LESSON

APPLIED ECONOMICS:

3 Supply and Demand

What I need to know?

After going to this lesson you are expected to:

 Define the concept of supply and demand.

 To analyze to importance of supply and demand in our everyday lives.

Content
SUPPLY AND DEMAND

MEANING OF DEMAND AND SUPPLY

Demand means the desire for a particular good backed up by sufficient purchasing power. The term
demand signifies the ability or the willingness to buy a particular commodity at a given point of time.

Supply, on the other hand, is the quantity of a commodity that is in the market and available for
purchase at particular price. In other words, supply is the amount of goods and services available for sale at
a given price in a given period of time and place. Supply implies the ability and willingness of sellers to sell.

DEMAND AND SUPPLY SCHEDULE

A market is a place where buyers and sellers interact with each other and that exchange takes place
among them. In the market, there are different buyers and sellers who will buy or sell different quantities of a
commodity. Because of this, different behaviors between buyers and sellers exist, thus, a demand/supply
schedule has to exist.

A demand schedule reflects the quantities of goods and services demanded by a consumer or an
aggregate of consumers at any given price. To understand this fulli, let us analyze a hypothetical demand
schedule of beef in the market as shown in table 1.

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 The supply schedule shows the different quantities that are offered for sale at various prices. The
supply schedule may reflect the individual schedule of only one producer or the market schedule showing
the aggregate supply of a group of sellers or producers. Table 2 gives you an idea of a supply schedule.

Table 1 Table 2
Hypothetical Demand of Hypothetical Supply of
Beef in the Market Rice in the Market

Price of Beef QD Price of Beef QD

(Per Kilo) In Kilos (Per Kilo) In Kilos

Php 300 20 Php 300 20

250 40 250 40
200 60 200 60
150 80 150 80
100 100 100 100
50 120 50 120

In Table 1, it is shown that an individual would tend to buy more when its price is low than when the
price is high. At a price of Php 300.00, quantity demanded by the consumers is 20 kilos while a decrease of
price to Php 50.00 increase the quantity demanded of consumers to 120 kilos.

Table 2 indicates that a seller offers a big quantity of rice supply in the market if the price is high and
likewise, sells only a few sack of rice when the price is low.

THE LAW OF DEMAND AND SUPPLY

The law of demand may be stated as “the quantity of a commodity which buyers will buy at a
given time and place will vary inversely with the price.” This means that as price increases, quantity
demanded decreases, and as price decreases, quantity demanded increases other things are constant.
Such general tendencies of consumers can be explained by two reasons:

1. Income effect – At lower prices, an individual has a greater purchasing power. This
means, he can buy more goods and services. But at higher prices, natural, he can buy
less.

2. Substitution effect – Consumers tend to buy goods with lower prices. In case the price of
a product that they are buying increases, they look for substitutes whose prices are lower.
Thus, the demand for higher priced goods will decreased.

The law of supply states that the quantity offered for sale will vary directly with price. This means that
as price increases quantity supplied also increases; and as price decreases, quantity supplied also
decreases. The direct relationship between price and quantity supplied is the law of supply. Producers are
willing and able to produce and offer more goods at a higher price than at a lower price. Obviously, sellers
offer more goods at a higher price because they make more profits. Such behavior of sellers or producers is
a natural inclination. No businessman is willing to produce goods if he makes no profit.

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DEMAND AND SUPPLY CURVE

The demand schedule shown in Table 1 can also be understood through graphical illustration known
as the demand curve. In many instances, it is more convenient to express the relation between prices and
quantity demanded by means of a demand curve.

Figure 1 shows the translation of Table 1 into graphical illustration.

The supply schedule as shown in Table 2 can also be illustrated in graphical form known as the
supply curve. This is shown in Figure 2.

Fig 1. Graphic Illustration of Fig 2. Graphic Illustration of

Demand Curve Supply Curve

In Figure 1, price is presented on the vertical axis and quantity demanded on the horizontal axis. The
points can be connected a continuous curve. It can be noted that the demand curve is sloping down. It
shows that price and quantity demanded are inversely proportional producing negative relationship. This
inverse relationship between prices and quantity demanded depicts the law of demand.
In Figure 2, it can be noted that the supply curve has an upward slope. It shows that price and
quantity supplied are proportional to each other. This kind of relationship depicts the law of supply.

DETERMINANTS OF DEMAND DETERMINANTS OF SUPPLY

1. Income 1. Technology
2. Population 2. Cost of Production
3. Tastes and Preferences 3. Number of Sellers
4. Price Expectation 4. Taxes and Subsidies
5. Prices of Related Goods 5. Weather

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Name: _________________________ Subject Teacher: Mr. Nebochadnezar M. Manzo
Grade/ Track: ___________________

Assessment 1.3 SCORE

A. DIRECTION: Identify the following:

____________________1. A place where buyers and sellers interact with each other and that exchange
takes place among them.
____________________2. States that the quantity offered for sale will vary directly with price.
____________________3. The term _________ signifies the ability or the willingness to buy a particular
commodity at a given point of time.
____________________4. The ability and willingness of sellers to sell
____________________5. This means that as price increases, quantity demanded decreases, and as price
decreases, quantity demanded increases.

B. DIRECTION: USING YOUR OWN UNDERSTANDING, write 5 importance of demand and supply in
our everyday lives.

1. ________________________________________________________________________________
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2. ________________________________________________________________________________
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3. ________________________________________________________________________________
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4. ________________________________________________________________________________
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5. ________________________________________________________________________________
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