INTRODUCTION TO DEMAND AND

SUPPLY
Chapter 3
■ The Law of Demand and Supply is one of the most important laws in Economics. It
give us a closer look at the system of exchange in the circular flow.
■ In the Philippines, the law assumes greater importance since our economic system is
predominantly market in nature and, therefore, operates strongly under the forces of
demand and supply.

The Market
■ A market is a means of interaction between buyers and sellers for trading or exchange.
The consumer buys and the seller sells. The most common type of market is the goods
market.
■ There is also a Labor Market where workers offer their services and employers look for
workers to hire.
■ The market is important because through it, a person who has excess goods can dispose
of them, and a person who feels a need for goods obtains them.
 Demand
■ The demand for a product is the quantity of a good that buyers are willing to buy. A
demand schedule shows different quantities that will be bought of a good.
■ A demand functions shows how the quantity demanded of a good is dependent on its
determinants, the most important of which is the price of the goods itself.

Price of Sugar (per kilo) Quantity Demanded In Kilos

18 40
20 35
22 30
24 25
26 20
28 15
30 10
 Price of sugar (per kilo) 30

28

26

24

22

20

18 Demand
0 5 10 15 20 25 30 35 40 Quantity demanded (in kilos)

■ Plotting table 4 to derive the above figure, we can see seven points representing the
various combinations of quantities of demand and prices. The connection of these points
results in the demand curve.

■ After analyzing the relationship between price and demand, we can now state the Law
of demand; “ all other things remaining constant (ceteris paribus), the quantity
demanded of a good is inversely related to the price of that good.”
■ The ceteris paribus assumption means that other determinants of demands are assumed
to remain constant.
 Non-Price Factors Affecting Demand
■ Les us take a closer look at the most significant non-price determinants of demand. The
consumer’s income can greatly influence demand since it determines capacity to buy.
Thus, an increase in income will enable him to buy more even if the price of the good is
unchanged, and a decrease in income will cause hon to buy less.
■ Another significant non-price determinant is the size of the population results in a
greater demand since there will be more consumers.
 Supply
■ The Supply of a product is the quantity of goods that sellers are willing to sell. The
supply schedule shows the different quantities that will be offered for sale at various
prices.

Price of Sugar (per kilo) Quantity Supplied (in

cavans)
18 10
20 20
22 30
24 40
26 50
28 60
30 70

A supply function shows how the quantity offered for sale of a good is dependent on its
determinants, the most important of which is the price of the good itself.
 Price of sugar (per kilo) 30
Supply
28

26

24

22

20

18

0 10 20 30 40 50 60 70 Quantity Supplied (in kilos)

■ Plotting Table 5 to derive Figure 21, we can see seven points representing the various
combinations of supply and prices. The connection of these points results in the supply
curve. This curve is upward sloping, reflecting the direct relationship between the price
of sugar and its supply.
 Non-Price Determinants of Supply
■ Let us now take a closer look at the effect of other significant non-price determinants.
One of there is the cost of production. Cost refers to all expenses incurred to produce
the good. An Increase in cost will normally result in a lower supply of good since the
producer has to come with outlay to produce the same amount of output.

Market Equilibrium
■ Now that we have Studied demand and Supply separately, it is time to combine them
and show both forces should be considered in the determination of prices in the market.
■ Alfred Marshall, a British economist, was responsible for introducing the very
important Law of Demand and Supply. Strictly Speaking, Equilibrium means a state of
balance. In the market, equilibrium is attained where demand is equal to Supply. The
price where demand and supply are equal is the equilibrium price.
Price of Sugar Quantity Quantity
(per kilo) Demand Supplied
30 10 70

28 15 60

26 20 50

24 25 40

22 30 30 Equilibrium
20 35 20

18 40 10
 Elasticities of Demand and Supply
■ While we expect demand and supply to respond to changes in their determinants, goods
differ in the degree of their responsiveness

1. Elastic - Demand and Supply leads to a GREATER change in quantity of demand or

supply
2. Inelastic – Demand and Supply lead to a LESSER change in quantity of demand or
supply
3. Unitary elastic – Demand and Supply lead to a EQUAL change in the Quantity of
demand or supply
 Price Elasticity of Demand
■ It is the study of responsiveness of demand to changes in the price of the good. The
concept depends on percentage changes. Price elasticity in important to the seller
because based on the nature of the good, he can decide on how far to go with a price
change.

INCOME ELASTICITY OF DEMAND

■ It’s a study of the responsiveness of demand to a change in consumer income.
■ It expresses the percentage change in demand compared to a percentage change
in income.
 CROSS ELASTICITY OF DEMAND
■ Relates a percentage change in demand for a good with a percentage
change in the price of another good.
■ When two goods are related, the price of one tends to affect the demand
for another.
■ This is true for substitute goods and complementary goods.
■ Substitute goods – butter and margarine. (The price of butter can affect
the demand for margarine)
■ Complementary goods – used together. Ex: cars and gasoline, printer and
ink.
 PRICE ELASTICITY OF SUPPLY
■ May be studied in the same context as the price elasticity of demand.
■ Compares a percentage change in the quantity supplied with a percentage
change in the price of the good.
■ The degree of responsiveness of supply to price change varies with the
case of producing the product and with the period involved.
■ (the longer the time period, the more elastic supply will be)
■ Just in demand, different shapes of supply curves also result from
different degrees of elasticity.