Basic

Microeconomics
( Lecture 2)
Demand and Supply

In this module the students are expected learn and examine the
following:
 Understand the process of price formation

 How the prices that we observe in the marketplace come to be

what they are.
 Illustrate that price for a good is inevitably linked to the
quantity of a good; price and quantity are different sides of
the same coin and cannot generally be analyzed separately.
 Understand the process in a typical market the demand and
supply.
 Identify the determinants of Demand and Supply

 Know the importance of Demand and Supply

 Compute for the surplus/shortage and market equilibrium and

its effect on market prices
Demand

 Demand
Is the amount or quantity of a good or service that
consumer/buyer wish to purchase at each conceivable price,
with all other influences on demand remaining unchanged
 Law of Demand

 States that there is an inverse relationship between the price

and the quantity demanded (ceteris paribus assumption).
 As the price increases the quantity demanded decreases or
vice versa
(Ceteris paribus) – Is a latin word which means other things
equal or constants or unchanged
Demand
Demand Curve
The demand curve is a graphical representation of the relationship
between the price of a good or service and the quantity demanded
for a given period of time

Figure 1: Illustrates the demand curve

Demand

 Shifts of the Demand Curve

Figure 2: illustrates a shifting of the demand curve

Demand

 Demand Schedule
 Is a tabular presentation of the relationship between price and quantity
demanded.
Table 1. Demand Schedule for oranges.

Price Quantity demanded

10 50

20 40

30 30

40 20

50 10
Demand

 Demand Function
A mathematical expression showing the functional
relationship of between the demand for a commodity
and its various determinants
 Qd = a-bP

Where :
Qd = quantity demanded
P = Price of the good
a = vertical intercept
b = slope of the demand curve
Demand

Determinants of Demand
 Population/number of buyers

 The price of the good or service.

 The income of buyers.

 The prices of related goods or services

 The tastes or preferences of consumers

 Consumer expectations.
 Demand
Determinants of Demand
 Population/number of buyers

 The number of consumers affects “total,” demand.

 As more buyers enter the market, demand rises

 The price of the good or service.

 The law of demand states that when prices increases or rises,
the quantity demand falls.
 That means that when prices drop, demand will increase. People
base their buying decisions on price if all other things are equal.
Demand
Determinants of Demand
 The income of buyers.

 When income rises, so with the quantity

demanded. When income falls, so with
quantity demand.
 Normal Goods – These are goods whose
demand increases as income rises.
 Inferior Goods – These are goods whose
demand decreases as income rises.
Demand
Determinants of Demand
 Prices of related goods or services

The price of related goods or services raises the cost

of using the product you demand, so you'll want less.
 Complementary Goods – these are goods that go
together
 Substitute Goods - In place or substitute for a

product at lower prices

Demand
Determinants of Demand
 Taste or Preference

When the consumer desires, emotions, or preferences

change in favor of a product, so does the quantity
demanded. Likewise, when tastes go against it, that
depresses the amount demanded.
 Expectation of Future prices

When people expect that the value of something will

rise, they demand more of it.
 Supply
 Is the amount or quantity of a good or service that
producers wish to produce at each conceivable price.
 Willingness of the producers

 Law of Supply
 States that there is a direct relationship between the price
and the quantity supply (ceteris paribus assumption).
 As the price increases the quantity supply increases
Supply
Supply Curve
 The Supply curve is a graphical representation of the relationship between the
price of a good or service and the quantity supplied.

 a line that shows the relationship between price and quantity supplied on a
graph, with quantity supplied on the horizontal axis and price on the vertical
axis

Figure 1: Illustrates the Supply curve

Supply
 Shifts of the Supply Curve

Figure 2: Illustrates a shifting of supply

Supply
 Supply Schedule
 A tabular presentation that shows a range of prices
for a good or service and the quantity supplied at
each price
Table 1. Supply Schedule of Stuffed Toys
Price of Quantity Supply
Stuffed Toys (Stuffed Toys)
10 100
20 200
30 300
40 400
50 500
Supply

 Supply Function
A mathematical expression showing the
relationship between the supply for a commodity
and its various determinants
 Qs = c+dP

Where :
Qs = quantity supplied
P = Price of the good
c = level of supply
Supply

Determinants of Supply
 Number of firms/seller

 Cost of Production

 Technology:

 Expectation for future prices

 Government Taxes/Subsidies
Supply
 Number of firms /sellers:
 More sellers in the market increase the market supply.
 Production cost:
 Companies’ goal is to maximize profit. Higher production cost will lower
profit, thus hinder supply.
 Technology:
 Technological improvements help reduce production cost and increase profit,
thus stimulate higher supply.
 Expectation of future prices
 If producers expect future price to be higher, they will try to hold on to their
inventories and offer the products to the buyers in the future, thus they can
capture the higher price.
 Government’s tax policies
 High tax rates increase overall productions costs, which will make it difficult
for suppliers to offer products in the market.
Demand /Supply Analysis

 Income Effect and Substitution effect

 Income effect is the change in the consumption of
goods by consumers based on their income.
 Substitution effect happens when consumers replace
cheaper items with more expensive ones when their
financial conditions change.
 Income effect can be both direct (when it is directly
related to a change in income) or indirect (when
consumers must make buying decisions not directly
related to their incomes).
 A small reduction in price may make an expensive
product more attractive to consumers, which can
also lead to the substitution effect.
Demand /Supply Analysis

 Market Equilibrium
 A state in which market supply and demand balance
each other, and as a result prices become stable
 Surplus- occurs when supply is greater than demand
that results to lower price
 Shortage –occurs when demand is greater than
supply that results to a higher price
 Price Floor – minimum price set by the government
for a certain goods/services
 Price Ceiling- maximum price set by the
government for a certain goods/services