DEMAND AND SUPPLY

Prepared by:
JOSEPH EL ROY B. CASSION II
Adapted from:
Belinda P. Ato-Candelario
 DEMAND
• Willingness and Capability of a consumer to
buy goods or services

• Quantity Demanded (Qd)

– The amount of a product that people are willing
and able to purchase at one, specific price.
 DEMAND
• Can be presented using:
– Demand Schedule
– Demand Curve
– Demand Function
Demand Schedule and Demand Curve

A Demand Schedule 600

A Demand Curve

Price Qd per week 500

Price per DVDs (in peso)

per DVD
400 E

A 50 9 350
300 D
B 100 8 Demand for
C
C 200 6 200 DVDs
D 300 4 100
B
A
E 400 2 50
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of DVDs demanded (per week)
 Demand Function
• Qd = F(P, Ps, Pc, Y, A, Ac, N, Cp, Pe, T/S)
– P = Prices of goods or services
– Ps = Prices of substitute goods
– Pc = Prices of complementary goods
– Y = income of consumers
– A = Advertising
– Ac = Competitors advertising
– N = Number of buyers
– Cp = Consumer taste and preference
– Pe = Expectation of future prices
– T/S = Taxes and subsidies
 Movements of Demand

600

500
Price per DVDs (in peso)

400
350
300 D
Change in quantity demanded
200 - a movement along the curve
- quantity demanded change due to
100 B a change of price
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of DVDs demanded (per week)
 Movements of Demand

600
Change in demand
500 (a shift of the curve)
Price per DVDs (in peso)

400 E
350 F
300 D

200 C

B
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of DVDs demanded (per week)
 Movements of Demand

600 Change in demand

1. Rightward Shift D to F
500 >No change in price
Price per DVDs (in peso)

E >Quantity demand Increases

400 2. Leftward Shift C to G
350 F
300 D >No change in price
>Quantity demand decreases
200 C
G
B
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of DVDs demanded (per week)
 LAW OF DEMAND
• An increase in price the quantity demanded
will decrease (vice versa), ceteris paribus
(other things constant)

– Purchasing Power Effect

– Substitution Effect
 SUPPLY
• Quantity supplied is the amount of a good
that sellers are willing and able to sell at
various prices over a given period of time
 SUPPLY SCHEDULE
Year Price of Quantity
Rice per Supplied of Rice
kilo in thousand
metric tons
2002 P18.00 8450
2003 17.00 8300
2004 19.00 8500
2005 23.0 8950
 SUPPLY CURVE
24
23
Price of Rice per kilo
22
21
20
19
18
17
16
15

Quantity Supplied of Rice in

thousand metric tons
 SUPPLY FUNCTION
• Qs = F(P, Pi, T, EE, Fr, RC, Pe, Ta, T/S)
– P = Price
– Pi = Price of inputs
– T = Technological advancement
– EE = Entry or Exit of sellers
– Fr = Accident Supply interruptions
– RC = Cost of Regulatory Compliance
– Pe = Expectation of future prices
– T/S = Taxes or subsidies
 Movements of Supply
S0

B
Price (per unit)

A Change in quantity supplied (a

P15 movement along the curve)

1,250 1,500
Quantity supplied (per unit of time)
 Movements of Supply
Price (per unit)

S2 S
0
S1

C A Change in Supply
B (a shift of the curve)
P15 A to B•Rightward Shift
A to C•Leftward Shift

Quantity supplied (per unit of time)

 The Law of Supply
• As the price of a product rises,
producers will be willing to supply more
cet. par. (vice-versa)
• The law of supply is accounted for by
two factors:
–When prices rise, firms substitute
production of one good for another.
–Assuming firms’ costs are constant,
a higher price means higher profits.
 Elasticity – the concept
• The responsiveness of one variable to
changes in another
• When price rises, what happens
to demand?
• Demand falls
• How much does demand fall?
• Elasticity measures the extent to which
demand will change
 ELASTICITY

– PRICE ELASTICITY (DEMAND & SUPPLY)

– INCOME ELASTICITY
– CROSS ELASTICITY
 Price Elasticity of Demand
Where % change in demand
is greater than % change in price – elastic
• If Ped is greater than │1│ : the
relationship is elastic
• Luxury product
Where % change in demand is less than %
change in price - inelastic
• If Ped is lesser than │1│ : the
relationship is inelastic
• Necessity product
 Price Elasticity of Demand
• If demand is price • If demand is price
elastic: inelastic:
• Increasing price • Increasing price
would reduce TR would increase TR
(%Δ Qd > % Δ P)
• Reducing price (%Δ Qd < % Δ P)
would increase TR • Reducing price
(%Δ Qd > % Δ P) would reduce TR
(%Δ Qd < % Δ P)
 Elasticity of Demand
• Income (Y) Elasticity of Demand:
– The responsiveness of demand
to changes in incomes
• Normal Good – demand rises
as income rises and vice versa
• Inferior Good – demand falls
as income rises and vice versa
• A positive sign denotes a normal good
• A negative sign denotes an inferior good
 Elasticity

• Cross Elasticity:
• The responsiveness of demand
of one good to changes in the price of a
related good – either
a substitute or a complement
 Cross Price Elasticity of Demand
• Goods which are complements:
– Cross Elasticity will have negative sign (inverse
relationship between the two)
• Goods which are substitutes:
– Cross Elasticity will have a positive sign (positive
relationship between the two)
 Elasticity
• Price Elasticity of Supply: Qs2 - Qs1
% Δ Quantity Supplied Qs1
Pes = ____________________ =
% Δ Price P2 - P 1
– The responsiveness of supply to changes P1
in price
– If Pes is inelastic - it will be difficult for suppliers to react swiftly
to changes in price (agricultural products)
– If Pes is elastic – supply can react quickly to changes in price
(manufactured products)
 REGRESSION
• a statistical method that attempts to
determine the strength and character of
the relationship between one dependent
variable (usually denoted by Y) and a
series of other variables (known as
independent variables). -investopedia
 LINEAR REGRESSION
• attempts to model the relationship
between two variables by fitting
a linear equation to observed data
 LINEAR REGRESSION IN DEMAND
• Take into consideration the demand for bus
travel and fare.
• Dependent Variable: Qd = demand for bus
travel
• Independent Variable: P= Fare
• Expressing it into a linear function we have;
 RESULT AND INTERPETATION

• As fare increases by $1.00 the number of

miles travelled will decrease by 417.67miles.
Other things constant.
• If the fare is 0 the bus can travel up to 2301.77
miles.
 PRICE ELASTICITY OF DEMAND

• What if the bus company will set the price to

$1.6. How would the consumer react to the
change in price?
 PRICE ELASTICITY OF DEMAND

• Fare = $1.6
• Bustravel (Qd)?
• Bustravel = 2301.77 – 417.67 (1.6)
• Bustravel = 1,633.498
• . = -417.67
 PRICE ELASTICITY OF DEMAND

• Fare = $1.6
• Bustravel (Qd)?
• Bustravel = 2301.77 – 417.67 (1.6)
• Bustravel = 1,633.498
• . = -417.67

• PED = - 417.67 (1.6/1,633.498)

• PED = -417.67 (0.0009794931)
• PED = -0.41 , inelastic
 MULTIPLE LINEAR REGRESSION
• attempts to model the relationship between
two or more explanatory variables and a
response variable by fitting a linear equation
to observed data.
 MULTIPLE REGRESSION IN DEMAND
• Take into consideration the demand for bus
travel, fare, gas price and income.
• Dependent Variable: Qd = demand for bus
travel.
• Independent Variables:
• Fare, Gas Price and Income
• Expressing it into a linear function we have;
 RESULT AND INTERPETATION

• Bustravel = -16,569.8 – 460.68(Fare) + 16,944.98(Gas

Price) + 0.20 (Income)
• As fare increases by $1.00 the number of miles
travelled will decrease by 460.68miles. Other things
constant.
• As Gas price increases by $1.00 the number of miles
travelled by the bus will increase to 16,944.98miles.
Other things constant.
• As income increases, by 1 unit the miles travelled by
the bus will increase by 0.20 miles. Other things
constant.
 CROSS ELASTICITY OF DEMAND
What if the bus company will set the price to
$1.6. The gas price is set at $1.25 and the
consumer’s income will increase by $16,000 How
would the consumer react to the change in gas
price?
• Cross Elasticity ( Cars/ Other vehicles are
related goods)
 CROSS ELASTICITY OF DEMAND

• Bustravel = -16,569.8 – 460.68(Fare) + 16,944.98(Gas Price) + 0.20 (Income)

• Gas Price = $1.25

• Bustravel (Qd)?
• Bustravel = -16,569.8 – 460.68(1.6) + 16,944.98(1.25) + 0.20 (16,000)
• Bustravel = 7,074.337
• . = 16,944.98
 CROSS ELASTICITY OF DEMAND

• Bustravel = -16,569.8 – 460.68(Fare) + 16,944.98(Gas Price) + 0.20 (Income)

• Gas Price = $1.25
• Bustravel (Qd)?
• Bustravel = -16,569.8 – 460.68(1.6) + 16,944.98(1.25) + 0.20 (16,000)
• Bustravel = 7,074.337
• . = 16,944.98

• CED = 16,944.98 (1.25/7,074.337)

• CED = 16,944.98 (0.0001766949)
• CED = 2.99 , elastic substitute
 INCOME ELASTICITY OF DEMAND
What if the bus company will set the price to
$1.6. The gas price is set at $1.25 and the
consumer’s income will increase by $16,000 How
would the consumer react to the change og their
income?
• Income Elasticity
 INCOME ELASTICITY OF DEMAND

• Bustravel = -16,569.8 – 460.68(Fare) + 16,944.98(Gas Price) + 0.20 (Income)

• Income= $16,000
• Bustravel (Qd)?
• Bustravel = -16,569.8 – 460.68(1.6) + 16,944.98(1.25) + 0.20 (16,000)
• Bustravel = 7,074.337
• . = 0.20
 INCOME ELASTICITY OF DEMAND

• Bustravel = -16,569.8 – 460.68(Fare) + 16,944.98(Gas Price) + 0.20 (Income)

• Income= $16,000
• Bustravel (Qd)?
• Bustravel = -16,569.8 – 460.68(1.6) + 16,944.98(1.25) + 0.20 (16,000)
• Bustravel = 7,074.337
• . = 0.20
• IED = 0.20(16,000/7,074.337)
• IED = 0.20 (2.26169043)
• IED = 0.45 , inelastic, normal good