Supply

&
Demand
Prepared by: Jojelyn E. Tenebroso, CTT, MMPA
Chapter Summary:
 Demand
 Supply
 Market Equilibrium
 Shocks to the Equilibrium
 Effects of Government Interventions
 When to Use Supply and Demand
Model
 Supply
 The amount of a product that producers are willing and able
to make available for sale at each of a series of possible prices
during a specific period.

 Two things stands out from the definition of supply:

• Willingness
• Ability
Law of Supply
 Law of Supply says that; other things equal , an increase in
a product’s price will increase the quantity of it supplied;
and conversely for a decrease in price

 There is a positive or direct relationship between price

and quantity supplied

 Ceteris Paribus Assumption

Supply Schedule and Supply Curve
 Supply Schedule – a table showing the total quantity of a
good that producers wish to supply at each price

 Supply Curve- a graph displays the quantity supplied

 at each possible price, holding constant the other factors
that influence firms’ supply decisions.
 Quantity Supplied- is the amount of a good that firms want to sell at a
given price, holding constant other factors that influence firms’ supply
decisions, such as costs and government actions.
 Supply Curve
The estimated supply curve, S1, for
coffee shows the relationship
between the quantity supplied per
year and the price per lb, holding
constant cost and other factors that
influence supply. The upward slope
of this supply curve indicates that
firms supply more coffee when its
price is high and less when the
price is low. An increase in the
price of coffee causes firms to
supply a larger quantity of coffee; Note: 1. it’s possible for the supply curve to start from the origin
any change in price results in a 2. At the origin when price is zero, quantity supplied of a
movement along the supply commodity is also zero
curve.
Determinants of Supply and Quantity Supplied

 Own Price
 Input Price (Costs of Production)
 Technology
 Price of Related goods
 Government Rules and Regulations
Effects of Price on Supply.

 Own Price

 Changes in the price of

a coffee will affect the
Quantity Supplied of
Coffee

 This causes a
movement along the
supply curve
 Effects of Other Variables on Supply.

Input Price (Costs of Production)

- to produce a good, producers use various inputs
such as machines, labor, fuel, & etc.
Figure 1: if prices of machines, labors
and all inputs brought to production
Figure 1 Figure 2
process REDUCES.

Figure 2: if prices of inputs

INCREASES
 Effects of Other Variables on Supply.

 Technology
 Changes in technology affects the supply of a given
commodity
Figure 1 Figure 2

Figure 1: if technology has

IMPROVED.

Figure 2: if technology has

DETERIORATES.
Effects of Other Variables on Supply.
 Price of Related goods
A change in a relevant variable other than the good’s own price causes the entire
supply curve to shift. One such variable is the price of cocoa (which is a major
component in chocolate). When the price of cocoa rises, many coffee farmers
switch to producing cocoa. Therefore, when the price of cocoa rises, the amount
of coffee produced at any given price for coffee falls

Figure 1: if price of
Cocoa decreases.

Figure 2: if price of
Cocoa Increases.
Determinants of Supply and Quantity Supplied
 Government Rules and Regulations
e.g. : Taxes and Subsidies
• Business treats most taxes as costs
• In contrast, subsidies are “Taxes in reverse”
Figure 1: if there is a REDUCTION of tax Figure 3: if there is a subsidy given to
which firms are supposed to pay the suppliers
Figure 4: it subsidies are REMOVED.
Figure 2: it taxes were to INCREASE

Figure 1 Figure 2 Figure 3 Figure 4

SUPPLY FUNCTION
 We can write the relationship between the quantity supplied and price and other
factors as a mathematical relationship called the supply function. Using a
general functional form, we can write the coffee supply function, S, as

Quantity of coffee supplied price of coffee price of cocoa (other factor)

Our estimated supply function for coffee is

Equation 2.1
 SUPPLY FUNCTION (cont.)
 If we hold the cocoa price fixed at $3 per lb, we can rewrite the supply function in Equation 2.1
(Q=9.6+0.5p−0.2pc) as solely a function of the coffee price.
Substituting pc = $3 into Equation
Q = 9.6 + 0.5p – (0.2pc)
Q = 9.6 + 0.5p - (0.2 * 3)
Q = 9.6 + 0.5p – (0.6)
Q = 9.6 + 0.5p - 0.6
Q = 9 + 0.5p
If price of coffee = 2, considering all other factors like the price of
cocoa are constant
Q = 9 + 0.5(2)
=9+1
= 10

If there is a 3 per lb increase in the price of cocoa at a coffee price

of 2
Q = 9.6 + 0.5p – 0.2pc
= 9.6 + 0.5(2) - (0.2 * 6)
= 9.6 + 1 – 1.2
= 10.6 – 1.2
= 9.4
 Market Equilibrium
 MARKET

 Is any institution or mechanism that brings together buyers and sellers of particular
goods, services or resources for the purpose of exchange
 The market reaches equilibrium when the quantity of goods or services that sellers
are willing to offer matches the quantity buyers are willing to purchase at a
particular price, ensuring a balance between supply and demand.
 Equilibrium price - A price at which consumers can buy as much as they want and
sellers can sell as much as they want. At this price, the quantity demanded equals the
quantity supplied. This quantity is the equilibrium quantity.
Market Equilibrium
Using Math to Determine the Equilibrium

To illustrate how supply and demand curves determine the equilibrium price and quantity, we
use the coffee example.

We can determine the coffee equilibrium mathematically, using supply and demand functions
that correspond to the supply and demand curves.

The Demand and Supply function of coffee are already given:

Solving Equilibrium price
 In equilibrium, Qd = Qs
The Demand and Supply function of coffee are already given:

thus, 12-p = 9 + 0.5p

12 = 9 + 1.5p
12-9 = 1.5p
_3_ = 1.5p
1.5 1.5p
2 = p (equilibrium
price)
Solving Equilibrium Quantity
 We can determine the equilibrium quantity by substituting the p into either the supply
function or the demand function

Using the demand function: Using the Supply function:

Q = 12 – 2 Q = 9 + (0.5 x 2)
Q = 10 (million tons) Q=9+1
Q = 10 (million tons)
Using Graph to Determine the Equilibrium
EXCESS DEMAND
 Occurs when the
commodity price is
BELOW the
equilibrium price
 At any price below
the equilibrium
price, there will be
a shortage of
commodities
EXCESS SUPPLY
 Occurs when the
commodity price is
ABOVE the
equilibrium price
 At any price above
the equilibrium
price, there will be
a surplus of
commodities
 Shocks to the Equilibrium
The equilibrium changes only if a shock occurs that shifts the demand curve or the supply
curve. These curves shift if one of the variables we were holding constant changes. If tastes,
income, government policies, or costs of production change, the demand curve or the
supply curve or both shift, and the equilibrium changes.
Equilibrium Effects of a Shift of a Demand or
Supply Curve
- End of Presentation -