Lesson 2.

Demand, Supply, Market Equilibrium, and Elasticity

What is Demand?
 A relation showing the quantities of a good that consumers are willing and able to buy at
various prices per period, other things constant
 Demand for commodity implies
 Desire to acquire it
 Willingness to pay for it
 Ability to pay for it
Law of Demand
As the price of a good falls, the quantity demanded rises. The quantity of a good demanded per
period relates inversely to its price, other things constant.
Factors Influencing Demand
a. Price of goods or services d. Taste patterns of the consumer

b. Incomes of consumers e. Expected future price of product

c. Prices of related goods and services f. Number of consumers in market
Types of Demand
 Individual demand for the commodity the quantity of a commodity an individual is
willing and able to purchase at a particular price during a specific period given his
income, taste and prices of other commodities such as substitutes and complements
 Market demand for the commodity the total quantity which all the consumers of the
commodity are willing and able to purchase at a given price per time unit, incomes, their
tastes and prices of other commodities
 Autonomous or direct demand for a commodity is one that arises on its own out of a
natural desire to consume or possess a commodity. This type of demand is independent
of the demand for other commodities
 Derived demand arises from the demand for other commodities. Demand for land,
fertilizers and agricultural tools are demanded due to demand for food.
 Short-term demand refers to the demand for goods over a short period
 Long-term demand refers to the demand which exists over a long period of time

SUPPLY
Supply of goods refers to the various quantities of the good which a seller is willing and able to
sell at a different prices in a given market at a particular point of time.
Law of Supply As the price of a good rises, the quantity supplied rises.
Factors Influencing Supplies
a. Price of good or service d. Technological advances
b. Input prices e. Expected future price of product
c. Prices of goods related in production f. Number of firms producing the product

MARKET EQUILIBRIUM
Equilibrium refers to a situation in which the price has reached the level where quantity
supplied equals quantity demanded
Surplus. There is excess supply. Suppliers will lower the prices to increase sales, thereby
moving toward equilibrium
Shortage. There is excess demand. Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium
N.B. At the equilibrium price, the quantity demanded equals the quantity supplied
The behavior of buyers and sellers naturally drives markets toward their equilibrium
Price Ceiling
The maximum legal price that can be charged in a market
Price Floor
The minimum legal price that can be charged in a market

ELASTICITY
A measure of the responsiveness of one variable to changes in another variable
Elasticity of Demand
Measures the degree of responsiveness of the quantity demanded of a commodity to a given
change in any of the determinants of demand
Types of Elasticity of Demand
 Price elasticity of demand
 Income elasticity of demand
 Cross elasticity of demand
Price elasticity of demand is a measure of how much the quantity demanded of a good
responds to a change in the price of that good
Determinants of Price Elasticity of Demand
1) Nature of commodity. The demand for luxury goods is more price-elastic than the
demand for necessities and comforts. Comforts have more elastic demand than
necessities, and less elastic demand than luxuries
2) Availability and proximity of Substitutes. If a large number of close substitutes exist
with a higher degree of substitutability, when price is increased, customers will find it
very easy to switch. Thus, the quantity demanded for the good goes down with elastic
demand
3) Proportion of Income Spent. The larger the proportion of income spent on a
commodity, the greater will be the elasticity of demand for such commodity, and vice
versa
4) Time. The longer the adjustment time, the greater the price-elasticity of demand

Income elasticity is a measure of the responsiveness of consumer demand to changes in

income
Elasticity of Supply. A measure of the way suppliers respond to a change in price
Elastic Supply. A product has elastic supply when a price change causes significant change in
the quantity supplied
Inelastic Supply. A price change causes very little change in the quantity supplied
Factors Influencing Elasticity of Supply
 Availability of resources required to make the product
 Amount of time required to make the product
 Skill level of the worker needed to make the product
 Time period for adjustment