affected by changes in the
prices of related goods.
a. Substitute products – are goods that can be used
in place of other goods.
b. Complementary products – are goods that go
together or cannot be used without the other.
4. Consumers’ Tastes and Preferences - consumers’
tastes and preferences are major factors in
determining the demand for any product
5. Population – an increases in the population means
more demand for goods and services
 DEMAND FUNCTION

it is a representation of the relationship between

demand and all of its determinants expressed in a
mathematical language using functional form given
below:
• Qd – quantity demand
• P – price of goods and services
• Y – income of consumers
• e – consumers’ expectation of future prices
• P – price of related products
• T – consumers’ tasted and preferences
• Pop – population size
 DEMAND SCHEDULE

the demand schedule shows the tabular

representation of the relationship between the
quantity of a good demanded and the price of that
good.
DEMAND SCHEDULE FOR SPORTS
UTILITY VEHICLE (SUV)
Points Price ( in millions) Quantity Demanded
for SUV
A 0 4000
B 1 3500
C 2 3000
D 3 2500
E 4 2000
F 5 1500
G 6 1000
H 7 500
 DEMAND CURVE

After deriving the demand schedule, we can now

draw the demand curve.
 CHANGE IN QUANTITY DEMANDED
(QD) VERSUS CHANGE IN DEMAND
(D)
it is due only to a change in the price of goods and
services
 CHANGE IN DEMAND

It is brought by the changes in the non-price

determinants of demand.
 SUPPLY

The first thought that comes to mind when we hear

the supply is the “availability” of goods and services as
if these are fixed amounts.
 LAW OF SUPPLY

the law of supply states that as price increases,

quantity supplied also increases; and price decreases,
quantity supplied also decreases.
VALIDITY OF THE LAW OF SUPPLY

just like the law of demand, the law of supply is only

correct if the assumption of ceteris paribus is applied.
 DETERMINANTS OF SUPPLY
• Change in Technology – state of the art technology that uses
high tech machines increases the quantity supply of goods and
services which causes the reduction of production cost.
• Cost of Inputs Used – an increase in the price of an input or the
cost of production decreases the quantity supply because the
profitability of a certain business decreases.
• Expectation of Future Price – expectation about future prices can
shift the supply curve.
• Price of Related Product – changes in the price of goods have a
significant effect in the supply of such goods.
• Government Regulation and Taxes – it is expected that taxes
imposed by the government increases cost of production which
in turn discourages production because it reduces producers
earnings.
• Government Subsidies – subsidies or the financial aids/assistance
given by the government reduce cost of production which
encourage more supply.
• Number of Firms in the Market – an increase in the number of firms
in the market leads to an increase in supply of goods and
services.
 SUPPLY SCHEDULE

supply schedule shows the tabular representation of

the relationship between the quantity of a good
supplied and its price.
Points Price (in millions) Quantity Supplied for
SUV
A 0 -2000
B 1 -1000
C 2 0
D 3 1000
E 4 2000
F 5 3000
G 6 4000
H 7 5000
 SUPPLY CURVE

After developing the supply schedule, the supply

curve can now be obtained.
 CHANGE IN QUANTITY SUPPLIED

movement along the supply curve is known as a

change in quantity supplied, which shows the
movement from one point to another point on the
same curved.
 CHANGE IN SUPPLY

Shifting from one supply curve to another is called

change in supply.
 DETERMINATION OF MARKET
EQUILIBRIUM
We have considered demand and supply separately.
We have seen how consumers demand the amount
or quantity of goods and services at each
corresponding price.
EQUILIBRIUM USING DEMAND AND
SUPPLY SCHEDULE
Points Price (in Quantity Quantity State of Pressure
millions) demanded supplied Market on price
(Qd) (Qs)
A 0 4000 -2000 Shortage Upward
-6000
B 1 3500 -1000 Shortage Upward
-4500
C 2 3000 0 Shortage Upward
-3000
D 3 2500 1000 Shortage Upward
-1500
E 4 2000 2000 Equilibrium Neutral
0
F 5 1500 3000 Surplus Downwar
1500 d
G 6 1000 4000 Surplus Downwar
3000 d
H 7 500 5000 Surplus Downwar
 MARKET EQUILIBRIUM
(MATHEMATICAL APPROACH)
As discussed earlier, market is in equilibrium when
quantity demanded equals quantity supplied or the
Qd intersects with Qs at a particular point.
 A CHANGE IN THE MARKET

• In order to utilize the concept of demand and

supply more effectively in explaining or predicting
changes in the prices, we need to consider what
happens to the equilibrium price when there is a
change in the demand and supply for particular
product.
 INTERFERENCE IN THE MARKET

thus far we have utilized demand and supply model

in an unregulated market (no Government
intervention) where price is determined solely by
interactions between buyers and sellers.
PRICE CEILING AND PRICE FLOORS

there are two broad kinds of price controls of the

government. These are price ceilings and price floors.
 SHORTAGES AND SURPLUS AS
RESULT OF PRICE CONTROLS
shortages are likely to occur if government tries to
restrict firms in charging higher prices through price
ceilings.