Republic of the Philippines

City of Caloocan
St. Vincent de Ferrer College of Camaranin, Inc.
SVFC Compound, San Vicente de Ferrer Rd. Area D, Brgy. 179, Caloocan City

COURSE TITLE: MANAGERIAL ECONOMICS Professor: Orland L. Adrigado, CPA

Lesson 3: LAW ON SUPPLY AND DEMAND

Learning Objective
➢ Explains the Law of Demand and determine the factors that affects
demand
➢ To know the Law of Supply and analyzed the factors affecting supply
➢ To determine the equilibrium price to graphical presentation
➢ To expound the effects on the price of movement/shift of either demand
and supply.
Supply- a stock of a resource from which a person or place can be provided with
the necessary amount of that resource
- quantity of a product available in the market for sale at a specified
price and time. In other words, supply can be defined as the willingness
of a seller to sell the specified quantity of a product within a particular
price and time period.
Demand- In economics, demand is formally defined as ‘effective’ demand
meaning that it is a consumer want or a need supported by an ability to pay –
namely a budget derived from disposable income.
The Law of Supply and Demand
- The most basic economic law and the foundation of other economic
theories which may be applied to markets final goods and services or to
markets for labor, capital etc.
- Defines the relationship between the price of a given good or product and
the willingness of people to either buy or sell it.
- In general term, if the demand is higher than the supply, price will increase
and vice versa. In a free market, supply and demand pull against each other
until the equilibrium price is settled.
- Other than the price, there are also other factors that affect both supply
and demand.
 Law of Supply
- The economic law that explains the relationship between price and
quantity supplied which is directly proportional. It states that, as the price
of goods or services increase, the quantity supplied increases and vice
versa, ceteris paribus. If the price of the product increases, the producers
would be willing to supply more of that product, and vv.

Price = Quantity or Price = Quantity

Supply Supply

Supply Schedule and Supply Curve

Supply schedule is a chart that shows the different quantities of goods or services
that a producer is willing provide/produce to meet demand at a given price.
Price Quantity
supplied
50 10,000
25 5,000
10 2,000
5 1,000
2 500

Supply Curve is an economic model that represents the relationship between

quantity and price of a product which the supplier is willing to supply at a given
point of time and is an upward sloping curve where the price of the product is
represented along the y-axis and quantity on the x-axis

SUPPLY CURVE
60 50
50
40
PRICE

25
30
20 10
5
10 2
0
0 2,000 4,000 6,000 8,000 10,000 12,000
SUPPLY
Factors Affecting Supply
Aside from the price, the following are factors affecting supply
1. Cost of production / cost of inputs
- Four factors affecting Cost of production or inputs
❖ Land
❖ Labor
❖ Capital
❖ Entrepreneurship
• When production cost goes up, supply goes down
• when production cost goes down, supply goes up
2. Changes in productivity / Technological progress
- Technology has a big role in affecting productivity
• When productivity goes up, supply goes up
• When productivity goes down, supply goes down
3. Changes in the number of sellers
• More sellers in the market increases supply
• Fewer sellers in the markets decreases supply
4. Fiscal policy / taxes
- Both local and imported products are subjected to different taxes and these
cost are added to the price of these products.
• Higher taxes, duties and tariffs will limit the supplies
• Lower taxes, duties and tariffs will stimulate supplies
5. Future / price expectation
• When the producers expect the prices to go up, they increase supply
• When producers expect the prices to go down, they decrease supply
Some of predictable future events- New year, Christmas season, all souls
day, valentine’s day etc.
LAW OF DEMAND
- The law that explains the relationship between price and quantity demand
which is inversely proportional. It also states that, “as the price of a goods
or services increase, the quantity demand decreases and vice versa”. If the
price of a product increases, less consumers would want to buy the product
and vice versa.

PRICE
PRICE DEMAND DEMAND
OR
Demand Schedule and Demand Curve
Demand schedule- shows the different quantities of goods/services that a
consumer is willing to buy at a given price.
Price Quantity
demand
50 500
25 1,000
10 2,000
5 3,000
2 5,000

Demand curve – is a downward sloping economic graph that shows the

relationship between quantity of product demanded by a market and the price
the market is willing to pay.
DEMAND CURVE
60
50
50

40

30 25
PRICE

20
10
10 5
2
0
0 1000 2000 3000 4000 5000 6000
-10
DEMAND
Factors affecting demand
Aside from price, the following are the factors affecting demand
1. Changes in income
- When income goes up, consumer buys more
- When income goes down, consumer buy less

2. Availability and prices of substitutes

- If the price of product A increases significantly, consumers switch to its
cheaper substitute/alternative, thus decreasing the demand for product A.
- If the price of product A decreases significantly, consumers of its substitute
switch to it, thus increasing the demand for product A.

3. Availability and prices of complementary goods

- (note: complementary goods are things that are often sold and used
together)
- If the price of the complementary goods for product A falls, then demand
for both products increases.
- If the price of the complementary goods for product A increase, then
demand for both products decreases

4. Changes in the number of consumers

- The more buyers there are, the higher the demand
- The fewer the buyers there are, the lower the demand

5. Changes in taste and preferences

- If a product is on trend or becomes popular, the demand increases
- If a product is outdated or if the alternative becomes popular, its demand
decreases.

6. Future/prices expectations
- When consumers expect the price of commodities to rise, then they
demand/buy more.
- When people expect the price to fall, then they are discouraged to buy
now. Instead, they wait until that time comes.
THE EQUILIBRIUM PRICE
Market Equilibrium is a situation where the price at which quantities demanded
and supplied are equal (Supply = Demand). When the market is in equilibrium,
there is no tendency for prices to change. This is an implicit agreement of how
much buyers and sellers are willing to transact to each other.
Equilibrium Price- where the supply of goods matches demand. When a major
index experiences a period of consolidation or sideways momentum, it can be
said that the forces of supply and demand are relatively equal and the market is in
a state of equilibrium. Also called as “market clearing price”

Disequilibrium and Shifts

In a free market economy, disequilibrium happens when supply and demand are
not equal. This imbalance of the two creates disequilibrium prices, surplus and
shortage.
 ➢ When the quantity supplied is more than the quantity demanded, it result
to surplus. Hence, this will encourage seller to lower their prices to
eliminate the surplus.
❖ Supply > Demand = Surplus

➢ When the quantity demanded is greater than the quantity supplied,

shortage exists. Therefore, this would lead to increase the price, an
opportunity to make more profit.
❖ Supply < Demand = Shortage

The Shifts that Change Price

1. Supply shift to the right
- an increase in supply shifts the supply curve to the right (S2). This
Movement increases output (Q2) and causes the price to reduce (P2)
- Possible reasons for the supply to increase are; cheaper cost of production.
Improvement in productivity, increase in number of sellers, lowered taxes
and expectation of price increase by the producers.
2. Supply shifts to the left
- A decrease in supply shifts the supply curve to the left(S2). This shift
decreases output (Q2) and causes the price to increase (P2)
- Possible reasons for the supply to decrease are; expensive cost of inputs,
decline in productivity, decrease in number of sellers, imposition of higher
taxes, and expectation of price fall by the producers.

3. Demand shifts to the right

- An increase in demand shifts the demand curve to the right (D2). This
movement increases consumption (Q2) and causes the price to rise (P2)
- Possible causes for demand to rise are; increase in income, unavailable or
costly substitutes, available and cheaper complementary goods, increase in
population, anticipation of elevated prices by consumers.
4. Demands shifts to the Left
- A decrease in demand shifts the demand curve to the left (D2). This shift
decreases consumption (Q2) and causes price to fall (P2).
- Possible causes for demand to fall are; reduce in income, available or
cheaper substitutes, unavailable or expensive complementary goods,
decrease in population, anticipation of reduced prices by the consumers.