THE BASIC

ANALYSIS
OF
DEMAND
AND
SUPPLY
CHAPTER 2.1
 Learning Objectives
Define market
Know the difference between demand and supply
Identify the ways forces of demand and supply affect its
curve
Categorize the forces of factors that affect the level of
demand and supply
Explain how the law of demand and supply affect the market
Define equilibrium
Explain how equilibrium occur in the market
Differentiate surplus from shortage
Describe how the government utilize price control
1.Describe the difference between
demand and supply.
DEMAND and
SUPPLY
● Demand generally affected by the
behavior of consumers, while supply is
usually affected by the conduct of
producers.
● The interplay between these two is the
foundation of economic activity
● Thus, the consumer identifies his or her
needs, wants, and demands, while
producers address these by accordingly
producing goods and services.
 MARKET

 where buyers and sellers meet

 Place where they both trade or exchange goods
or services – in other words, it is where
transaction takes place
 KINDS OF MARKERT
 Wet market
o Where people usually buy vegetables,
meat, etc
 Dry market
o Where people buy shoes, clothes, or
other dry goods
 DEMAND

 Pertains to the quantity of a good or service

that people are ready to buy at given prices
within a given period of time, when other
factors besides price are held constant
 Demand for a product is the quantity of a good
or services that buyers are willing to buy given
its price at a particular time.
 IMPLIES THREE (3) 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
 METHODS OF DEMAND
ANALYSIS

Demand Demand Demand

Schedule Curve Function
 DEMAND SCHEDULE

A table that shows the relationship of prices and

the specific quantities demanded at each of these
prices.
Information provided by a demand schedule can be
used to construct a demand curve showing the
price-quantity demanded relationship in graphical
form.
Methods of Demand
 Hypothetical Demand Schedule for
Rice Per Month
Situation Price (P) Quantity (kg)
A 5 8
B 4 13
C 3 20
D 2 30
E 1 45

 The table shows the various prices and quantities for the demand for
rice per month. For instance, at a given price of Ᵽ5, the buyer is
willing to purchase only 8 kilos of rice (situation A); however, at a
price of Ᵽ1, he is willing to buy 45 kilos of rice (situation E)

Methods of Demand
 DEMAND CURVE

 A graphical presentation showing the relationship between price and

quantities demanded per time period.
 Has negative slope, thus its slopes downward from left to right.
 The downward slope indicates the inverse relationship between price and
quantity demand
 Most demand curves slope downward because
a. As the price of the product rise, consumers will tend to substitute this
(now relatively cheaper) product for others in the purchases
b. As the price of the product falls, this serves to increase their real
income allowing them to buy more products
Methods of Demand
Demand Curve

 The figure illustrates a typical demand

curve. The Y-axis represents price (P),
while the X-axis represents the quantity
demanded (QD). The demand curve is
negatively sloped or downward sloping.
The (negative) slope measures the
change in quantity demanded for a unit
change in price. This indicates that as
the price of commodities decreases
(increases), more (less) goods will be
bought by the consumer.

Methods of Demand
 LAW OF DEMAND

States that “if price goes UP, the quantity

demanded of a good would go DOWN”. Conversely,
“if price goes DOWN, the quantity demanded of a good would
go UP ceteris paribus”.
 The reason for this is because consumers always tend to
MAXIMIZE SATISFACTION.

Methods of Demand
 DEMAND FUNCTION

 Shows the relationship between demand for a commodity and the

factors that determine or influence this demand
 These factors are – the price of commodities, level of incomes, taste
and preferences, size and composition level of population,
distribution of income, etc.
 Expressed as a mathematical function for demand
QD = f (product’s own price, income of consumers, price of related
goods, ect)

Methods of Demand
 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

Methods of Demand
 Example of Demand Function

Let us assume that the current price of good A is Ᵽ5.00. The

intercept of the demand curve is 3 while the slope is 0.25. If we
want to determine how much of good A will be demanded by
consumer W?

Methods of Demand
 Example of Demand Function

Let us assume that the current price of good A is Ᵽ5.00. The

intercept of the demand curve is 3 while the slope is 0.25. If we
want to determine how much of good A will be demanded by
consumer W?
QD = a – bP

Methods of Demand
 Example of Demand Function

Let us assume that the current price of good A is Ᵽ5.00. The

intercept of the demand curve is 3 while the slope is 0.25. If we
want to determine how much of good A will be demanded by
consumer W?
QD = a – bP
QD = 3 – 0.25 (5)

Methods of Demand
 Example of Demand Function

Let us assume that the current price of good A is Ᵽ5.00. The

intercept of the demand curve is 3 while the slope is 0.25. If we
want to determine how much of good A will be demanded by
consumer W?
QD = a – bP
QD = 3 – 0.25 (5)

= 3 – 1.25

= 1.75 units of good A Methods of Demand

 Sample of Demand Function

What if the price of good A will increase to Ᵽ6.00? What will now
be the new quantity demand by consumer X? What happened to
quantity demanded?

Methods of Demand
 CHANGE IN QUANTITY
DEMANDED VS. CHANGE IN
DEMAND
Change in Quantity
There is a change Demanded
in quantity demanded (rQD)
if there is a movement from one point to
another point – or from one price-quantity
combination to another – along the same
demand curve

a change in quantity demanded is mainly

brought by an increase (decrease) in the
product’s own price

the direction of the movement however is

Figure 2.2 Change in Quantity
Demanded
The figure illustrates the
concept of change in quantity
demanded. Change in quantity
demanded occurs when price of
the product changes, thus,
resulting to a change in
quantity demanded. This is
illustrated in the graph above
where P0 declines to P1 resulting
to change in Q0 to Q1 and a
movement along the demand
curve from point a to point b.
 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 the factors other than the
price of the good sold.

At the same price, therefore, more

amounts of a good or service are
demanded by consumers.
Figure 2.3 Change in The
Demand
figure shows
the two different
movements of
the demand
curve. Figure
2.3a shows an
increase in
demand while
Figure 2.3b
illustrates a
decrease or fall
FORCES THAT CAUSES THE DEMAND CURVE TO CHANGE

 TASTE OR PREFERENCES
 CHANGING INCOMES
 OCCASIONAL OR SEASONAL PRODUCTS
 POPULATION CHANGE
 SUBSTITUTE AND COMPLEMENTARY GOODS
 NOMINAL GOOD AND INFERIOR GOOD
 EXPECTATIONS OF FUTURE PRICES
 Taste or Preferences

o Pertains to personal likes or dislikes of consumers for a

certain goods and services
o If tastes or preferences changes so that people want
to buy more of a commodity at a given price, then an
increase in demand will result or vice versa.
 Changing Incomes
o Increasing incomes of households raise the demand
for certain goods or services or vice versa
o This is because an increase in one’s income generally
raises his or her capacity or power to demand for
goods or services which je pr she is not able to
purchase at lower income.
o On the other hand, a decrease in one’s income
reduces his or her purchasing power, and
consequently, his or her demand for some goods or
services ultimately declines.
 Occasional or Seasonal
Products
o The various events or seasons in a given year also
result to a movement of the demand curve with
reference to particular goods
o Example: during Christmas season, demand for
Christmas trees, parols and other Christmas decors
increase.
o It should be noted, however, that after these events,
demand for these products returns back to the original
level.
 Population Change
o An increasing population leads to an increase in the
demand for some types of good or service, and vice-
versa
o More goods or services are able to be demanded
because of rising population
o Increase in population generally results to an increase
in demand for basic goods, such as food and
medicines
o On the other hand, a decrease in population results in
a decline in demand.
 Substitute and
Complementary Goods
o Substitute goods are goods that are
interchanged with another good
o Closely related commodities
o Generally offered at a cheaper price,
consequently making it more attractive for
buyers to purchase
o Complementary goods are goods that
complement with each other
o One good cannot exist without the other good
 Nominal and Inferior Goods

o Normal goods are goods for which demand increases

when the income of the consumer increases, and
those goods that decline when income of the
consumer decreases, price of goods remain constant.
o Example:
o Demand for LED TVs, demand for more
expensive iPhones, cars, and houses
 Nominal and Inferior Goods
o Inferior goods are goods for which the demand decreases when
income of the consumer increases
o A good become inferior simply when the capacity of the consumers
has favorably increased, for instance, increase in income, leading
him/her to buy better alternatives
o Example:
o Consumption of pandesal
o When the income of the consumer has significantly increased, instead of
buying pandesal, he or she would opt to buy cheesebread or ensaymada
o This move to buy better alternatives makes the pandesal the inferior good
over the now-preferred cheesebread or ensaymada
o This makes the demand for low priced product, like pandesal, to decrease.
o If income once again declines, the demand for inferior goods would increase
again
The graph shows the demand
for the three goods – normal
goods, luxury goods and
inferior goods. As income
increases, from P100 to P150,
demand for normal goods
increases, while the demand
for luxury goods increases
more. Demand for inferior
good falls as income
increases.
Expectations of Future Prices
o If buyers expect the price of a good or service to rise (fall) in
the future, it may cause the current demand to increase
(decrease)
o Expectations also about future may alter demand for a
specific commodity
o Example: Fluctuating prices of rice
o If households expect that a drastic increase
in the price of rice will happen after a week,
their natural behavior is to purchase and
stock-up rice before the price goes up.
 SUPPLY

 Firms/ seller side

 The quantity of goods and services that
firms are ready and willing to sell at a given
price within a given period of time, other
factors are being held constant
 Thus, it 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

Supply Supply Supply

Schedule Curve Function
 SUPPLY SCHEDULE

A table listing the various prices of a product and

the specific quantities supplied at each of these
prices at a given point in time
The information provided in a supply schedule can
be used to construct a supply curve showing the
price/quantity supply relationship in graphical form

Methods of Demand
 Hypothetical Supply Schedule for
Rice Per Month
Situation Price (P) Quantity (kg)
A 5 48
B 4 41
C 3 30
D 2 17
E 1 5

 The table shows the various prices and quantities for the supply for
rice per month. For instance, at a given price of Ᵽ5, the seller is
willing to sell 48 kilos of rice (situation A); however, at a price of Ᵽ1,
he is willing to sell 5 kilos of rice (situation E)

Methods of Demand
 SUPPLY CURVE

 A graphical presentation showing the relationship between

price of the product sold or factor of production (e.g., labor)
and the quantity supplied per time period.
 The typical market supply curve for a product slopes upward
from left to right indicating that as price rises (falls) more
(less) is supplied.
 The upward slope indicates the positive relationship between
price and quantity supplied.

Methods of Demand
Supply Curve
 The figure illustrates a typical
supply curve. The Y-axis
represents price (P), while the X-
axis represents the quantity
demanded (QS). The supply
curve is positively sloped or
upward sloping. This positive
slope indicates that as the price
of commodities increases
(decreases), more (less) goods
will be offered for sale of
producers.

Methods of Demand
 LAW OF SUPPLY

States that “if price of a good or service goes UP,

the quantity supplied for such good or service will
also goes UP”. Conversely, “if price goes DOWN, the
quantity supplied also goes DOWN, ceteris paribus”.
 Implies that higher price is an incentive for business forms to
produce more goods or services as it will maximize their
profits.

Methods of Demand
 SUPPLY FUNCTION

 A form of mathematical notation that links the dependent variable,

quantity supplied (QS) with various independent variables which
determine quantity supplied
 These factors are – the price of the product, number of sellers in the
market, price of factor inputs, technology, business goals,
importations, weather conditions, and government policies.
 Expressed as a mathematical function for demand
QS = f (number of sellers in the market, price of factor inputs,
technology, etc)
Methods of Demand
 Supply Equation

QS = c + dP

where:
QS = quantity supplied at a particular price

c = intercept of the supply curve

d = slope of the supply curve

P = price of the good sold

Methods of Demand
 Example of Supply Function

Suppose the price of good A is Ᵽ5.00. The intercept of the

supply curve is 3 and the slope of the supply curve is 0.25. How
much of good A will be supplied by sellers?

Methods of Demand
 Example of Supply Function

Suppose the price of good A is Ᵽ5.00. The intercept of the

supply curve is 3 and the slope of the supply curve is 0.25. How
much of good A will be supplied by sellers?

QS = c + dP

Methods of Demand
 Example of Supply Function

Suppose the price of good A is Ᵽ5.00. The intercept of the

supply curve is 3 and the slope of the supply curve is 0.25. How
much of good A will be supplied by sellers?

QS = c + dP
QS = 3 + 0.25 (5)

= 3 + 1.25

= 4.25 units of good A Methods of Demand

 CHANGE IN QUANTITY
SUPPLIED VS. CHANGE IN
SUPPLY
 Change in Quantity Supplied
 There is a change in quantity supplied (rQS)
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

the direction of the movement however is

positive considering the Law of Supply.
Figure 2.6 Change in Quantity
Supplied
The figure illustrates the
concept of change in quantity
supplied. Change in quantity
supplied happens when the
price of the product changes,
thus, resulting to a change in
quantity supplied. This is
illustrated in the graph where P0
increases to P1 resulting to
change in Q0 to Q1 and a
movement along the supply
curve from point a to point b.
 Change in Supply

Happens when the entire supply curve

shifts leftward to rightward

At the same price, therefore, less/more

amounts of a good or service is supplied
by producers or sellers.
Figure 2.3 Change inThe
Supply
figure shows
the two opposite
movements of
supply curve.
Figure 2.7a
shows an
increase in
supply while
Figure 2.7b
illustrates a
decrease or fall
FORCES THAT CAUSES THE SUPPLY CURVE TO CHANGE

 OPTIMIZATION IN THE USE OF FACTORS OF

PRODUCTION
 TECHNOLOGICAL CHANGE
 FUTURE EXPECTATIONS
 NUMBER OF SELLERS
 WEATHER CONDITIONS
 GOVERNMENT POLICY
 MARKET EQUILIBRIUM
 Referred to the meeting of supply and demand results
to what
 Pertains to a balance that exists when quantity
demanded equals quantity supplied
 General agreement of the buyer and the seller in the
exchange of goods or services at a particular price and
at a particular quantity.
 There is a balance between price and quantity of
goods bought by consumers and sold by sellers in the
market.
 Equilibrium Market Price

 Price agreed by the seller to offer its good or service

for sale and for the buyer to pay for it
 Specifically, the price at which quantity demanded of
a good is exactly equal to quantity supplied of the
same good.
 Generated by the intersection of the demand and
supply curve
 What Happens when there is Market
Disequilibrium?
1. Two conditions happen
a. Surplus
i. Condition in the market where the quantity supplied is more the
quantity demanded
ii. The tendency is for the sellers to lower the market prices in order
for the goods and services to be easily disposed from the market
iii. There is a downward pressure to price when a surplus in order to
restore equilibrium
b. Shortage
i. Condition in the market in which quantity demanded is higher than
quantity supplied at a given price
ii. There is an upward pressure to prices to restore equilibrium in the
market
 PRICE CONTROL

o Is the specification by the government of minimum or maximum

prices for certain goods and services when the government
considers it disadvantageous to the producer or consumer
o Classification
o Floor price
o Ceiling price
 Floor Price
o The legal minimum price imposed by the
government on certain goods and services
o A price at or above the price floor is legal; a
price below it is not
o The setting of a floor price is undertaken by
government if a surplus in the economy
persists
 Price Ceiling

o Is the legal maximum price imposed by the

government
o Usually below the equilibrium price
o Utilized by the government if there is a
persistent shortage of goods in the economy
MARKET EQUILIRBIUM: A MATHEMATICAL
APPROACH
1.QD = QS
2.Example:
Look for PE and QE given the following information

QD = 68 – 6P
QS = 33 + 10P