Basic Analysis of Demand and Supply

DEMAND
It pertains to the quantity of a good or service that people are ready to buy at
given prices within a given time period, when other factors besides price are
held constant. Simply put, the demand for a product is the quantity of a good
or service that buyers are willing to buy given Its price at a particular time.
It implies three things: desire to possess a thing (good or service); the
ability to pay for it or means of purchasing it (price) and; willingness in
utilizing it.
 MARKET
A market is where buyers and sellers meet. It is the place where they both
trade or exchange goods or services or where the transaction takes place.
There are two different kinds of markets such as wet and dry.
The Wet market- is where people usually buy vegetables, meet etc.
The Dry market- is where people buy clothes, shoes, or other dry goods.
METHODS OF DEMAND ANALYSIS
• Demand can be analyzed in several ways. However the most common
way of analyzing demand is through demand schedule, demand curve, and
demand function.

• Demand Schedule- is a table that shows the relationship of prices and the
specific quantities demanded each of these prices.
 Demand Curve- is a graphical representation showing the relationship
between price and quantities demanded per time period.

Demand function- A demand function also shows the relationship between demand for a commodity
and the factors that determine or influence this demand. These factors- are the price of the commodity
itself, prices of other related commodities, level of incomes, taste and preferences, size and composition of
level of population, distribution of income, etc. Demand function is expressed as a mathematical function.
Qd = f (product’s own price, income of consumers, price of related goods, etc.)
DEMAND EQUATION
Qd = a-bP
Where:
Qd= quantity demanded at a particular price.
a= intercept of the demand curve
b= slope of the demand curve
p= price of the good at a particular time period .
CHANGE IN QUANTITY DEMANDED VS.
CHANGE IN DEMAND
• Change in Quantity Demanded - We can say that there
is change in quantity demanded (symbolized as ΔQD) if
there is a movement from one price-quantity combination to another-along
the same demand curve. A change in quantity demanded is mainly brought
about by an increase (a decrease) in the products own price. The direction of
the movement however is inverse considering the Law of Demand.
 CHANGE IN DEMAND

• There is a change in demand if the entire demand curve

shifts to the right (left) resulting to an increase
(decrease) in demand due to other factors other than the
price of the good sold. At the same price, therefore,
more amount of a good or service are demanded by
consumers.
 FORCES THAT CAUSE THE DEMAND
CURVE TO CHANGE
• There are several reasons why demand changes the demand curve to move
either upwards or downwards. The following are the more general reasons
for the change in demand.
 TASTE OR PREFERENCES
• Taste or preferences pertain to the personal likes or dislikes of consumers
for certain goods and services. If tastes or preferences change so that
people want to buy more of a commodity at a given price, then an increase
I demand will result or vice versa.
 CHANGING INCOMES
• Increasing incomes of households raise the demand for certain
goods or services or vice versa. This is because an increase in
ones income generally raises his capacity or power to demand
for goods or services which he is not able to purchase at lower
income. On the other hand, a decrease in one's income reduces
his purchasing power, and consequently, his demand for some
goods or services ultimately declines.
 OCCASIONAL OR SEASONAL
PRODUCTS
• The various events or seasons in a given year also result to a movement of
the demand curve with reference to particular goods. For example: During
Christmas season, demand for Christmas trees, parols , and other Christmas
decors increases. Moreover, demand for food items like ham and quezo de
bola also increases. Similarly, as Valentine's Day approaches, the demand
for red roses and chocolates also rises. It should be noted, however, that
after these events, demand for these products returns back to the original
level.
 POPULATION CHANGE
• An increasing population leads to an increase in the demand for
some types of good or service, and vice-versa. This simply
means that more goods or services are to be demanded because
of rising population. In particular, increase in population
generally results to an increase in demand for basic goods, such
as food and medicines. On the other hand, a decrease in
population results in a decline in demand.
 SUBSTITUTE AND COMPLEMENTARY
GOODS
• Substitute goods are goods that are interchanged with
another good. In a situation where the price of a
particular good increases a consumer will tend to look
for closely related commodities. Substitute goods are
generally offered at cheaper price, consequently
making it more attractive for buyers to purchase.
EXPECTATIONS OF FUTURE PRICES

• If buyers expect the price of good or service to

rise (or fall) in the future, it may cause the current
demand to increase (or decrease). Also,
expectations about the future may alter demand
for a specific commodity.
 PRACTICAL APPLICATION OF THE
CONCEPT OF CHANGE IN QUANTITY
DEMANDED AND CHANGE IN DEMAND
• Let us now consider some practical applications of the concept of
change in quantity demanded and change in demand.
• We already know that the price of gasoline in the domestic market
tends to change every now and then. Because of the price changes,
private car owners tend to lessen the consumption of gasoline during
high prices by not using their cars, but tend to increase their
consumption during low prices by utilizing more their cars.
 SUPPLY (FIRMS/SELLER'S SIDE)
• We now go to the other side of the coin which is supply. Simply
defined, 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, other
factors being held constant. It is the quantity of goods and services
which a firm is willing to sell at a given price, at a given point in time.
Thus, supply is a product made available for sale by firms. It should be
remembered that sellers normally sell more at a higher price than at a
lower price. This is because higher price results to higher profits.
 METHODS OF SUPPLY ANALYSIS

• Just like demand, supply can also be analyzed through

a supply schedule, supply curve, and supply function.
 • A supply schedule is a table listing
the various prices of a product and
the specific quantities supplied at
SUPPLY SCHEDULE
each of these prices at a given point
in time. Generally, the information
provided by a supply schedule can
be used to construct a supply curve
showing the price/quantity supply
relationship in graphical form.
 • A supply curve is a graphical
representation showing the
SUPPLY CURVE
relationship between the price
of the product sold or factor
of production (e.g. labor) and
the quantity supplied per time
period.
 • A supply function is a form of
mathematical notation that
SUPPLY FUNCTION
links the dependent variable,
quantity supplied (Q), with
various independent variables
which determine quantity
supplied.
 CHANGE IN QUANTITY SUPPLIED

• A change in quantity supplied occurs if there is a

movement from one point to another point along the
same supply curve. A change in quantity supplied is
brought about by an increase (decrease) in the product's
own price.
 CHANGE IN SUPPLY

• Change in Supply A change in supply

happens when the entire supply curve shifts
leftward or rightward. At the same price,
therefore, less (more) amounts of a good or
service is supplied by producers or sellers.
 FORCES THAT CAUSE THE SUPPLY
CURVE TO CHANGE
• Just like demand, there are also other factors that
cause the supply curve to change. Below are
some of the factors that cause the supply curve to
change.
 OPTIMIZATION IN THE USE OF
FACTORS OF PRODUCTION
• An optimization in the utilization of resources will
increase supply, while a failure to achieve such
will result to a decrease in supply. Optimization in
this sense refers to the process or methodology of
making or creating something as fully perfect,
functional, or effective as possible.
 TECHNOLOGICAL CHANGE

The introduction of cost-reducing innovations in

the production technology increases supply on one
hand. On the other hand, this can also decrease
supply by means of freezing the production
through the problems that the new technology
might encounter, such as technical trouble.
 FUTURE EXPECTATIONS

• This factor impacts sellers as much as buyers. If sellers

anticipate a rise in prices, they may choose to hold back
the current supply to take advantage of the future
increase in price, thus decreasing market supply. If
sellers however expect a decline in the price for their
products, they will increase present supply.
 NUMBER OF SELLERS

• The number of sellers has a direct impact on quantity

supplied. Simply put, the more sellers there are in the
market the greater supply of goods and services will be
available.
 WEATHER CONDITIONS

• Bad weather, such as typhoons, drought or other natural

disasters, reduces supply of agricultural commodities
while good weather has an opposite impact.
 GOVERNMENT POLICY

• Removing quotas and tariffs on imported products also

affect supply. Lower trade restrictions and lower quotas
or tariffs boost imports, thereby adding more supply of
goods in the market.
 MARKET EQUILIBRIUM

• From a separate discussion of demand and supply, we

now proceed with reconciling the two. The meeting of
supply and demand results to what is referred to as
'market equilibrium". As carlier said the market
referred to here is a situation "where buyers and sellers
meet', while equilibrium is generally understood as a
'state of balance'.
 EQUILIBRIUM

• Market equilibrium generally pertains to a balance that

exists when quantity demanded equals quantity
supplied. Market equilibrium is the general agreement
of the " buyer and the seller in the exchange of goods
and services at a particular price and at a particular
quantity. At equilibrium point, there are always two
sides of the story, the side of buyer and that of the
seller.
 EQUILIBRIUM MARKET PRICE

• Equilibrium market price is the price agreed by

the seller to offer its good service for sale and for
the buyer to pay for it. Specifically, it is the price
at which quantity demanded of a good is exactly
equal to quantity supplied of the same good.
 SHORTAGE

• The reverse happens when shortage occurs in the

market. Shortage is basically a condition in the
market in which quantity demanded is higher
than quantity supplied at a given price.
 SURPLUS
• The quantity supplied is higher than quantity demanded at a given price.
 CHANGES IN DEMAND, SUPPLY, AND
EQUILIBRIUM
• We already know that demand might change because of the
factors other than the price of the goods and services sold
like changes- in consumers' income, tastes and preferences,
and variations in the prices of related goods.
• Supply- changes in technology, cost of production and
government policies.
 CHANGES IN DEMAND

An increase in and demand with supply remaining

constant raises both equilibrium price and quantity.
 CHANGE IN SUPPLY
• It results to a decrease price but increase in a quantity of good sold in the
market.
 COMPLEX CASES

• When both demand and supply change, the effect

is a combination of the individual effects.
 PRICE CONTROLS
Is the specification by the government of minimum or maximum
prices for certain goods and services, when the government
considers its advantageous to the producers or consumers.
 FLOOR PRICE

• A floor price is the legal minimum price imposed by

the government on certain goods and services. A price
at or above the price floor is legal; a price below it is
not. The setting of a floor price is undertaken by
government if a surplus in the economy persists.
 PRICE CEILING

• A ceiling price is the legal maximum price

imposed by the government.