BMSH2007

Demand and Supply (Part 1)

I. Demand

The demand is a relation showing the quantities of a good that consumers are willing and able to buy per
period at various prices, other things held constant (ceteris paribus). Individual demand is the demand of
an individual consumer. The market demand is the sum of the individual demands of all consumers in the
market. (McEachern & Burrow, 2017)

METHODS OF DEMAND ANALYSIS

The demand mentioned in this lesson pertains to the entire demand schedule or demand curve.

1. A demand schedule is a table showing the relationship between prices and the specific quantities
demanded at each. Generally, the provided information by a demand schedule can be used in
graphical form to construct a demand curve showing the price-quantity demanded relationship. (Viray
Jr. & Avila-Bato, 2018)

2. A demand curve is a curve or line showing the quantities of a particular good demanded at various
prices during a given period, other things constant. The market demand curve is the sum of the
individual demand curves for all consumers in the market. The demand curve has a negative slope –
left to right, downward slope indicating the inverse relationship between quantity demanded and
price (Viray Jr. & Avila-Bato, 2018). The quantity demanded is the amount demanded at a particular
price. It is the specific amount of the good on the demand schedule or demand curve.

Demand Schedule
Price of Quantity
Chicken (in Demanded (in
kilos) kilos)
50 1000
100 800
150 600
200 400
250 200
Whereas:
P = Price
QD = Quantity demanded
D = Demand curve

The Law of Demand states that the quantity of demanded products per period relates inversely to their
price, other things constant (ceteris paribus). Since consumers are inclined to maximize satisfaction, the
Law of Demand states that if the prices go up, the quantity demanded of a product will go down, and if
the prices go down, the quantity demanded of a product will go up (Viray Jr. & Avila-Bato, 2018).

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The substitution effect is felt when a product’s price changes demand due to people buying and
consuming other substitute goods. For example, when the prices of bananas rise, people buy oranges
instead. The income effect is felt when a product’s price changes a consumer’s real income or purchasing
power (the capacity to buy within a given income). For instance, if there is an increase in tuition fees,
parents will either not enroll their children or transfer to another school with a lesser tuition fee. (Dinio
& Villasis, 2017)

Marginal utility is the change in total economic utility (or simply utility) resulting from a one-unit change
(meaning buying more than one) when you consume a product or service. Economic utility is the amount
of satisfaction a consumer receives from the consumption of a product or service. For example, a
consumer was hungry, so he/she purchased a burger priced at Php 59. He/she is still hungry, thus deciding
to buy another burger. Now, he/she is full. The consumer's satisfaction from buying another burger is
his/her marginal utility.

The Law of Diminishing Marginal Utility states that the more of the product or service an individual
consumes per period, other things constant (ceteris paribus), the smaller the marginal utility of each
additional unit consumed. Consumers estimate the marginal utility or marginal benefit from the products
or services in deciding what to buy. Consumers choose how much money they can and are willing to spend
based on the expected marginal benefit. Due to diminishing marginal utility, the willingness to buy
another piece of whatever product you decided to buy lessens (diminishes) than your first purchase. For
example, you are buying a bag of chips for Php 25. You will buy another bag (increase in consumption) as
long as your expected marginal benefit from buying another bag exceeds Php 25. You will not buy another
bag of chips (decrease in consumption) if the expected marginal benefit is less than Php 25. Later, you find
out that the price drops to Php 15; as long as the marginal benefit of buying another bag exceeds Php 15,
you will buy more chips (increase in consumption). The Law of Diminishing Marginal Utility helps in
explaining the reason people buy more when the price declines.

Examples of applications of Diminishing Marginal Utility:

• Restaurants that have all-you-can-eat specials. At the all-you-can-eat restaurant, the food,
drinks, and service are priced at Php 990. As long as the marginal utility or marginal benefit of
another bite exceeds the price, the customer will be paying for it, and customers will continue to
eat as much as possible.
• Having a second copy of today’s newspaper. There is no marginal utility in having a second copy.

3. With the use of the demand function, the demand can be analyzed mathematically. The demand
function shows the relationship between the demand for a commodity and the factors (product’s
price, prices of related products, level of income, taste, preferences, etc.) that determine or influence
this demand. It is expressed as a mathematical function. (Viray Jr. & Avila-Bato, 2018)

QD = f (factors)

QD = a – bP Whereas:
QD: Quantity demanded at a price
a = Intercept of the demand curve
b = Slope of the demand curve
P = Price of the good at a period

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Illustration:
The current price of Product A is Php 7. The QD = a – bP
intercept of the demand curve is 4. The slope is QD = 4 – 0.25 (7)
0.25. Compute how much of Product A will be QD = 4 – 1.75
demanded by Consumer Z. QD = 2.25 units of Product A

What if the price increases by Php 2? QD = a – bP

QD = 4 – 0.25 (9)
QD = 4 – 2.25
QD = 1.75 units of Product A

What if the price decreases by Php 2? QD = a – bP

QD = 4 – 0.25 (5)
QD = 4 – 1.25
QD = 2.75 units of Product A

There is an inverse relationship between quantity demanded and price – a price increase will cause a
decrease in the quantity demanded, and vice versa.

CHANGE IN QUANTITY DEMANDED VERSUS CHANGE IN DEMAND (Viray Jr. & Avila-Bato, 2018)

If there is a movement from one point to another (or from one price-quantity combination to another)
along the same demand curve, there is a change in quantity demanded (∆QD). Such change is mainly due
to an increase or decrease in the product’s price. Considering the Law of Demand, the movement is
inverse.

Illustration: The original price of

chicken is Php 200 per kilo. Its
price is now lowered to Php 100
per kilo.

Whereas:
P = Price is plotted along the y-
axis
QD = Quantity demanded is
plotted along the x-axis
P0 = Original price
Q0 = Quantity demanded of the
Original Price
a = Indicator where P0 and Q0
meets
P1 = Price change (there is a price
decrease)
Q1 = Quantity demanded due to
price change
b = Indicator where P1 and Q1
meets
D = Demand curve

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When an entire demand curve shifts leftward or rightward, there is a change in demand – more or fewer
amounts of products or services demanded by consumers at the same price; the factors (besides the price
of the product) caused the increase (right) or decrease (left) in demand.

Illustration: The original price of

chicken is Php 200 per kilo. Factoring in
the taste or preference, priced at Php
100, there is a decrease in the demand
on the amount of product from 800
units to 600 unit.

Whereas:
P = Price is plotted along the y-axis
QD = Quantity demanded is plotted
along the x-axis
P0 = Price of a product
Q0 = Quantity demanded of the
product
Q1 = Quantity demanded of the
product
D = Indicating a shift/movement;
demand curve
D’ = Resulting in a change; demand
curve

Illustration: The original price of chicken

is Php 200 per kilo. Factoring in the taste
or preference, priced at Php 100, there is
an increase in the demand on the
amount of product from 800 units to
1,000 units.

Whereas:
P = Price is plotted along the y-axis
QD = Quantity demanded is plotted along
the x-axis
P0 = Price of a product
Q0 = Quantity demanded of the product
Q1 = Quantity demanded of the product
D = Indicating a shift/movement;
demand curve
D’ = Resulting in a change; demand curve

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NON-PRICE DETERMINANTS OF DEMAND

These are some of the factors/forces that cause changes to the demand curves: (Viray Jr. & Avila-Bato,
2018)
1. Taste or Preference
Taste or preference is consumers' personal likes or dislikes for certain goods and services. There is a
brand preference by consumers when they believe that having such a product is trendy. There is
usually an increase in demand for a certain product due to consumer preference. The product that
consumers do not prefer suffers a decrease in demand.
2. Changing Incomes
An increase in one’s income increases an individual's capacity or power to demand products or
services that they cannot buy due to having a lower income.

Two (2) broad categories vary on how demand for the good is responding to changes in income:
(McEachern & Burrow, 2017)
a. Where there is an increase in income, there is an increase in the demand for normal goods, with
the demand curve shifting to the right. Most goods are said to be normal goods.
b. When there is an increase in income, there is a decrease in demand for inferior goods. Consumers
switch to normal goods from inferior goods.

Examples:
INFERIOR GOODS NORMAL GOODS
Ukay-ukay clothing New clothes
Jeepney rides Car
Plane rides
Secondhand furniture New furniture

3. Population Change
An increase in the demand for some goods or services, particularly for basic goods, results from an
increasing population. There is a decline in demand due to a decrease in population.
4. Occasional or Seasonal Products
Various events and seasons within the year may cause a movement on the demand curve for specific
goods. Examples: Queso de bola during Christmas, flowers and chocolates during Valentine’s Day.
After such events, the demands for such products revert to the original level.
5. Substitute and Complementary Goods
Substitute goods are interchanged with another good, usually offered at a lower price, thus making
them more attractive to customers. Example: Lena wants to buy Adidas Nizza Trefoil shoes priced at
Php 2,310. With the price and her budget of only P2,000, she bought a cheaper pair of shoes, Reebok
Runner 4.0, priced at Php 1,836.49. Adidas and Reebok are substitutes. Complementary goods
complement each other, and one good cannot exist with the other good. Example: your car cannot
function without gasoline/petrol.
6. Expectations of Future Prices
If customers expect the price of a product or service to increase (or decrease) in the future, it may
lead to an increase (or decrease) in current demand. Future expectations may alter the demand for a
specific good.

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II. Supply

The supply is a relation showing the quantities of goods producers are willing and able to sell at various
prices at a given period, and other things are held constant. The individual supply is the supply of an
individual producer. The market supply is the supply from all producers in the market for that good.
(McEachern & Burrow, 2017)

METHODS IN SUPPLY ANALYSIS

The supply mentioned in this lesson pertains to the supply schedule or supply curve.

1. A supply schedule is a table listing the various prices of a product and the specific quantities supplied
at each of these prices at a given time. Generally, the provided information by a supply schedule can
be used in graphical form to construct a supply curve showing the price-quantity supplied relationship.
(Viray Jr. & Avila-Bato, 2018)

2. A supply curve is a curve or line showing the quantities of a particular good supplied at various prices
during a given period and other things held constant. The market supply curve shows the total
quantities of all producers at various prices. It is simply the horizontal sum of the individual supply
curves for all the producers in the market. There is an upward slope showing the positive relationship
between price and quantity supplied – as the prices of commodities increase (or decrease), there will
be more (or less) goods offered for sale by the producers (Viray Jr. & Avila-Bato, 2018). The quantity
supplied is the amount offered for sale at a specific price, as shown by the point on the given supply
curve.

Supply Schedule
Price of Quantity
Chicken (in Supplied (in
kilos) kilos)
50 200
100 400
150 600
200 800
250 1000
Whereas:
P = Price
QS = Quantity supplied
S = Supply curve

The Law of Supply states that the quantity of product supplied during a period is usually directly related
to its price, other things constant (ceteris paribus).

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If the price of a product or service increases, the quantity supplied for such a product or service increases,
and vice versa. The Law of Supply indicates that a higher price, which is an incentive for businesses or
producers, encourages them to produce more goods or services for profit maximization. (Viray Jr. & Avila-
Bato, 2018)

3. A supply function is a mathematical notation that links the dependent variable, quantity supplied (QS),
with various independent variables that determine quantity supplied. These independent variables
are the price of the product, the price of factor inputs, the number of sellers in the market,
importations, weather conditions, technology, policies of the governments, and business goals. (Viray
Jr. & Avila-Bato, 2018)

QS = f (independent variables)

QS = c + dP Whereas:
QS: Quantity supplied at a price
c = intercept of the supply curve
d = slope of the supply curve
P = price of good sold at a period

Illustration:
The current price of Product A is Php 15. The QS = c + dP
intercept of the supply curve is 5. The slope is 0.25. QS = 5 + 0.25 (15)
Compute how much of Product A will be supplied QS = 5 + 3.75
by the sellers. QS = 8.75 units of Product A

What if the price increases by Php 4? QS = c + dP

QS = 5 + 0.25 (19)
QS = 5 + 4.75
QS = 9.75 units of Product A

What if the price decreases by Php 4? QS = c + dP

QS = 5 + 0.25 (11)
QS = 5 + 2.75
QS = 7.75 units of Product A

CHANGES IN QUANTITY SUPPLIED VERSUS CHANGE IN SUPPLY (Viray Jr. & Avila-Bato, 2018)

If there is movement from one point to another along the same supply curve, there is a change in quantity
supplied (∆QS). Such change is due to an increase or decrease in the product’s price. Because of the law
of supply, the direction of the movement is positive.

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Illustration: The original price of

chicken is Php 200 per kilo. Its price
is now lowered to Php 100 per kilo.

Whereas:
P = Price is plotted along the y-axis
QS = Quantity supplied is plotted
along the x-axis
P0 = Original price
Q0 = Quantity supplied for the
original price
a = Indicator where P0 and Q0
meets
P1 = Price change (there is a price
increase)
Q1 = Quantity supplied due to the
price change
b = Indicator where P1 and Q1
meets
S = Supply curve

When an entire supply curve shifts leftward or rightward, there is a change in supply – more or fewer
quantities of a product or service are supplied by sellers or producers at the same price; the independent
variables (besides the price of the product) caused the increase (right) or decrease (left) in supply.

Illustration: The original price of

chicken is Php 200 per kilo. Factoring
in the number of sellers, the price is at
Php 100, and there is a decrease in the
quantity of the product from 400 units
to 200 units.

Whereas:
P = Price is plotted along the y-axis
QS = Quantity supplied is plotted along
the x-axis
P0 = Price of a product or service
Q0 = Quantity supplied of the product
or service
Q1 = Quantity supplied of the product
or service
S = Indicating a shift/movement;
supply curve
S’ = Resulting in a change; supply
curve

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Illustration: The original price of

chicken is Php 200 per kilo. Factoring
in the number of sellers, the price is at
Php 100, and there is an increase in
the quantity of the product from 400
units to 200 units.

Whereas:
P = Price is plotted along the y-axis
QS = Quantity supplied is plotted along
the x-axis
P0 = Price of a product or service
Q0 = Quantity supplied of the product
or service
Q1 = Quantity supplied of the product
or service
S = Indicating a shift/movement;
supply curve
S’ = Resulting in a change; supply
curve

NON-PRICE DETERMINANTS OF SUPPLY

These are some of the forces/independent variables that cause changes to the supply curve (Viray Jr. &
Avila-Bato, 2018):
1. Optimization in the Use of Factors of Production
An increase in supply will happen when there is an optimization of the utilization of production factors
(economic resources). However, a decrease in the supply will occur when there is a failure to optimize.
Optimization refers to the process or methodology of making or creating something as fully perfect,
functional, or effective as possible.
2. Technological Change
There is an increase in the supply brought by the introduction of cost-reducing innovations. However,
the problems that the new technology might encounter, such as technical disruptions, can cause a
decrease in supply, and freezing production (Samuelson and Nordhaus, 2004; cited by Viray Jr. & Avila-
Bato, 2018).
3. Future Expectations
These can impact not just buyers but also sellers. If there is an anticipation of an increase in prices,
sellers may choose to hold back the current supply, taking advantage of the future price increase,
consequently decreasing market supply. There will be an increase in the present supply when sellers
expect a decline in their products' prices.
4. Number of Sellers
A greater supply of products and services will be available if more sellers are in the market – such a
variable directly impacts the quantity supplied.
5. Weather Conditions
There is a reduction in the supply of agricultural commodities during natural disasters. It is the
opposite when there is good weather.

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6. Government Policies
When quotas and tariffs on imported products are removed, there is an effect on the supply, and
when restrictions and quotas or tariffs are lowered, there is a boost in the supply of goods in the
market due to imports. Importers pay the government tariffs or duties and taxes for their products to
be accepted in a country. To protect domestic/local products, importers accept the government's
quota on certain products.

III. Market Equilibrium

DEFINITION OF TERMS (McEachern & Burrow, 2017)

Market equilibrium is when the quantity consumers are willing and able to buy equals the quantity
producers are willing and able to sell. Equilibrium price (market-clearing price) equates quantity
demanded with quantity supplied. There is no pressure for the price to change since there is no shortage
and surplus. Equilibrium market price is the price agreed upon by the seller to offer his good or service
for sale and for the buyer to pay for it (Viray Jr. & Avila-Bato, 2018).

The market finds equilibrium through the independent and voluntary actions of buyers and sellers. In
competitive markets, many individual buyers’ and sellers’ independent decisions cause the price to reach
equilibrium. The market is personal – each consumer and producer decides how much to buy or sell at a
certain price. The market is also impersonal – requiring no conscious coordination or communication
among consumers or producers; let the price do all the talking.

Disequilibrium (Market Disequilibrium) is a mismatch between the quantity demanded and quantity
supplied as the market seeks equilibrium. It is usually temporary, except when government intervenes to
set the price. A surplus is an amount by which quantity supplied exceeds the quantity demanded at a
given price. It usually forces the price down. Consumer surplus is the difference between what consumers
are willing and able to pay for a given quantity of a good and what they pay. A shortage is an amount by
which quantity demanded exceeds the quantity supplied at a given price. It usually forces the price up.

Whereas:
P = Price is plotted along the y-axis
Q = Quantity supplied and
demanded is plotted along the x-
axis
S = Supply curve
D = Demand curve

For instance:
At Php 250: QS = 1000; QD = 200 units
There is a surplus.

At Php 50: QS = 200; QD = 1000 units

There is a shortage.

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CHANGES IN DEMAND, SUPPLY, AND EQUILIBRIUM (Viray Jr. & Avila-Bato, 2018)

1. Changes in Demand
As supply remains constant, an increase (or decrease) in demand increases (or decreases) both
equilibrium price and quantity.

Whereas:
P = Price is plotted along the y-
axis
Q = Quantity supplied and
demanded is plotted along the x-
axis
S = Supply curve
D = Demand curve
D’ = Increase in demand; demand
curve
E0 = Equilibrium point
E1 = New equilibrium point

If there is an increase in demand,

this results in higher prices and
quantities.

2. Changes in Supply
If there is an increase (or decrease) in supply, as demand remains constant, it will decrease (or increase)
in the equilibrium price and increase (or decrease) in the number of goods sold in the market.

Whereas:
P = Price is plotted along the y-axis
Q = Quantity supplied and demanded
is plotted along the x-axis
S = Supply curve
S’ = Increase in supply; supply curve
D = Demand curve
E0 = Equilibrium point
E1 = New equilibrium point

If there is an increase in supply, this

results in a lower price and a higher
quantity.

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3. Complex Cases
The changes in both supply and demand result in a combination of individual changes.

a. When there is an increase in supply and a decrease in demand

Whereas:
P = Price
Q = Quantity
S = Supply curve
S’ = Increase in supply
D = Demand curve
D’ = Decrease in demand
EQ = Equilibrium quantity
EP = Equilibrium price
EP1 = New equilibrium price

S = 600 units
D = 600 units
EQ = 600 units; EP = Php 150

S’ = 600 units
D’ = 600 units
EQ = 600 units; EP1 = Php 50

S = 400 units Explanation:

D’ = 400 units Both equilibrium quantity and equilibrium price will fall: S’ < D’.
EQ = 400 units; EP = Php 100
The equilibrium quantity will rise, and the equilibrium price will
S’ = 800 units fall: S’ > D’.
D = 800 units
EQ = 800 units; EP = Php 100

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b. When there is a decrease in supply, and there is an increase in demand

Whereas:
P = Price
Q = Quantity
S = Supply curve
S’ = Increase in supply
D = Demand curve
D’ = Decrease in demand
EQ = Equilibrium quantity
EP = Equilibrium price
EP1 = New equilibrium price

S = 600 units
D = 600 units
EQ = 600 units; EP = Php 150

S’ = 600 units
D’ = 600 units
EQ = 600 units; EP1 = Php 250

S = 800 units Explanation:

D’ = 800 units The equilibrium quantity will fall, and the equilibrium price will
EQ = 800 units; EP = Php 200 rise: S’ > D’.

S’ = 400 units Both equilibrium quantity and equilibrium price will rise: S’ < D’.
D = 400 units
EQ = 400 units; EP = Php 200

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c. When there is an increase in both supply and demand

Whereas:
P = Price
Q = Quantity
S = Supply curve
S’ = Increase in supply
D = Demand curve
D’ = Decrease in demand
EQ = Equilibrium quantity
EP = Equilibrium price
EP1 = New equilibrium price

S = 600 units
D = 600 units
EQ = 600 units; EP = Php 150

S’ = 1000 units
D’ = 1000 units
EQ = 1000 units; EP1 = Php 150

Equilibrium price increases: an Explanation:

increase in demand The equilibrium quantity will rise, and the equilibrium price will
S = 800 units fall: S’ > D’.
D’ = 800 units (D’ boosts EP)
EQ = 800 units; EP = Php 200 Both equilibrium quantity and equilibrium price will rise: S’ < D’.

Equilibrium price decreases:

an increase in supply
S’ = 800 units (S’ lowers EP)
D = 800 units
EQ = 800 units; EP = Php 100

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d. When there is a decrease in both supply and demand

Whereas:
P = Price
Q = Quantity
S = Supply curve
S’ = Increase in supply
D = Demand curve
D’ = Decrease in demand
EQ = Equilibrium quantity
EP = Equilibrium price
EP1 = New equilibrium price

S = 600 units
D = 600 units
EQ = 600 units; EP = Php 150

S’ = 200 units
D’ = 200 units
EQ = 200 units; EP1 = Php 150

S = 400 units Explanation:

D’ = 400 units Both equilibrium quantity and equilibrium price will fall: S’ < D’.
EQ = 400 units; EP = Php 100
The equilibrium quantity will fall, and the equilibrium price will rise:
S’ = 400 units S’ > D’.
D = 400 units
EQ = 400 units; EP = Php 200

PRICE CONTROLS (Viray Jr. & Avila-Bato, 2018)

Price controls are the government’s specification of minimum or maximum prices for certain goods and
services when the government considers existing prices disadvantageous to the producer or consumer.
Aimed at combating inflation, price controls may be applied across various products and services as part
of a price and income policy.

Government intervention (such as price controls) introduces new products in the market, and when
demand or supply suddenly changes, they are sources of disequilibrium. Price controls cause market price
distortions and interfere with the ability of the market to allocate resources efficiently. (McEachern &
Burrow, 2017)

The two (2) types of price control are the price floor and price ceiling. The price floor (floor price) is a legal
minimum price below which a product cannot be sold. The price ceiling is a legal maximum selling price
above which a product cannot be sold. For an impact to occur, a price floor is set above the equilibrium
price, while a price ceiling is positioned below the equilibrium price. There is a surplus when a floor price
is above the equilibrium price. There is a shortage when a ceiling price is below the equilibrium price.

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Whereas: There is an equilibrium between the quantity supplied and

P = Price quantity demanded at Php 150 and 600 units.
Q = Quantity
S = Supply curve
D = Demand curve

When the government imposes a

price floor of Php 200, the quantity
supplied falls to 400 units, and the
quantity demanded rises to 800 units,
resulting in a shortage of 400 units
(800 – 400 = 400). In the long run, a
floor price will create a surplus of
products in the market – producers
are enticed to produce more due to
the higher price, and consumers are
restrained from purchasing more.

When the government imposes a price ceiling of Php 100, the quantity supplied falls to 400 units, and the
quantity demanded rises to 800 units, resulting in a shortage of 400 units (800 – 400 = 400). In the long
run, there will be a greater shortage in the market – producers are taking advantage of the consumers
since they are selling their products at higher prices in illegal/black markets, and consumers are left with
no option but to purchase products at a price higher than the price ceiling.

LAW OF SUPPLY AND DEMAND

The Law of Supply and Demand states that price decreases when supply is greater than demand and
increases when demand is greater than supply (Leaño Jr., 2016).

References:
Dinio, R. P., & Villasis, G. A. (2017). Applied Economics. Manila, Philippines: Rex Book Store, Inc.
Leaño Jr., R. D. (2016). Applied Economics For Senior High School. Intramuros, Manila: Mindshapers Co.,
Inc.
McEachern, W. A., & Burrow, J. L. (2017). Applied Economics: An Introduction (Philippine Edition). Quezon
City, Philippines: Abiva Publishing House, Inc.
Viray Jr., E. B., & Avila-Bato, M. J. (2018). Applied Economics. Mandaluyong City, Philippines: Anvil
Publishing, Inc.
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