CHAPTER 2: ANALYSIS OF DEMAND AND SUPPLY

MARKET

• A market is where buyers and sellers meet.

• It is the place where they both trade and
exchange goods or services – in other words it
is where transaction takes place.
• Different kinds of markets, such as wet and
dry.
▫ Wet market is where people usually buy
vegetables, meat etc.
▫ Dry market is where people buy shoes, clothes
or other dry goods.
DEMAND
Demand pertains as to the quantity of a good or
service that people are ready to buy at a given
prices within given time period, where other
factors beside price remain constant.
▫ Desire to possess a thing;
▫ The ability to pay for its means of
purchasing it; and
▫ Willingness in utilizing it.
LAW OF DEMAND
The Law of Demand states that if price goes UP, the
quantity demanded will go DOWN. Conversely, if
price goes DOWN, the quantity demanded will go
up ceteris paribus.
 The reason for this is because consumer always
tend to MAXIMIZE SATISFACTION
DEMAND FUNCTION
A Demand Function shows the relationship
between demand for a commodity and the factors
that determine of influence this demand
These factors are – the price of commodity itself,
prices of other related commodities, consumer’s
level of incomes, taste and preferences, size and
composition of level of population, distribution of
income etc.
Demand function is expressed as a mathematical
function:
QD = f (own price, income, price of related goods,
etc.)
CHANGE IN QUANTITY DEMANDED
There is change in quantity demanded if the
movement is along the same demand curve. A
change in quantity demanded is brought about by
an increase (decrease) in product’s price. The
direction of movement however is inverse
considering the Law of Demand.

DEMAND SCHEDULE
A Demand Schedule is a table that shows
relationship of prices and specific quantities
demanded at each of these price.

Table 2.1 Hypothetical Demand Schedule for Rice

Per Month

CAHNGE IN DEMAND
There is an increase of demand if the entire
demand curve shifts to the right side resulting to an
increase of demand. At the same price, therefore,
more amount of good and service are demanded
by the consumer.
DEMAND CURVE
- Figure 2.3a, illustrates an increase in
 It is the graphical representation showing the
demand. We can observe that the entire
relationship between price and quantities
demand curve shifts upward or to the right
demanded per time period.
from D to D’. We can also observe that the
 A demand curve has negative slope thus, it
same price P1 more goods will be
slopes downward from left to right. The
demanded by consumers (from Q1 to Q2)
downward slope indicates the inverse
- Figure 2.3b, We can observe in the figure
relationship between price and quantity
that the entire demand curve shifts
demanded.
downward or to the left from D to D’. If
(a) as the price of the product falls, consumer tends
price remains the same, demand for
to substitute this (now relatively cheaper) product
product or service decrease (from Q1 to Q2)
for other in their purchase;
-
(b) as the price of the product falls, this serves to
increase their real income allowing them to buy
more products
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Forces that cause the demand curve to change
 Taste or preferences
 Pertain to the personal likes or dislikes of
consumers for certain goods and services.
 Changing Income
 Increasing income of household raise the
demand of certain goods or services or vice
versa.
 Occasional or seasonal products
 The various events or seasons in given year
also result to a movement of the demand
curve with reference to particular goods.
 Population change
 An increasing population leads to an
increase in the demand for some types of
goods or services, and vice-versa
 Substitute goods
 Substitute goods that are interchanged with
another good. In a situation where the price
of a particular good increases a consumer
will tend to look closely related
commodities.
 Expectations of future prices
 If buyers expect the price of a good or
service to rise (or fall) in the future, it may
cause the current demand to increase
(decrease). Also, expectations about the
future may alter demand for specific
commodity.
SUPPLY
Supply is the quantity of goods or services that the
firms are ready and willing to sell at a given price
within a given period of time, other factors being
held constant.
▫ Supply is a product made available
by firms.
▫ It should be remembered that
sellers normally sell more at the
higher price than at lower price.
LAW OF SUPPLY
The Law of supply states that if the price of a good
or service goes up, the quantity supplied for such
good or service will also goes up; if the price goes
down the quantity supplied also goes down, ceteris
paribus.
 The law of supply implies that higher price is an
incentive for business firms to produce more
goods or services as this will maximize their
profit.
SUPPLY SCHEDULE
A supply schedule is schedule listing the various
prices of a product and the specific quantities
supplied at each of these prices.
SUPPLY CURVE
 It is a graphical representation showing the
relationship between the price of the product
or factor of production (e.g. Labor) and the
quantity supplied per time.
 The typical market supply curve for a product
slopes upward from left to right indicating that
as price rises (fall) more (less)is supplied.
 The upward slope indicates the positive
relationship between price and quantity
supplied.
Change in quantity Supplied vs. Change in Supply
• There is a change in supply when the
entire supply curve shifts rightward or
leftward. At the same price, therefore,
more amounts of a good or service are
supplied by producers or sellers.
▫ Figure 2.6a an increase in supply. In
the figure, we can see the entire
supply curve moves rightward from
S to S’. We can also observe that at
the same price P1 more goods will
be offered for sale by the producers
(from Q1 to Q2).
▫ Figure 2.6b we can see in the figure
that the entire supply curve shifter
leftward from S to S’. We can also
see that the same price P, supply for
the product will decrease (from Q1
to Q2)
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 • Equilibrium
 Generally pertains to balance exists
when quantity demanded equals
quantity supplied.
• Equilibrium Market price
 Is the price agreed by the seller to
offer its good and service for sale for
the buyer to pay for it.
 Specifically, it is the price at which
quantity demanded of a good is
exactly equal to quantity supplied.

Forces that causes the supply curve to change What happens if there is market disequilibrium?
 Optimization in the use of factors of
 Surplus
production
▫ Optimization refers to the process, or ▫ Is a condition in the market where the
methodology of making something as fully quantity supplied is more than its quantity
perfect, functional, or effective as demanded.
possible. ▫ When there is a surplus, the tendency is for
▫ Efficient use of resources sellers to lower market prices in order for
▫ Maximum production of output at the goods to be easily disposed from the
minimum cost. market.
 Technological change ▫ There is a downward pressure to price
▫ The introduction of cost-reducing where there is surplus in order to restore
innovations in production technology equilibrium in the market.
increase supply on one hand.
 Future expectations  Shortage
▫ If sellers anticipate a rise in prices, they may
choose to holdback the current supply to ▫ Is a condition in the market where the
take advantage of the future increase of quantity demanded is higher than supplied.
price, thus decreasing market supply. ▫ When market experiencing shortage, there
▫ If sellers however expect a decline in the is a possibility of consumers being abused,
price for their products, they will increase while the producers are imposing higher
present supply. prices for their own interest.
 Number of sellers ▫ There is an upward pressure to prices to
▫ The number of sellers has a direct impact restore equilibrium in the market.
on quantity supplied. The more sellers there
are in the market the greater supply of
goods and services will be available.
 Weather condition
▫ Bad weather, such as, typhoons, drought or
other natural disasters, reduces supply of
agricultural commodities while good
weather has an opposite impact.
 Government policy
▫ Removing quotas and tariffs on imported
products also affect supply.
▫ Lower trade restriction and lower quotas
or tariffs boost import, thereby adding
more supply of goods in the market.

MARKET EQUILIBRIUM

• The meeting of supply and demand results

to what is referred to as a “market
equilibrium”.
• Market referred to here is a situation
”where buyers and sellers meet” while
equilibrium is generally understood as a
“state of balance”.
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 Types of Price Control

 Floor Price
▫ It is the legal minimum price imposed by
the government. This is undertaken if a
surplus in the economy persists.
▫ In this case, the government may impose a
minimum price on producer commodities.
 Price Ceiling
▫ It is the legal maximum price imposed by
the government. Price ceiling is utilized by
the government if there is persistent
shortage of goods (e.g. Basic commodities
like food items and oil products) in the
economy.