MANAGERIAL

ECONOMICS
Prepared by:
MARIANNE O. CLEMENTE, MBM

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CHAPTER 2 DEMAND AND SUPPLY
Learning Objectives
At the end of this chapter, the student should be able to:
1. define what market is;
2. describe and explain the law of supply and demand, and
determine the factors that affect them;
3. Determine the equilibrium point in the market for a good
based on given data; and
4. Interpret how prices result in shortages and surpluses in the
market

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What is a Market?
 Market is a place where buyers and sellers
meet.
 Stock market – there is a buying and selling
of stock in that place.
 Wet market is the area where we can buy
wet commodities, such as fish and dressed
chicken.

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 What is Demand?
 Demand is the quantity of goods and services
buyers are willing and able to buy.
 Demand can be depicted by tables, numbers, or
graphs.
 By depicting a hypothetical table, we can make a
demand schedule.

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Case Analysis 1:
The city of Puerto Princesa in Palawan is renowned for its
famous Underground River, which is now considered one
of the new Seven Wonders of Nature. Now that it has that
distinction, how much is an individual willing to pay to
visit that area? In the Philippines. Let us say, we have a
price for a boat ride per person and the quantity demand is
the number of persons who are willing to ride a boat and
can pay for it as well.

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 Table 2.1. Hypothetical Demand Schedule of the
Demand for a Boat Ride in the Underground River
Year Price (in Php) Quantity Demand (QD)

2005 1,000 1,145

2006 1,250 1,120

2007 1,350 1,110

2008 1,400 1,105

2009 1,500 1,095

2010 1,800 1,065

2011 2,000 1,045

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The table shows that as the price increases, the quantity
demand decreases, which is a natural state of the market.
In this table, our dependent variable is the quantity
demand because it is the value that we would like to know.
Price is our independent variable as it is the value that is
expected to affect demand. Because we can see that
whenever the price of the service increases, the quantity
demand declines, we can say that the price has a negative
or inverse relationship to the quantity deman.d

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In a linear equation like this, it is important to consider the
intercept and slope. In this equation, 1,245 is the intercept and
-0.1 is the slope. Intercept is the value that we can get, with the
absence of the independent variable (price) or the value of QD if
the independent variable is zero. Meaning, that if the boat ride is
free, we can expect 1,245 people to avail of the service. The
slope is the impact of the independent variable on the price.
Hence, if the price is Php 1,000.00 there would be 1,145 people
going to that area. This can be computed by substituting the price
on a certain period to the P in the equation. Hence, it can be
computed using the values on the next slide:

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 Equation 2.1
 QD = 1,245 – 0.1P
 QD = 1,245 – 0.1(1,000)
 QD = 1,245 – 100
 QD = 1,145

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 Intercept is the value that we can get, with
the absence of the independent variable
(price) or the value of QD if the independent
variable is zero.
 Slope is the impact of the independent
variable to the price.

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 Figure 2.1. Graphical Representation of the
Hypothetical Demand Schedule of the Demand for a
Boat Ride in the Tubbataha Reefs

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 The Law of Demand
 states that as price increases, quantity
demand will decrease ceteris paribus
(assuming all factors are constant).

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 Other Factors Affecting Demand
(Determinants of Demand)
1. Income;
2. Price of related goods and services;
3. Taste and preference;
4. Expectations on future prices;
5. Changes in population.

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 1. Income
 Normal goods – goods or services that have
an increasing demand whenever income
increases. Whenever income decreases, we
can expect these commodities to decrease as
well. – jewelry, expensive liquors etc.
 Inferior goods – goods or services that have a
decreasing demand whenever income
increases. – noodles, sardines

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 2. Price of Related Goods and Services
 Substitute goods – goods that can replace
another commodity in its absence. – If the
price of the commodity doubles up we can
expect the demand to decrease.
 Complementary goods – goods that go hand
in hand with each other. – coffee and creamer

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 3. Taste and Preference
 As taste and preference increase, we can
expect an increase in demand for that product,
and vice versa.

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 4. Expectations on Future Prices
 As people expect prices to increase in the
future, QD at present will increase, and if
prices will decrease in the future, QD at
present will decrease.

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 5. Changes in Population
 As population increases, QD is likely to
increase as well, and vice versa.

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 What is Supply?
 Supply is the quantity of goods or services sellers
are willing and able to sell at different prices. If
demand depicts the willingness and ability of the
people to purchase a commodity, supply shows the
behavior of producers in selling their
commodities. Supply can be depicted by tables,
numbers, or graphs.


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Table 2.2. Hypothetical Supply Schedule for a Boat
Ride in the Underground River
Year Price (in Php) Quantity Demand (QS)

2005 1,000 1,065

2006 1,250 1,090

2007 1,350 1,100

2008 1,400 1,105

2009 1,500 1,115

2010 1,800 1,145

2011 2,000 1,165

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 Equation 2.2
 QS = 965 + 0.1P
 QS = 965 + 0.1(1,000)
 QS = 965 + 100
 QS = 1,065

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 Figure 2.2. Graphical Representation of the
Hypothetical Supply Schedule for a Boat Ride in the
Underground River

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 The Law of Supply
 states that as price increases, quantity
supplied will also increase ceteris
paribus (assuming all factors are
constant).

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 Other Factors Affecting Supply
1. input price,
2. price of related goods and services,
3. expectation on future prices,
4. technology,
5. government regulations,
6. number of suppliers,
7. unexpected calamities or natural disasters.

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 1. Input Price
 If the price of the input of a commodity is
high, we can expect that its price will also
increase. Moreover, we can expect that the
supply of the said commodity will decrease as
well because these inputs, serving as raw
materials for the commodity, will be costly for
the producer/seller.

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 2. Price of Related Goods and Services
 If the price of the substitute good of a
commodity increases, the supply of the other
will increase, and vice versa. – coffee and tea
 If the price of a complementary good of a
commodity increases, the supply of the other
will decrease, and vice versa. – coffee and
creamer

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 3. Expectations in Future Prices
 If the price of the substitute good of a
commodity increases, the supply of the other
will increase, and vice versa. – coffee and tea
 If the price of a complementary good of a
commodity increases, the supply of the other
will decrease, and vice versa. – coffee and
creamer

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 4. Technology
Technological
development increases
supply.

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 5. Government Regulations
 A high amount of money to be paid due to government
regulations is likely to decrease supply in an area. Just
like government, regulations, taxes are also a burden to
suppliers. Thus, if tax is high, we can expect a decrease
in the supply of different commodities. Conversely, we
expect that when government subsidies increase, the
supply would also increase because subsidies assist
sellers to produce more.

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 6. Number of Suppliers

 If the number of suppliers increases, the

supply will also increase.

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 7. Unexpected Calamities

 Unexpected calamities or natural disasters

will decrease the supply in the area

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 Market Equilibrium
 One thing that is observable in studying the impact of price
on quantity supplied (QS) and quantity demanded (QD) is
that consumers would want to lower prices, but the producer
would want to have a higher price. As these two market
entities are important, we should determine a certain value
that will be advantageous to both consumers and producers.
This is the reason why we look for the market equilibrium.
This equilibrium is a point where the quantity demanded is
equal to the quantity supplied.

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 Market Equilibrium
 This is the point where buyers are willing and able to
buy the product or deliver the service. Determining the
equilibrium can also be done in tables, graphs, or
mathematically. To explain this clearly, let us use our
example of the Underground River. Let us combine the
numbers for the demand and supply of the said service.

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 Table 2.3. Hypothetical Demand and Supply Schedules for a Boat
Ride in the Underground River

Year Price (in Php) Quantity Demand (QD) Quantity Demand (QS)

2005 1,000 1,145 1,065

2006 1,250 1,120 1,090

2007 1,350 1,110 1,100

2008 1,400 1,105 1,105

2009 1,500 1,095 1,115

2010 1,800 1,065 1,145

2011 2,000 1,045 1,165

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 In table 2.3., the highlighted value is our equilibrium
point. This is because the value of QD is equal to the
value of QS (1,105=1,105)
 Hence, for this example, the equilibrium price is 1,400
and the equilibrium quantity is 1,105. In reality, the
equilibrium point could not be depicted as easily as
this. Suppose you are given an example like the
hypothetical demand and supply schedule of tofu in
Table 2.4.

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Table 2.4. Hypothetical Demand and Supply Schedule
Tofu
Year Price (in Php) Quantity Demand (QS)

15 20 190

14 40 170

13 70 120

12 120 60

11 200 30

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 In table 2.4., you have yet to determine what your
equilibrium price and quantity would be, or the price
and quantity where buyers and sellers meet. One way
to determine these is through the use of a graph. The
graph on the next slide is plotted from Table 2.3. We
can see that the equilibrium point can be found easily
as (1,105;1,400) because it is the point where QS meets
QD.

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Figure 2.3. Graphical Representation of the Supply and Demand
Schedule for a Boat Ride in the Underground River

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 Now, let us plot the example shown in Table 2.4. This
can be found in Figure 2.4. We can see that the
equilibrium price is slightly above 12.5, but not above
12.8. Hence, we can say that the equilibrium price for
this commodity is between 12.6 and 12.7. Therefore,
the average would be 12.65. Meanwhile, the
equilibrium quantity is 90.

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Figure 2.4. Graphical Representation of the Supply and Demand
Schedule of Tofu

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 Another way of computing equilibrium price and
quantity is through a mathematical equation. Using the
Underground River example: we were able to arrive at
two equations from the demand and supply schedule:
 QD = 1,245-0.1P
 QS = 965+0.1P

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 To get the equilibrium price and quantity, we should
equate QS to QD:
 QS=QD
1,245-0.1P = 965+0.1P
Transpose similar terms:
1,245-965 = 0.1P+0.1P
280 = 0.2P
 Divide both sides by 0.2:
1,400 = P

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 Hence, we get an equilibrium quantity, we just need to
substitute the value that we get from the equilibrium
price to the previous equations that we have, it will be
like this:
 QS = QD
1,245-0.1(1,400) = 965+0.1(1,400)
1,105 = 1,105

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 Movement and Shifting of the Supply and Demand
Curve
 We can see from the examples that the market
equilibrium can be determined through the intersection
of supply and demand. We observe that the market
equilibrium is looking at how supply and demand can
be affected by price alone, but other factors of
production can affect the overall supply and demand of
a commodity.

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 Let us start with the overall income as an example. We will
use the Underground River’s equilibrium price and quantity
as an example. In this example, we can see that equilibrium
price is Php 1,400 and equilibrium quantity is 1,105.

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 Now, This type of recreation is considered a normal
good because people do not usually go to places like
these unless they have a budget to visit such
landmarks. Assuming that the overall income in the
Philippines increases, we can expect a shift in the
demand curve. A shift in the demand curve can be seen
in Figure 2.6. QD1 is the demand without the changes
yet in income, and QD2 is the demand after the
occurrence of the change in income. In this example,
the demand curve shifted to the right because we
expected that an increase in income will increase the
demand for a product.

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Figure 2.6. Shifting of the Demand Curve for a Boat Ride in
the Underground River

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 We can then conclude that an increase in the quantity
demanded will shift the demand curve to the right. We
can see that the equilibrium price changed from 1,400
to 1,500, and the equilibrium quantity changed from
1,105 to 1,115. From this example, we can say that
indeed, an increase in the quantity demanded will shift
the demand curve to the right

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 Conversely, are there changes in the supply curve?
Because QD = QS, the change in income has an impact
on supply. We can observe that there is a movement of
the equilibrium from 1,105 to 1,115, and we call this a
movement of the supply curve. From the example, we
can conclude that shifting of the demand curve exists
when non-price determinants (such as income, taste
and preference, and others) impact demand, and
movement exists when there are changes in the price or
quantity of a good or service.

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 To make this fact clearer, let us have an example of an
inferior good, Let us consider Table 2.5. as the
hypothetical demand curve of noodles in Barangay
Palangoy. Noodles are considered an inferior good
because as your income increases, the demand for this
good will decrease. If a person’s income increases by
twofold at a certain period, he/she would no longer
want to consume noodles that often (unless one craves
it). Hence, this could be considered as an inferior good.
Table 2.5. also interpreted in Figure 2.7.

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Table 2.5. Hypothetical Demand and Supply Schedule of
Noodles in Brgy. Palangoy
Price (in Php) Quantity Demand (QD) Quantity Demand (QS)

20 229 213

25 224 218

27 222 220

28 221 221

30 219 223
36 213 229
40 209 233

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 Again, assuming that the overall income increases, we
can expect a shift on the demand curve. If we expect
the demand to decrease in this scenario, there should
also be a shift of the demand curve to the left. This can
be seen in Figure 2.7. QD1 is the demand without any
change in income, and QD2 is the demand after the
occurrence of the change in income. In this example,
the demand curve shifted to the left because we expect
that an increase in income will decrease the demand of
a product.

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Figure 2.7. Graphical Representation of the Supply and
Demand Schedule of Noodles in Brgy. Palangoy

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 Therefore, a decrease in the quantity demanded will
shift the demand curve to the left. The equilibrium price
changed from 28 to 24, and the equilibrium quantity
changed from 221 to 213. From this example, we can
say that indeed, a decrease in the quantity demanded
will shift the demand curve to the left. As QD = QS,
there would still be an impact on supply. We can
observe that there is a movement of the equilibrium
from 221 to 213, so there is still a movement of the
supply curve.

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Thank you!

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