THE BASIC ANALYSIS OF

DEMAND AND SUPPLY

Principles of Economics with Land
Reform and Taxation
(SSC05)
DEMAND
• pertain as to the quantity of a good or service
that people are ready to buy at a given prices
within a given time period, when other factors
besides price are held constant.
DEMAND
• The desire for a particular good backed up by
sufficient purchasing power.

• The schedule of various quantities of commodities

which buyers are willing to purchase at various
prices in a given time and place.
DEMAND IMPLIES THREE THINGS:
• Desire to possess a thing;
• The ability to pay for it or means of purchasing it;
and
• Willingness in utilizing it.
TWO KINDS OF DEMANDS
1. Potential demand
- the demand which is not backed up by the
ability to pay or no purchasing power.

2. Effective demand
- the demand which is backed up by the
ability to pay.
MARKET
• A place where buyers and sellers interact with
each other and that exchange takes place
among them.

* There are different buyers and sellers who will

buy and sell different quantities of a commodity in
the market. Because of this, different behaviors
between buyers and sellers, thus, a demand
schedule has to exist.
DEMAND SCHEDULE
• A demand schedule is a table that shows the
relationship of prices and the specific
quantities demanded at each of these
prices.
• Reflects the quantities of goods and
services demanded at different prices.
Table 1
Hypothetical Demand Schedule for Rice per Month

Situation Price (P) Quantity

(kg)
A 50 8
B 40 13
C 30 20
D 20 30
E 10 45
* The information provided by the demand schedule can be used to
construct a demand curve showing the price- quantity demanded
relationship in graphical form.
 DEMAND CURVE
• In many instances, it is more convenient to
express the relation between prices and
quantity by means of a demand curve.

*It shows that price and quantity demanded are

inversely proportional.
The inverse relationship between prices
and quantity demanded depict the “law of
demand”, *the demand relationship curve
illustrates the negative relationship
between price and quantity demanded

• The higher the price a good, the lower the

quantity demanded.
• The lower the price, the more the good will
be in demand.
THE LAW OF DEMAND
• The quantity of commodity which buyers will buy
at a given time and place will vary inversely with
the price.
o Price increases = quantity demanded decreases
o Price decreases = quantity demanded increases
TWO REASONS WHY DEMAND CURVES
SLOPES DOWNWARDS ARE:
1. Income effect – at lower prices, an individual
has a greater purchasing power.
2. Substitution effect – consumers tend to buy
goods with lower prices. In case the price of a
product that they are buying increases, they
look for substitutes whose prices are lower.
DEMAND FUNCTION
• A demand function shows the relationship
between demand for a commodity and the
factors that determine or influence this demand.
Thus,
Qd = f (own price, income, price of
related goods, etc.)
DETERMINANTS OF DEMAND
• Income
People buy more goods and services when
their income increases, but will buy less if their
income decreases, thus affecting the demand for
goods and services.
o Normal goods
o Inferior goods
DETERMINANTS OF DEMAND
• Population
More people mean more demand for goods
and services.
• Taste and Preferences
Demand for goods and services increases
when people like it or prefer them.
DETERMINANTS OF DEMAND
• Price expectations
When people expect the price of goods,
especially basic commodities like rice, soap,
cooking oil or sugar to increase tomorrow or next
week, they will buy more of these goods
DETERMINANTS OF DEMAND
• Prices of Related Goods
When the price of a certain goods increase,
people tends to buy substitute products.
o Complement goods
o Substitute goods
THE CETERIS PARIBUS ASSUMPTION
• Law of Demand states that as price increases,
quantity demanded decreases, and as price
decreases, quantity demanded increases.
• Ceteris Paribus Assumption – “all other things
equal or constant”
Meaning, the determinants of demand are
constant and are not considered factors that will
affect demand in the market.
 * Thus, the law of demand, using ceteris
paribus, can be restated as:

“Assuming that the determinants of demand are

constant , prices and quantities demanded are
inversely proportional to each other.”
CHANGE IN QUANTITY DEMANDED VS.
CHANGE IN DEMAND
• Change in Demand
refers to the shift of demand curve which is
brought about by the changes in the determinants of
demand, like income, population, price-expectations
and so forth.
CHANGE IN QUANTITY DEMANDED VS.
CHANGE IN DEMAND
• Changes in Quantity Demanded
Indicate the movement from one point to
another point. This means, the demand curve does
not change it’s position like that of the demand
curve in the changes in demand.
THE BASIC ANALYSIS OF DEMAND AND
SUPPLY
• Supply
- is the quantity of goods and services that
firms are ready and willing to sell at a given price
within a period of time
 SUPPLY
• The schedule of various quantities or commodities
which producers are willing and able to produce
and offer at various prices in a given time and
place.
• The amount of goods and services available for
sale at given prices in a given period of time and
place.
SUPPLY SCHEDULE
• Shows the different quantities that are offered for
sale at various prices.
• It also shows us the quantities that suppliers are
willing to offer at various prices.
*This happens because suppliers tend to have
different costs of production. At a low price, only the most
efficient producers can make a profit, so only they
produce. At a high price, even high cost producers can
make a profit, so everyone produces.
SUPPLY CURVE
• *It shows that price and quantity are proportional
to each other.
- This kind of relationship depicts the
“law of supply”
THE LAW OF SUPPLY
• States that, the quantity offered for sale will vary
directly with price.
o Price increases = quantity supplies increases
o Price decreases = quantity supplied decreases
 *Obviously, sellers offer more goods at
higher price because but they make more profits.
Such behavior is a natural inclination.

* No business man is willing to produced

goods if he makes no profits
DETERMINANT OF SUPPLY
• Technology
This refers to techniques or methods of
production. Modern technology which uses modern
machines increases supply of goods. In contrast,
traditional technology which uses animal and
people is very slow in production. In addition,
technology reduces cost of production, and this
encourages the producers to increase their supply.
DETERMINANT OF SUPPLY
• Cost of Production
The price of raw materials which are needed
together with the cost of labor.

• Number of sellers
More sellers or more factories means an
increase in supply. On the other hand, less sellers
or factories means less supply
DETERMINANT OF SUPPLY
• Taxes and subsidies
Certain taxes increase cost of production. In
the case of subsidies, there are financial grants or
financial assistance to producers. Clearly,
subsidies reduce cost of production.
• Weather
Production of goods also depends on
weather conditions.
THE CETERIS PARIBUS OF SUPPLY
• The law of supply is only correct if we apply the
assumption of ceteris paribus (“all other things
equal or constant”).
• This means the law of supply like cost of
production, technology, number of sellers and so
forth, are held constant.
CHANGES IN SUPPLY
• Pertains to a shift of supply curve brought by
changes in the determinants of supply
CHANGES IN QUANTITY SUPPLIED
• Show the movements from one point to another
point in a constant point in constant supply
curve. Changes in quantity supplied are brought
about by a change in price.