Interplay

of
Demand
and
Supply
Objectives:

1. Justify why the market price is an effective tool for allocating resources.
2. Explain how the market price is determined.
3. Cite the importance of the equilibrium price.
4. Illustrate how a market shortage or a market surplus occurs.
5. Discuss the economic consequences of a market shortage and of a market
surplus.
6. Suggest ways on how ordinary people can help prevent a market
shortage/surplus.
7. Prove that the government sometimes ignores the market forces and sets the
price of products.
 TAKE NOTE!
Buyers and sellers interact
based on the prices of goods
and services.

Image source: https://www.greenpeace.org/philippines/

Jack’s Demand Schedule for Product X
Price (in PhP) Quantity Demanded

1 25
2 20
3 15
4 10
5 5
JACK’S DEMAND CURVE FOR PRODUCT X
 Supply Schedule

Price Quantity
(in Php) (in sticks)
20 5
25 8
30 16
35 25
40 35
 S
SS
E
D

AA
 MARKET PRICE – the market value of
products

EFFECTIVE TOOL FOR ALLOCATING AND DISTRIBUTING

GOODS AND SERVICES IN THE MARKET
MARKET PRICE
FAIR
FREE
ELASTIC
COST-FREE
EFFICIENT
 MARKET PRICE DETERMINATION
TABLE 1.1: PRODUCT XYX
Price (Php) Quantity Demanded Quantity Supplied
110 1 11
100 2 10

Surplus
90 3 9
80 4 8
70 5 7
60 6 6 Equilibrium
50 7 5
40 8 4
30 9 3

Shortage
20 10 2
10 11 1
 MARKET
EQUILIBRIUM

EXISTS WHEN
DEMAND IS EQUAL TO
SUPPLY AT A PRICE
ACCEPTABLE TO BOTH
BUYERS AND SELLERS.
Results to:
Low prices/deflation
Sale

Results to:
High prices/inflation
Panic buying /Hoarding
 DEMAND AND SUPPLY INTERACTION

SURPLUS SHORTAGE
SUPPLY IS GREATER DEMAND IS GREATER
THAN DEMAND THAN SUPPLY
Meaning and Significance of
Equilibrium Price:
1. Reasonable price (affordable
to consumers; profitable to
sellers)
2. Happy buyers and sellers
3. Stable price and market
4. Stable purchasing power of
the peso
5. Maximum use of resources

Note: Price rarely stabilizes,

because of the constant struggle
between demand and supply.
Fixing the price though is not
good for the market and the
economy in the long run.
Consequences of Market Surplus:

1. Low prices (if sustained, it

could lead to deflation).
2. Wastage of
products/resources.
3. Sluggish economy
4. Bankruptcy
5. Massive unemployment
6. Imposition of price floor
(lowest possible price - such as
the daily minimum wage of
workers)
Consequences of Market Shortage:

1. High prices (if excessive, it could

lead to a paralyzing inflation and
decline in the demand for
products).
2. Hoarding of products by
unscrupulous sellers.
3. Panic buying
4. Decline in the purchasing power
of the peso
5. Imposition of price ceiling (highest
allowable price – such as during a
state of calamity)
 Concept of Price Floor – Daily Minimum Wage
Price

D S
Surplus
(S>D)
Minimum Wage
(Price Floor – P610)

Equilibrium
Price Equilibrium Point
(Market (D=S)
Price –P500)

Shortage
(S<D)

Quantity
Equilibrium Quantity
 Concept of Price Ceiling – Price Cap on Rice
Price

D S
Surplus
(S>D)

Equilibrium
Price Equilibrium Point
(Market (D=S)
Price – P60)
Maximum Price
(Price Ceiling – P50)
Shortage
(S<D)

Quantity
Equilibrium Quantity
 What can your P20.00 buy now?

• Cellphone load
• 1 bus ride
• A bet in Lotto
• 1/2 hour rent in
neighborhood café
• Fish balls, squid balls etc.
• 1 pack of instant noodles
 0.75
per call
(1980s)

https://i.pinimg.com/474x/c9/cd/e1/
c9cde1e56294522755dbfaed24e07aca.jpg
 Exchange Rate (1990 – present)

• 1990s - P24.268
• 2000 - P44.14
• 2001 - P51.002
• 2002 - P51.5762
• 2005 - P55.0984
• 2010 - P43.679
• 2012 - P41.0067
• 2013 - P43.1825
 Exchange Rate (1990 – present)

• 2014 - P44.77
• 2015 - P45.18
• 2016 - P49.55
• 2017 - P50.40
• 2018 - P54.59
• 2019 - P50.37
• 2020 - P48.20
• 2021 - P49.16
 Causes of Inflation
1. Demand-Pull- Increase in income leads
to increase in demand that can cause
prices to increase.
Demand-pull inflation
 Causes of Inflation
2. Cost-Push- Rise of cost of inputs
leads to increase in prices.
– Oil-Push- Increase of prices of basic
commodities is mainly due to increase
in oil prices.
Cost-push inflation
 Causes of Inflation

3. Structural
- When the government implements new
economic policy like tax reform that results to
higher prices.
- Result of the abrupt imbalance of S and D
- Competition of the private and public sectors
in resources
 Causes of Inflation
4. Built-in Inflation
Built-in inflation is related to adaptive expectations, the idea that
people expect current inflation rates to continue in the future. As
the price of goods and services rises, workers and others come
to expect that they will continue to rise in the future at a similar
rate and demand more costs or wages to maintain their standard
of living. Their increased wages result in a higher cost of goods
and services, and this wage-price spiral continues as one factor
induces the other and vice-versa.
https://www.thebalance.com/thmb/RaT_-Aba9C8wgtGrtu0l1Zpy_P0=/896x0/
filters:max_bytes(150000):strip_icc():format(webp)/types-of-inflation-4-
different-types-plus-more-3306109-Final2-
79a7abf4e9ed4d408e84f075d7029b07.png
 4 MAIN TYPES OF INFLATION
1. Creeping
Inflation
Creeping or mild inflation is
when prices rise 3% a year
or less.
When inflation rate is low, it
benefits economic growth.
This boosts demand.
Consumers buy now to
beat higher future prices.
That's how mild inflation
drives economic
Bill Pugliano / Getty Images
expansion.
4 MAIN TYPES OF 2. Walking
INFLATION
Inflation
This strong, or
destructive,
inflation is between
3-10% a year. It is
harmful to the
economy because
it heats-up
economic growth
too fast.
Fanatic Studio / Getty Images
 3. Galloping Inflation
When inflation rises to 10% or
more, it wreaks absolute havoc
on the economy. Money loses
value so fast that business and
employee income can't keep up
with costs and prices. Foreign
investors avoid the country,
depriving it of needed capital.
The economy becomes
unstable, and government
leaders lose credibility.
Galloping inflation must be
prevented at all costs.
sesame / Getty Images
 4. Hyperinflation
Hyperinflation is when prices
skyrocket more than 50% a
month. It is very rare. In fact,
most examples of hyperinflation
occur when governments print
money to pay for wars.
Examples of hyperinflation
include Germany in the 1920s,
Zimbabwe in the 2000s, and
Venezuela in the 2010s.2 The
last time America experienced
hyperinflation was during its civil
war.
APIC / Getty Images
Who benefits from Inflation?
• Debtors
• People without fix income
• Speculators

Who are hurt from Inflation?

• Creditors
• Employees
• People who save
 Important Terms
• Purchasing Power - How much can peso purchase; how
much the peso in the base period is worth in another
period
• Currency Depreciation – decline in the purchasing
power of the peso, resulting to fewer goods/ services
that could be purchased by the same amount of
income.
• Example:
– Before P3000 = push cart of goods
– Now P5000= Same push cart of goods
 Deflation
Deflation is the opposite of inflation.
It's when prices fall. It's caused
when an asset bubble bursts.
That's what happened in housing in
2006. Deflation in housing prices
trapped those who bought their
homes in 2005.7 In fact, the Fed
was worried about the overall
deflation during the recession.
That's because deflation can turn a
recession into a depression. During
the Great Depression of 1929,
prices dropped 10% a year.8 Once
deflation starts, it is harder to stop
Mario Tama / Getty Images than inflation.
HEADLINE INFLATION & CORE INFLATION DISTINGUISHED

Core inflation and headline inflation are two

measures of inflation that are used to track the rise
in prices of goods and services over time.
The main difference between the two is that
headline inflation
includes all goods and services, while
core inflation
excludes the prices of food and energy
HEADLINE INFLATION AND CORE INFLATION DISTINGUISHED
HEADLINE INFLATION AND CORE INFLATION DISTINGUISHED
 CPI Based on a Hypothetical Weekly Market Basket
Unit Price in Peso Weighted Price in Peso
Market Basket Unit Weight or Nov. Nov. Nov. Nov.
(per week) Quantity 2022 2023 2022 2023
Rice
(well-milled) Kilo 5 43 45 215 225
Chicken Kilo 2 165 190 330 380
(whole)
Sugar Kilo 1 85 92 85 92
(white)
Cooking Oil Liter 1 80 85 80 85
(palm oil)
Egg (large) tray 1.5 190 200 285 300
Total Weighted Price 995 1,082
Consumer Price Index 100% 108.74%
Price Level Change/Headline Inflation or Deflation Rate - 8.74%
Purchasing Power - 91.26
Results to:
Low prices/deflation
Sale

Results to:
High prices/inflation
Panic buying /Hoarding