Big Picture in Focus: ULO - B.

Discuss the basic analysis of

demand and supply.

Metalanguage

The essential terms below are operationally defined for you to have a better
understanding of this section in the course.

1. Tariff. This refers to a tax imposed on imported products.

2. Quotas. This refers to a limited quantity of a particular product that can be produced,
exported, or imported under official controls.

3. Substitute goods. These are the goods that may be used in place of another. For
example: coffee and tea, Pepsi and Coca-cola, etc.

Essential Knowledge

In the previous ULO, you have learned the circular flow model, which depicts the
relationship between the firm and the household (consumers). Their interaction
enables the economy to operate; otherwise, it will remain stagnant. Therefore, it is
essential that you understand the basic elements of demand and supply, as well as
the concept of market equilibrium.

Market

Just like what you have in mind, a market is where we go to buy foods and other
essential needs. It is simply a place where buyers and sellers meet to trade goods.

Types of Market

▪ Dry Market. This is where people buy dry goods such as shoes, bags, clothes,
etc.

▪ Wet Market. This is where people buy vegetables, meat, fruit, etc.

▪ Labor Market. This refers to an intangible domain wherein employers and job
seekers meet.

▪ Stock Market. This is where people buy, sell, and share stocks, which are
shares of ownership in a public company.

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Demand (Household/Consumers’ Side)

Demand pertains to the quantity of goods or services that people are willing to buy at
a given price at a given time.

Law of Demand

The law of demand states that “If the price goes UP, the quantity demanded will go
DOWN, if the price goes DOWN, the quantity demanded will go UP”.

If the price of rice goes down to 35.00/kilo, your mother is likely to buy more than your
family’s usual consumption, but if the price goes up to 60.00/kilo, she is likely to reduce
her purchase or find another alternative such as buying corn instead.

Demand Schedule

Demand schedule is a table that shows the relationship between prices and specific
quantities demanded at each price.

Hypothetical Demand Schedule for Rice per Month

Situation Price (P) Quantity (Kg)

A 60.00 10
B 55.00 20
C 50.00 30
D 45.00 40
E 40.00 50

This table shows the various prices and quantities that the customer is willing to buy
at each price. For example, at 60.00, the customer is willing to buy only 10 kilos of rice
(situation A); however, at the price of 40.00, he is willing to buy 50 kilos of rice (situation
E). As you may have noticed, the lower the price goes, the higher the quantity the
customer is willing to buy. This is congruent with the law of demand.

Demand Curve

Demand curve is a graphical representation showing the relationship between price

and quantities demanded per time period. A demand curve has a negative slope; thus,
it slopes downward from left to right – indicating the inverse relationship between price
and quantity demanded.

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Using the information provided by the hypothetical demand schedule, the figure on the
following page illustrates a typical demand curve.

DEMAND CURVE
70

60

50

40
Price

30

20

10

0
0 10 20 30 40 50 60
Quantity

The figure above illustrates a typical demand curve. The Y-axis represents the price
while the X-axis represents the quantity demanded. As mentioned, the demand curve
slopes downward which indicates the inverse relationship between price and quantity
demanded.

Demand Function

Demand function shows the relationship between demand for a commodity and the
factors that influence such demand. These factors are the price itself, prices of other
related commodities, buyers’ income, tastes and preferences, size and composition of
the population, etc. The demand function is expressed in mathematical function, thus,
Qd = f (price, income, price of related goods, etc.)

Change in Quantity Demanded vs. Change in Demand

These terms sound the same, but it is crucial to understand the difference between
“change in quantity demanded” and “change in demand”.

Change in Quantity Demanded: There is a change in quantity demanded if the

movement is along the same demand curve. This is caused by the increase or
decrease in the product’s price.

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 Change in Quantity Demanded
70

60

50

40
Price

30

20

10

0
0 10 20 30 40 50 60
Quantity

In this figure, the change in quantity demanded occurs due to changes in price. Hence,
from 60.00 to 50.00 (axis Y), the quantity demanded also changed from 10 kilos to 20
kilos.

Change in Demand: There is a change in demand if the entire demand curve shifts
to the right side, resulting in an increase in demand. This is caused by other factors
aside from price.

Change in Demand
70

60

50

40
Price

30

20

10

0
0 10 20 30 40 50 60 70
Quantity

Q1 Q2

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In the figure (Change in Demand), there are two different movements (notice the two
lines) in the demand curve. The price remains the same, but the demand increases
(look at the orange line, where at the same price 60.00, the demand increases to 20
kilos). This happens due to the increase of other factors aside from price. For example,
due to an increase in income, the buyer could now afford to buy more even if the price
remains the same.

Other Factors that cause the demand curve to change

▪ Taste or Preference. This pertains to consumers’ likes or dislikes for a

particular goods or services. Changes in tastes or preferences result in either
increase or decrease in customers’ demand. For example, when sunflower-
designed blouses became a hit, the demand for it increases as customers want
to go with the current trend. However, when the popularity of such design faded,
customers’ demand also decreases.

▪ Changing incomes. An increase in one’s income increases their buying power

and, therefore, the capacity to demand more goods or services. On the other
hand, a decrease in one's income also reduces their buying power, thereby
reducing their demand for goods and services. For example, Harris, who
receives a salary of 10,000.00/month, could only afford to buy two shirts during
payday. After six months, he was promoted to a higher position and his salary
increased to 20,000/month. Due to the increase in his salary, he can now afford
to buy more shirts per month. His capacity to buy more is simply the result of
his changing income.

▪ Occasional or Seasonal Products. The various events or seasons in a given

year also cause the demand to change. For example, during Valentine’s day,
the demand for chocolates and flowers increases. Similarly, during Christmas,
demand for Christmas decors and delicacies also rises. However, the demand
reverts to the original level after the event.

▪ Population Change. An increase in population leads to more demand. Simply

put, more people means more goods and services are to be demanded. On the
contrary, a decrease in population leads to a decline in demand.

▪ Substitute Goods. In situations wherein the price of particular good rises, a

consumer tends to look for alternative commodities. For example, if the price of
Coke increases, the consumer may opt to buy juice instead. Or when the price
of Nike shoes is 5,000.00, the buyer may choose to purchase non-branded
shoes instead. Substitute products are generally offered at cheaper prices

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making it more attractive for the consumers to buy.

▪ 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 or
decrease. For example, if households expect the price of rice to increase next
week, their natural behavior would be to stock-up rice before the price goes up.
Thus, at some point, there will be an increase in demand for rice due to
consumers’ stockpiling because of the expected increase in price in the future.

Supply (Firms/Seller’s Side)

Supply refers to the quantity of goods or services that firms are willing to sell at a
given price at a given time, ceteris paribus. It is important to remember that sellers
normally sell more at a higher price than a lower price.

Law of Supply

The law of supply states that “if the price goes UP, quantity supplied also goes UP; if
the price goes down, quantity supplied also goes DOWN.

Obviously, sellers would like to sell their goods or services when the price is up to
maximize their profits.

Supply Schedule

A supply schedule is a table that shows the relationship between prices and specific
quantities supplied at each price.

Hypothetical Supply Schedule for Rice per Month

Situation Price (P) Quantity (kg)

A 40 48
B 35 41
C 30 30
D 25 17
E 20 5

This table shows the various prices and quantities that the seller is willing to sell at
each price. For example, at 40.00, the seller is willing to sell 48 kilos of rice (situation
A); however, at the price of 20.00, he is willing to sell only 5 kilos of rice (situation E).

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As you may have noticed, the higher the price goes, the higher the quantity the seller
is willing to sell. This is in congruence with the law of supply.

Supply Curve

A supply curve is a graphical representation showing the relationship between the

price of the product or factor of production (such as labor), and the quantity supplies
per time period. A supply curve typically slopes upward from left to right, indicating the
positive relationship between price and quantity supplied.

Using the information provided by the hypothetical supply schedule, the figure below
illustrates a typical supply curve.

Supply Curve
45

40

35

30

25
Price

20

15

10

0
0 10 20 30 40 50 60
Quantity Supplied

The figure above illustrates a typical supply curve. The Y-axis represents the price,
while the X-axis represents the quantity supplied. As mentioned, the supply curve
slopes upward, which indicates the positive or direct relationship between price and
quantity supplied.

Supply Function

A supply function shows the relationship between supply for a commodity and the
factors that influence such supply. These factors are the price itself, the number of

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sellers in the market, price of factor inputs, technology, business goals, importations,
weather conditions, and government policies. Thus, Qs = f (price, number of sellers,
price of factor inputs, technology, etc.)

Change in Quantity Supplied vs. Change in Supply

Like the concept of demand, the above terms differ in terms of their supply curve
movement.

Change in Quantity Supplied: There is a change in quantity supplied if the

movement is along the same supply curve. This is caused by the increase or decrease
in the product’s price.

Change in Quantity Supplied

45

40

35

30

25
Price

20

15

10

0
0 10 20 30 40 50 60
Quantity Supplied

In this figure, the change in quantity supplied occurs due to changes in price. As
illustrated above, when price increases from 20.00 to 25.00 (y-axis), the quantity
supplied also increases from 10 to 20 kilos.

Change in Supply: There is a change in supply if the entire supply curve shifts
rightward or leftward. This is caused by other factors aside from price.

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 Change in Supply
45

40

35

30
Price

25

20

15

10

0
0 10 20 30 40 50 60 70

Q1 Q2

In this figure, there are two different movements (notice the two lines) in the supply
curve. Notice also that the price remains the same, but the supply increases (look at
the orange line, where at the same price 20.00, the supply increase to 20 kilos from
10 kilos). This happens due to the increase of other factors aside from price. For
example, due to new technology, the seller can offer more goods even if the price
remains the same.

Supply increases if the entire supply curve shifts to the right. On the other hand, supply
decreases if the entire supply curve shifts to the left. This increase/decrease is caused
by factors other than price, such as technology, business goals, importations, weather
conditions, and government policies.

Other factors that cause the supply curve to change

▪ Optimization in the use of factors of production. Optimization refers to the

process of making something more efficient and effective as possible.
Therefore, optimization of resources will result to increase in supply.

▪ Technological change. Technology can either increase or decrease the

supply of goods. For example, a Motor Corporation uses Machine “A” in the

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 production of its cars. This machine can produce 20 cars per week. After three
years, they decided to replace Machine “A” with Machine “B”, which can
produce 80 cars per week. Because of this technological change, the quantity
of cars supplied by Motor Corporation increased from 20 to 80 per week.
However, if Machine "B" malfunctions and such were not fixed immediately, the
number of cars supplied would also decrease.

▪ Future expectations. Just as it affects the buyers, this factor also impacts the
sellers. If the sellers anticipate a rise in prices, they may choose to hold back
the current supply to take advantage of the future increase in price. As a result,
the current supply decreases. On the other hand, if sellers expect a decline in
the price, they will increase the current supply of their products.

▪ Number of Sellers. Obviously, the more sellers in the market, the greater
supply of goods and services will be available. For example, if more farmers
will plant rice instead of other crops, then the supply of rice in the market will
increase, assuming the weather condition is good.

▪ Weather conditions. Weather impacts the supply of agricultural goods in the

market. For example, if a typhoon strikes the country, agriculture will be
affected. Therefore, the supply of agricultural products will decline.

▪ Government policy. If the government removes quotas and tariffs on imported

products, the supply of goods in the market will increase. On the contrary,
higher trade restrictions will limit the imported products; however, it will protect
local or domestic products in the market.

Market Equilibrium

Market equilibrium pertains to the balance between demand and supply. It is an

agreement between the seller and the buyer at a particular price and at a particular
quantity.

Market Disequilibrium

Market disequilibrium happens under two conditions: surplus or shortage.

Surplus is a condition in the market where the quantity supplied is more than the
quantity demanded. When this condition happens, the sellers tend to lower their prices
so that goods can be easily disposed of.

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Shortage is a market condition where the quantity demanded is higher than the
quantity supplied. During this condition, there is a possibility of consumers being
abused while sellers may enjoy imposing higher prices.

What Happens when disequilibrium Persists at a longer period of time?

The government may intervene by imposing price control. Price control is the
specification by the government of minimum and maximum prices for goods and
services.

Floor Price – is the legal minimum price imposed by the government if the surplus
condition exists in the market. This move aims to protect the sellers or producers so
they can survive in their business.

Price Ceiling – is the legal maximum price imposed by the government if there is a
shortage in the market. The sellers cannot impose a price higher than what is being
imposed by the government. This action aims to protect consumers from abusive
sellers who take advantage of the situation.

The Partial Equilibrium Analysis

Demand Equation: Qd = a – bP
Supply Equation: Qs = -c + dP
Equilibrium condition: Qd = Qs

Example:

Look for the Price Equilibrium (PE ) and Quantity Equilibrium (QE)

Given:

Qd = 68 – 6P
Qs = -33 + 10P

Solution:

To solve for PE, equate Quantity Demand and Quantity Supply (use the equation for
equilibrium condition), thus:

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 Qd = Qs
68 – 6P = -33 + 10P given
68 + 33 = 10P + 6P
101 = 16P
16 16
6.3125 = PE

To solve for QE, substitute the value of PE to the given equation:

Qd = 68 – 6P PE = 6.3125

68 – 6P
68 – 6(6.3125)
68 – 37.875
QE = 30.125

To check your answer, you can use the quantity supply (given), thus;

Qs = -33 + 10P PE = 6.3125

-33 + 10P
-33 + 10(6.3125)
-33 + 63.125
QE = 30.125

Determining Shortage, Surplus, and Equilibrium

Example:

Price Qd Qs Surplus/Shortage

6 32 27 Shortage
5
4
3
2

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Using the given equation:

Qd = 68 – 6P
Qs = -33 + 10P
Price = 6

To solve for Qd To solve for Qs

Qd = 68 – 6P Qs = -33 + 10P
Qd = 68 – 6(6) Qs = -33 + 10(6)
Qd = 68 – 36 Qs = -33 + 60
Qd = 32 Qs = 27

Qd = 32 > Qs = 27 Shortage

Self-Help: You can also refer to the sources below to help you
further understand the lesson:

* Author, S. (2020). Are there any exceptions to the law of demand in economics?.
New York: Newstex. Retrieved from
https://search.proquest.com/docview/2351538632?accountid=31259

*Hall, M. (2020). Demand-side economics defined. New York: Newstex. Retrieved

from https://search.proquest.com/docview/2407957166?accountid=31259

*Investopedia stock analysis: Understanding supply-side economics (2018).

.Chatham: Newstex. Retrieved from
https://search.proquest.com/docview/2154299370?accountid=31259

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