Application of

Demand and
Supply
Basic Principles of
Demand and Supply
THE MARKET
• A market is not a place but a medium of interaction between buyers and sellers of
products. Products can be both tangible (goods) and intangible (services).
• Buyers and sellers meet to exchange products and purchasing power (money) guided
by the market price.
• The consumer market is the most visible to us consumers as we also partake in its
activities.
• Producer market enable raw material and intermediate product producers to sell
their products to final product producers who are now the market buyers.
• Resource market enables resource owners to sell the basic services of labor (skill),
land (occupancy), and capital (money use) to producers of goods and services.
DEMAN
D
Demand
• refers to the amount of goods
and services consumers are
willing to purchase given a
certain price.
What is the Law of Demand?
Law of Demand states that with all
other factors being constant or
equal, the price and quantity
demanded of any product or service
will be inversely related to each
other. In other words, with
increasing price the quantity
demanded will decrease and vice
versa.
What is Demand Curve?
• Demand curve is a graphical
representation of the relationship between
the price of a certain commodity and the
quantity demanded. In a demand curve
the price is shown on the left axis while
the quantity demanded is shown on the
right axis.
• Demand curve is sometimes also known
as demand schedule as it is a graphical
representation of the demand schedule.
They may be straight or curved.
What is Demand Curve Slope?
The result of such an inverse
relationship between price and
quantity demanded is the negative
slope of the demand curve. It can
also be said that the slope of the
demand curve is downward
highlighting the inverse relationship
between price and quantity
demanded.
Slope = P2-P1
Q2-Q1
Three Types of Elasticity of Demand

Price Elasticity of Demand

Income Elasticity of Demand
Cross Price Elasticity of Demand
Price Elasticity of Demand
 measures the responsiveness of the product’s quantity demanded
to a change in its price. The concept of elasticity is measured in
percentage changes.
The value of price elasticity may be measured in two ways:
1. Arc Elasticity – the value of elasticity is computed by choosing two
points on the demand curve and comparing the percentage changes in the
quantities and the prices of those two points. Ep = %∆Q/ %∆P
2. Point Elasticity – this measure the degree of elasticity on a single point
on the demand curve. Changes on a single point are infinitesimally
small. This means that the elasticity coefficient is the same regardless of
whether price increases or decreases. This type of advanced
measurement is used in quantitative research and decision-making.
What is Price Elasticity of Demand?
Price Elasticity of Demand =
Percentage Change in Quantity
Demanded / Percentage Change in
Price

The negative value of the slope

explains the inverse relationship of
price and quantity demanded.
 Shift of Demand Curve
Quantity demand is dictated by a
change in price. However, there are
also other factors that influence
demand. There are cases when the
demand curve shifts either to the
right or to the left. A demand shift
indicates an entirely different
demand schedule.
Price Elasticity of Demand Determinants
Determinants
1. Availability of of
Substitutes Demand

2. Necessity of the
Product
3. Number of
Competitors
4. Adjustment Time
5. Income Proportion
 What Factors Causes the Demand Curve Shift?

Determinants
of
Demand
Income Elasticity of Demand
 measures how consumer demand changes with income. Change in consumer
demand is a shift in the demand curve because income is a nonprice determinant.
The coefficient of income elasticity of demand particularly measure how strong
the income of every consumer can change their collective demand as derived
from the following equation.
Income Elasticity of Demand = %∆D/ %∆Y
Where:
%∆D is the percentage change in total demand.
%∆Y is the percentage change in the average or per capita
consumer income.
Example:
1. An increase in Peter’s income from 10,000 to 14,000 causes his demand for meat
to increase from 2 kilos to 3 kilos a month. Solve for income elasticity

Income Elasticity of Demand = %∆D/ %∆Y

=
D2-D1 3-2
D2+D1 3+2
2 = 2
Y2 - Y1 14,000 – 12,000
Y2+Y1 14,000 + 12,000
= 1/ 2.5 = 0.4 = +1.21 2 2
4,000/12,000 0.33
The positive sign of income elasticity indicates that the good is normal good because Peter
buys more when his income goes up.
Example:
2. An increase in Peter’s income from 10,000 to 14,000 causes his demand for meat
to increase from 2 kilos to 3 kilos a month. Solve for income elasticity

Income Elasticity of Demand = %∆D/ %∆Y

D2-D1 8-10
= D2+D1 10+8
2 = 2
Y2 - Y1 14,000 – 12,000
Y2+Y1 14,000 + 12,000
= - 2/ 9 = 0.22 = - .67
2 2
4,000/12,000 0.33
The income elasticity has a negative sign, indicating that instant noodles are inferior gods
because Peter prefers to buy less now that he has an increase in income.
Cross Price Elasticity of Demand
 measures how quantity demanded changes as the price of related
good changes.
• Cross elasticity (CE) measures the responsiveness of the demand
for a good to the change in price of a substitute good or a
complement.
• A+(positive) sign for CE signifies that the two gods involved are
substitute goods, which means that as the price of the substitute
good increases, the demand for the other good will increase.
• The – (negative) sign for CE indicates that the two goods are
complements, which means that the demand for a good will
increase when the price of a complement decreases.
Supply
• refers to the willingness of
sellers to produce and sell a
good at various possible
prices.
What is the Law of Supply?
The law of supply states that, all
other factors being equal, as the
price of a good or service increases,
the quantity of goods or services
that suppliers offer will increase,
and vice versa. The law of supply
says that as the price of an item
goes up, suppliers will attempt to
maximize their profits by increasing
the number of items for sale.
What is Supply Curve?
• The supply curve is a graphic
representation of the correlation
between the cost of a good or
service and the quantity
supplied for a given period. In a
typical illustration, the price will
appear on the left vertical axis,
while the quantity supplied will
appear on the horizontal axis.
 Slope = P2-P1
What is Supply Curve Slope?
A supply curve slopes upward to
Q2-Q1
the right (a positive slope),
indicating that the greater the
price buyers are wiling to pay for
the product, the greater the
quantity firms will supply. The
producer lowers the price until
the quantity demanded equals the
quantity he has to supply.
What is Price Elasticity of Supply?
• The price elasticity of
supply (PES or Es) is a measure used
in economics to show the
responsiveness, or elasticity, of the
quantity supplied of a good or service
to a change in its price.
• The elasticity is represented in
numerical form, and is defined as the
percentage change in the quantity
supplied divided by the percentage
change in price.
 Shift of Supply Curve
The shift in the supply
curve is when, the price of
the commodity remains
constant, but there is a
change in quantity supply
due to some other factors,
causing the curve to shift
to a particular side.
What Factors Causes the Supply Curve
Shift?
Demand, Supply, and
equilibrium price
 Market Equilibrium
Market equilibrium is an
economic state when the
demand and supply curves
intersect and suppliers
produce the exact amount of
goods and services consumers
are willing and able to
consume.
Equilibrium means a state of
balance.
Market Equilibrium
Surplus, Shortage, and Government Interventions

In a competitive market, a surplus or a shortage may

occur when there are movements or changes within the
supply and demand schedule. A surplus is experienced
when the price of a good is above the equilibrium price. A
surplus may also be experienced when government sets a
price floor above equilibrium price.
Surplus, Shortage, and Government Interventions

On the other hand, a shortage occurs when the quantity

demanded exceeds the quantity supplied. This happens
when the price is below the equilibrium level. When a
shortage existing the market, the consumers cannot buy as
much of the good as they would like. A shortage may also be
experienced if government sets a price ceiling below the
equilibrium price.
Applications of demand and
supply to housing shortage
Application of Demand and Supply to the Housing Shortage
Applications of demand and
supply to Philippine economic
problems
Philippine Economic Problems
A. Labor Supply, Population Growth, and
Wages
B. Savings and Investment
C. Rent
D. Minimum Wage
E. Taxes
Labor supply is comprised of the
available labor force who are willing and able to work,
and awaiting deployment. These include people who
are willing to work for a given period of time, such as
those who finished their education, those who were
unemployed from the past year or cycle, and those
who arrived from abroad and are willing to work
locally.
Labor demand refers to the
industry’s total available job vacancies
from the previous cycle or year up to
the present.
Wages are payments made in
exchange for the time and effort
exerted or given by an individual who
was able to either produce a good or a
service.

Total Output refers to the number of

workers multiplied by their
corresponding individual yield.
ANALYSIS OF DEMAND AND SUPPLY FOR LABOR
Figure shows an increase in Labor Supply from SL1 to
SL2, while demand for labor remains constant. A shift
of labor supply to the right results in decreased wage
per hour from P300 to P275 and increased quantity
from 24 million to 30 million laborers.
This will happen if there are lot of recent graduates
looking for jobs, a lot of unemployed workers who were
not deployed during the past cycle or year, or an
increase of returning workers who have no contracts
yet from abroad and are willing to work locally. Also,
the industry did not expand, meaning there are no
additional jobs because there were no additional
businesses established and existing businesses did not
expand.
 Figure shows a decrease in labor supply from SL1 to
SL2 while demand for labor remains constant. A shift of
labor supply to the left results in increased wage per
hour from P275 to P300 and decreased quantity from 30
million laborers to 24 million laborers.
This may happen if there are less college graduates
and the labor force declines while demand for labor
remains constant. Those who enter as college freshmen
during academic year 2015-2016 will graduate after four
years. By year 2020 to 2022, there will be fewer
graduates because of the implementation of the K to 12
program. This means the next batch of additional labor
supply, all things being constant, will be after 2022.
 Figure shows an increase in labor demand
from DL1 to DL2 while supply for labor remains
constant. A shift of labor demand to the right
results in increased wage per hour from P300 to
P350 and increased quantity from 24 million
laborers to 30 million laborers. This may happen
if industry expands while labor supply remains
unchanged. If our labor cost remains to be one of
the cheapest among Asia-Pacific Economic
Cooperation (APEC) member-countries, then it is
possible that we will be the most preferred
country for outsourced labor.
 Figure shows a decrease in labor demand
from DL1 to DL2 while supply for labor remains
constant. A shift of labor demand to the left
results in decreased wage per hour from P350 to
P300 and decreased quantity from 30 million
laborers to 24 million laborers.
This may occur during an economic recession
where business leave the industry or shut down.
 Figure shows demand for labor and labor
supply with an equilibrium wage of P300 and
quantity of labor is 2 million. If the government
sets a minimum wage of P350 which increases the
wage by P/50 hour, this will create unemployment
computed as follows: 3 million supply for laborers
at P360 wage but the demand is only for 1 million
laborers. This will lead to 2 million unemployed
people.
The previous example shows that although an
increase in the basic wage is supposed to bring
about a better life, it instead brings about negative
consequences such as unemployment.
THE PHILIPPINE PESO AND THE FOREIGN
CURRENCIES
Foreign exchange is the conversion of Philippine currency
into and international currency, such as the American dollar. A
stronger dollar means either international currency’s economy
is getting stronger, or the local currency’s economy is getting
weaker. A weaker dollar mean either the local currency is
getting stronger or the international currency is getting weaker.
Since the American dollar is used for foreign transactions, a
sudden increase in its supply will have an inverse effect on the
dollar-to-peso ratio, resulting in the dollar becoming weaker. If
supply for dollar decreases due to less remittances, then the
foreign exchange will rebound against the peso and the dollar
will regain its strength.
 There are reasons for devaluating the peso
against the dollar. The value of the dollar against the
peso is dependent on the supply and demand for
dollars. Dollar supply comes from dollar holders like
OFWs, or foreign counterparts whose objective is to
put in their dollars where they see profitable. If the
dollar is in demand in a country like the Philippines,
then its value will appreciate against the peso and
dollar holders will see this as a signal to pour in the
currency to take advantage of the high exchange rate
and withdraw the same if the exchange rate is low.
 Savings and Investment

Portion of income An asset acquired with

earned that is not spent the goal of generating
on consumption income or appreciation
Philippine Economic Problems
A. Labor Supply, Population Growth, and
Wages
B. Savings and Investment
C. Rent
D. Minimum Wage
E. Taxes
Market structures
Market Structure: refers to the competitive environment in which buyers and
sellers operate.
Competition: refers to rivalry among sellers in the
market.
Market: is a situation of diffused, impersonal competition
among sellers who compete to sell their goods and among
buyers who use their purchasing power to acquire the
available goods in the market. Market is defined as a place or
point at which buyers and sellers negotiate their exchange of
well-defined products or services.
There are varying degrees of competition in the market depending on the
following factors:
• Number and size of buyers and sellers
• Similarity or type of products bought and sold
• Degree of mobility of resources
• Entry and exit of firms and input owners
• Degree of knowledge of economic agents regarding prices, costs, demand, and
supply conditions
Competition and Market Structures:
Perfect Competition:
Pure Competition
Imperfect Competition:
Monopoly
Oligopoly
Monopolistic Competition
Pure Competition: a market structure where there are many buyers and sellers . Since many
participants, none of them can cause changes in prices and quantities of goods and services. “Price Takers”

The usual problem that a competitor faces are:

 How to survive and how to get a fair market share. In order to
be competitive, one has to adjust the size of his/her business to
achieve the most efficient plant size.
 Maintaining the profit. Total Revenue should be greater than
Total Cost.
TR = Price X Quantity and TC = Total Fixed Cost + Total Variable Cost.
Total Fixed Cost include those cost incurred that do not change as you increase output.
Total Variable Cost includes those costs incurred that vary as you increase output.
Monopoly: a market structure where there is only one seller that represents the whole industry. “Price Maker”

 The usual problem that a competitor faces is

improvement of its products or services. This
problems occurs because the monopolist lacks
the foresight to become efficient due to the
absence of competition.
Oligopoly: a market structure where there are few sellers.
 Competitors in this kind of a structure collude and are called “players.”
Either they play as one team or they play in different teams.
There are few sellers that prefer to make alliances than to
compete.
 In a duopoly, where there are two (2) sellers, it is best if they
work together rather than compete with each others; or they
can just work together and pretend they are competing with
each other.
 The problem here is the existence of barriers to entry where a
competitor finds it hard to enter the industry because of the
initial capital requirement. Although it is good idea to be able
to have more sellers and producers; the task for the players to
enter the industry is extremely difficult.
Monopolistic Competition: a market structure consists of different products with many sellers.
 Products belonging to the
same industry seem to be
identical, but they are not.
 The common problem that a
monopolistic competitor faces
is how to be unique and
different from its competitors.
 Types of Markets and thier Characteristics
Type Seller Product Entry of New Example Common Problem
Firms
Pure Competition Many Homegenous Free Vegetables, Profit / Market
Bangus, Share
Pork

Monopoly One One No MORE, ILECO, Improvements of

CAPELCO products/services

Oligopoly Few Differentiated Restrіcted Oil/Fuel High capital

Telecom requirement
Aіrlіnes

Monopolistic Many Differentiated Free Shampoo Distinguishing

Competition quality
 END OF
CHAPTER 2