DEMAND, SUPPLY AND MARKET

EQUILIBRIUM

RUDY M. CAMAY
DAVAO ORIENTAL SATE CLLEGE O SCIENCE
AND TECHNOLOGY

Lecture Prepared for the Training of Trainors for

the Agriculture Licensure Examination
DEMAND, SUPPLY AND MARKET EQUILIBRIUM
Demand - the amount of goods and services that consumers are
willing and able to purchase at alternative prices in a given period,
other things held constant
Law of Demand – asserts that the quantity of a good or service
is negatively related to its own price

Ways of Presenting Demand:

•Demand schedule
•Demand Curve
•Demand Function
Qd = f(P)
Demand Schedule

Price Quantity
10 0
8 2
6 4
4 6
2 8
Demand Curve
P

Q
 Demand Function
In equation form:

Qd = a – bP
Qd = quantity demanded
a = intercept of the equation
b = slope of the function
Intercept – gives the quantity demanded when price is zero
Slope – gives the unit change in quantity demanded for every
unit change in price; b = ∆Qd/∆P

Ex: Qd = 100 – 0.50P

Factors Affecting Demand
• Income of consumer (I)
- normal good, income and demand are positively related
- inferior good, income and demand are negatively related
• Prices of related goods (Pa)
-substitute goods - price of one good and the demand for
another good are positively related
-complementary goods – price of one good and the demand
for another good are negatively related
• Tastes and preferences (T) – effect on demand is due to
other sub-factors such as age, sex, religion, etc.
• Expectation about the future (E)
• Number of consumers or population (N)
Market Demand
• the summation of all the individual demand

Complete demand function: Qd = f(P, I, Pa, T, E, N)

Qd = a – bP + cI + dPa + e T + f E + gN

Change in Demand vs Change in Quantity Demanded

• Change in quantity demanded – when there is just a
movement along the same demand curve due to a change in
own price of the good
• Change in demand – when there is a shifting of the
demand curve due to changes in the factors affecting demand
but not own price.
 P P

A
P1
P1
B
P2
D1

Do

Q1 Q2 Q Q
Q1 Q2

Change in Quantity Demanded Change in Demand

When there is a movement When there is a shifting of the

along the same demand demand curve due to changes
curve due to changes in own in any of the factors affecting
price of the good demand, holding own price
constant
Supply – refers to the quantities of a product that the sellers or
producers are willing to produce or sell at different price levels
at a given period of time, other things held constant
Law of Supply – refers to the positive relationship between the
quantity of a good and its own price
Ways of Presenting Supply:
• Supply Schedule
• Supply Curve
• Supply Function
Qs = f(P)
Supply Schedule
Price Quantity
10 8
8 6
6 4
4 2
2 0
Supply Curve
P
S

Q
Supply Function
In equation form:

Qs = c + dP
Qs = quantity supplied
c = intercept of the equation
d = slope of the supply function

Intercept – gives the quantity supplied when price is zero

Slope – shows the unit change in quantity supplied for every
one unit change in own price; d = ∆Qs/∆P
Ex. Qs = 50 + 2.0P
Factors Affecting Supply
• Prices of inputs (Pi)

• Prices of related goods in production (Pr)

• Technology (T)
• Producers’ expectation (E)
• Number of producers/sellers (N)

Market Supply – summation of all the individual supply

Complete Supply Function: Qs = f (P, Pi, Pr, T, E, N)

In equation form: Qs = a + bP - cPi + dPr + eT + fE +gN
Change in Supply vs Change in Quantity Supplied
• Change in quantity supplied– when there is just a
movement along the same supply curve due to a change in
own price of the good

• Change in supply – when there is a shifting of the supply

curve due to changes in the any of the factors affecting supply
but not own price
 Change in Quantity Supplied vs Change in Supply

P So
P
S S1
P2 B

A
P1 P1

Q1 Q2 Q Q1 Q2 Q

Change in Quantity Supplied Change in Supply

When there is a movement along When there is a shifting of the

the same supply curve due to supply curve due to changes in
changes in own price of the good any of the factors affecting
supply, holding own price
constant
 Market Equilibrium
• The condition in which both price and quantity are at levels
where market demand is equal to market supply.
• Equilibrium Price – the where quantity demanded is equal
to quantity supplied

Additional Concepts:
•Shortage – quantity demanded > quantity supplied; Qd > Qs

• Surplus – quantity demanded < quantity supplied; Qd < Qs

How to Determine Equilibrium Price and Quantity
• Through Demand and Supply Schedules

Price Qd Qs
10 0 8
8 2 6
6 4 4
4 6 2
2 8 0
How to Determine Pe and Qe… cont’d

• Through Demand and Supply Curves

P
S

Pe

Qe Q

Pe = equilibrium price
Qe = equilibrium quantity
How to Determine Pe and Qe… cont’d
• Through Demand and Supply Equations

Qd = a – bP
Pe = (a-c)/b+d
Qs = c + dP
Ex: Demand equation = Qd = 100 – 0.50P
Supply equation = Qs = 50 + 2.0P
At equilibrium: Qd = Qs  100 – 0.50P = 50 + 2.0P
100 – 50 = 0.50P + 2.0P  50 = 2.5 P
P = 50/2.5 = 20; Pe = 20
Qe = 100 – 0.50(20) = 50 + 2(20)
= 100 – 10 = 50 + 40
90 = 90
Qe = 90
Surplus and Shortage
P
S
surplus

P”

Pe

P’

shortage
D

Qs’ Qd” Qe Qs” Qd’ Q

At P’ --- Qd’ > Qs’  shortage

At P” --- Qd” < Qs”  surplus
Changes in Equilibrium Price and Quantity
• Change in demand, holding supply constant

P S
P’
Pe
D’
D

Qe Q’ Q

Equilibrium price and quantity move in the same direction

Changes in Equilibrium Price and Quantity
• Change in supply, holding demand constant

P S
S’
Pe
P’

Qe Q’ Q

Equilibrium price and quantity move in opposite direction

Changes in Equilibrium Price and Quantity
• Both Demand and Supply Change

P P P
S S S
S’ S’ S’
P’
Pe Pe Pe
D’ P’ D’
D’
D
D D
Qe Q’ Q Qe Q’ Q Qe Q’ Q

The changes in equilibrium price and quantity depend on the

magnitude of changes in demand and supply
Application of the Demand and Supply Model
• Minimum Price Policy
- a pricing policy intended to protect the producers or workers
- to be effective, the price is set above the equilibrium price,
will lead to surplus
Example: price support or floor price; minimum wage
P • How to handle the surplus?
surplus
S
Ps The government should be ready to
absorb the surplus  what to do with the
Pe
surplus?
- store the surplus as buffer stock
- export/donate the surplus
D
- create new demand for the product
Qd Qe Qs Q
Application … cont’d
• Maximum Price Policy
- a pricing policy intended to protect the consumers
- to be effective, the price is set below the equilibrium price;
will lead to shortage
Example: price ceiling
P • How to handle the shortage?
S
The government should be ready to
supply
Pe
the necessary quantities with price not to
Pc exceed thethe
- release price ceiling
buffer stock
shortage - import the necessary quantities
D
- ration the available quantities
Qs Qe Qd Q
 Guide Questions

1. The demand curve is typified by a(an):

a.   positive relationship between price and quantity demanded
b.   inverse relationship between price and quantity demanded
c. greater percent change in quantity demanded relative to percentage
in prices
d. lesser percentage in quantity demanded relative to percentage change in
prices

 2. A change in which of the following will not change the demand for
asparagus?
a. family size c. incomes of consumers
b. price of asparagus d. growth in the community

3. Which of the following will not cause a shift in the demand curve for beef?
a.  a rise in the price of some goods which consumers regard as
substitute for beef.
b.  a change in the price of beef.
c.  an increase in incomes of beef consumers.
d.  a change in people’s tastes with respect to beef.
 4. If there is a negative relationship between the price of good A and the
demand for good B, then:
a.  goods A and B are substitutes.
b.   goods A and B are complements.
c.   good B is an inferior good.
d.   good B is a normal good.

5. A drought would probably:

a. cause wheat suppliers to move up their supply curves to a higher price.
b.    induce greater demand for wheat, yielding a higher price.
c.    cause people to reduce their demand for wheat.
d.    induce an upward and leftward shift in wheat’s supply curve.

6. An increase in supply of good X for any given price of good x can be expected
to systematically caused by:
a.    increase in the prices of other commodities.
b.    increases in the price of factors of production important to this good.
c.    decreases in the price of factors of production important to this good.
d.    none of the above.
7. What is the difference between a change in supply and a change in quantity
supplied?
a.     nothing, they mean the same thing
b.     the first implies a shift of the supply curve upwards, while the second
implies a change in the slope of the supply curve
c.     the first implies a shift in the entire supply curve, while the second is just a
movement along the same supply curve
d.    the first is a movement along the same supply curve, while the second
implies a shift of the entire supply curve

8. A price at which the quantities people wish to produce exceeds the quantities
that people wish to buy (assume normal goods)
a.    will cause a shift in the demand curve.
b.    will cause a shift in the supply curve.
c.    lies above the equilibrium price.
d.    lies below the equilibrium price.

9. If the demand schedule may be written P = 100 - 4Q, and the supply
schedule P = 40 + 2Q, the equilibrium price and quantity are:
a.                  P = 60, Q = 10.
b.                  P = 10, Q = 6.
c.                  P = 40, Q = 6.
d.                  P = 20, Q = 20.
10. If market demand shifts sharply to the left as market supply moves to the right,
we would expect:
a.  the same price to prevail.
b.  price and quantity to fall.
c.  price to fall while quantity may or may not change.
d. quantity to fall while price may or may not change.

11. Which of the following statements is incorrect? Assume upward-sloping supply

curves. (Hint: try to draw diagram)
a.  If supply shifts left and demand remains constant, equilibrium price will rise.
b.  If demand shifts left and supply increase, equilibrium price will rise.
c.   If supply shifts right and demand shifts left, equilibrium price will fall.
d.   If demand shifts right and supply shifts left, price will rise.

.  If 12. If you were a government official and wanted to raise the price of soybean
without imposing a price support, which of the following actions would you
take?
a.  Take soybean from government storage and sell it on the open market.
b.  Encourage farmers to use more fertilizer on their soybean-growing land.
c.  Try to lower the price of milk.
d.  Encourage farmers to grow less soybean.
 13.   In a standard supply-and-demand diagram, what happens when demand
decreases?
a.   Price declines and quantity demanded rises.
b.   Price rises and quantity demanded declines
c.   Price and quantity supplied rise.
d.   Price and quantity supplied decline.
For questions 14-15, refer to the following:
 
Given the demand and supply, equations for banana:
 
Qd = 25 - 0.4P
Qs = 20 + 0.6P
where: Qd = quantity demanded of banana
Qs = quantity supplied of banana
P = price per piece of banana

14. The equilibrium price of banana is

a. 5 b. 4 c. 22.50 d. 9
 
15. The equilibrium quantity of banana is:
a. 20 c. 21
b. 16 d. 22.50