DEMAND

- The concept of demand is focused on consumer behaviour in the market.

- Demand refers to the number of goods and services that consumers are willing and able to buy
at alternative prices at a given period of time.
- The capacity and the willingness of a consumer in buying certain product determine the
demand. ( Demand = Capacity + Willingness to buy )

4 ways to describe the relationship of price and demand:

o Law of Demand
o Demand Schedule
o Demand Function
o Demand Curve

Law of Demand

- It explains how people react every time price changes in terms of the quantity of the product
that they purchase.
- The law of demand states that as the price of good or service increases, the quantity of the
product or service the buyer is willing to buy decreases, ceteris paribus. ( ceteris paribus – all
other things being equal; keeping other things constant )

Demand Schedule

- A table showing the units of the product, which the consumer is willing and able
to buy at alternative prices.
- It shows the inverse relationship between price and quantity demanded.

Demand Function

- A mathematical expression of the relationship of the two variables. The Quantity Demanded
(Qd) as the dependent variable and Price (P) and the independent variable.
Demand Curve

- The graphical representation of the demand schedule.

- The demand curve is downward sloping.
- The quantity demanded varies inversely with price. In other words, the
higher the price, the lower the quantity demanded.

Market Demand

- It is the combination of all the demands of consumers in the market.

Determinants of Demand

o P - Population (directly proportional)

o P - Preference (directly proportional)
o P - Price of Related Goods (Substitute - directly proportional ; Complementary -
inversely proportional)
o E – Expectation (it encourages buying – directly proportional ; it discourages - inversely
proportional))
o I - Income (Normal - directly proportional; Inferior - constant)
o O - Occasion (directly proportional)

Shift of the Demand Curve

- The shift of the demand curve from left to right or vice versa shows the change in demand. A
change in demand may also happen even if there are no changes in price.

Change in Demand

- Increase in Demand (Shift to the right)

- Decrease in Demand (Shift to the left)
Elasticity of Demand and Supply

Elasticity of Demand

- The elasticity of demand refers to the degree to which demand responds to a change in an
economic factor.
- Elasticity measures how demand shifts when economic factors change.

Elasticity of Demand

- Price Elasticity of Demand

o measure of how sensitive the quantity demanded is to its price

o
- Income Elasticity of Demand
- Cross Elasticity of Demand

Types of Elasticity
Elasticity of Supply

- a measure of how sensitive the quantity supplied of a good is to changes in price

- it is calculated as the percentage change in quantity supplied divided by the percentage in price

The Concept of Supply

Supply

- is the quantity of a good or service that a producer is willing and able to supply onto the market
at a given price in a given time. (Producers buy goods and services and transform them into a
sellable product, which they sell to their customers for the purpose of making a profit.)
- it represents the amount of goods and services available for consumption at different prices.
The producers and sellers are considered as suppliers.
- The willingness and the capacity of the supplier is the basis of declaring the supply in the
market.
- Supply refers to the quantity of goods and services, which the supplier is willing and able to sell
at alternative prices at a given time. Supply is also affected by price.
- Price is the important factor that determines the quantity of goods that suppliers are willing to
sell.
- Supply = Supplier + Willing and Able

Supply Schedule

- Supply schedule shows that the supply increases as the price is continuously increasing.
- The producer is motivated to sell more when the price is high, assuming all other things remain
constant.
Law of Supply

- The law of supply states that an increase in price results in an increase in quantity supplied,
ceteris paribus.

Supply Curve

- It shows the relationship between market price and how much a firm is willing and able to sell.
- The supply curve is upward sloping from left to right.
- The price and quantity supplied is directly related to each other.

Determinants of Supply

o S – Subsidies and Taxes

 Subsidies - assistance provided by the government to small-scale businessmen
and farmers to enable them to produce more products. Some of the subsidies
given to the farmers are fertilizers and pesticides offered at lower prices, loans
with lower interest rates and the government will buy important machineries to
be used by farmers to improve their farming techniques. (directly proportional)
 Taxes - It is a compulsory contribution imposed by the government to
individuals & business firms. When the tax rate increases, it will mean an
additional cost for the businessmen. So if the production cost becomes high,
producers and businessmen lower their production, which will cause a decrease
in the availability of the supply in the market. (inversely proportional)
 Government regulation/increase in taxes results to a decreases supply.
Deregulation/increase of subsidies from the government will increase
the supply.
o T – Technology
 The use of modern machineries and technical knowledge in the production of
goods help the producer provide sufficient supply in the market. Modern
machineries speed up production processes and increase output. (directly
proportional)
 Additional Technology will increase production and supply.
o O – Other Related Goods
 Sellers are motivated to sell the products if the price is high. We can observe
that if the price of orange is higher than the apples, sellers will sell oranges
rather than apples. The result is, supply of oranges will increase and for apples,
it will decrease.
 An increase in the price of other related goods will cause a decrease in
supply. A decrease in the price of other related goods will cause an
increase in supply.
 o R – Resource Cost / Cost of Production
 Producers take into consideration the cost of producing the goods they would
like to supply in the market. In the production of goods, producers have to pay
the production cost and other expenses like raw materials, etc.
 Increase in cost of resources will decrease the supply. Decrease in cost
of resources will increase the supply.
o E – Expectation
 Producers also expect and sometimes speculate about the price increase. While
doing so, they decrease the supply of the product which may cause shortage in
the market.
 If producers expect prices to increase, supply will increase. If producers
expect prices to decrease, supply will also decrease.

o S – Size of the Market / Number of Sellers

 The number of sellers is a determinant of the abundant supply of a product in
the market. If the product is in season like fruits, sellers of this kind of fruits are
everywhere. If there is a new product, many sellers want to offer it. (directly
proportional)
 If number of sellers in the market increases, the supply will increase. If
number of sellers in the market decreases, the supply will also decrease.
o W – Weather/Climate
 Weather condition affects the production of goods especially agricultural
products. When the climate or weathers suits the needs of the producers,
sufficient supply is guaranteed in the flow to the market. Calamities such as
typhoons, heavy rains, floods and excessive heat affect the production of farm
crops, resulting in the decrease of the supply.

Graphical Representation of Change in Quantity Supplied

- Considering the other factors of supply are constant, price greatly affects the supply. Any
change in price results to changes in quantity supplied. It can be shown in the movement along
the curve.

Shifts in Supply Curve

- Increase of Supply (Shifts to the Right)

o Use of technology, Increase in the number of sellers, Subsidy on the expenditures of
producers, Increase in the price of related products.
- Decrease of Supply (Shifts to the Left)
o Calamities, Lack of subsidy, Decrease in # of sellers, Lack of technology
Supply Equation

Market Equilibrium
- An equilibrium exists in a market when there is no pressure for the market price to change.
- Quantity Demanded = Quantity Supply

- (the intersection is the MARKET EQUILIBRIUM)

Equilibrium

- A market condition where the quantity supplied equals the quantity demanded. At this point,
selling takes place when the seller agrees to sell a specific quantity of products equal to the
quantity the buyer is willing to buy
- Equilibrium shows the agreement between the seller and buyer in terms of price and quantity of
the product.
Equilibrium Quantity

- Refers to the quantity of products that buyers are sellers have agreed to transact at a specific
price.

Equilibrium Price

- The price level that both buyers and sellers agree to consummate a transaction in the market.

Shortage in Supply

Surplus
Equilibrium Quantity and Price

Changes in Equilibrium

- Any movement from supply and demand affects the market equilibrium. It is vital to know the
equilibrium changes because of the different factors of demand and supply.

Change in Demand While Supply is Constant

- As income of individuals increase, their demand increases too.

o Graph No.2 shows the demand curve shifts from left to right or
from (D1 to D2). You will notice that the equilibrium shifts from
E1 to E2 caused by the price increase from P5 to P10 and the
quantity from 30 to 60. Price increases motivate the sellers to
increase their supply.
o Graph 3 shows the shift of demand curve from right to left (D1 to D2). It
indicates a decrease in demand from 45 to 15. It happens when an
individual reaches the peak of satisfaction in consuming products. At this
point, the price will decrease in order to sell the excess supply. So the
equilibrium will shift from E1 to E2 due to a price decrease from 100 to 50.

Change in Supply while demand is Constant

1. Effect of Low Costs of Production

- If a seller sells an umbrella at ₱150.00 and the quantity sold is
500 pieces, but with low cost of production, then the producer
can make 700 pieces. This results to a surplus in the supply of
umbrellas.
2. Effect of calamities in supply
- Calamities can cause a decrease in supply and a change in the market
equilibrium. A businessman can supply 1,000 bundles of string beans at
₱40 under normal consition in the environment.

3. Simultaneous Change in Supply and Demand

- As we notice in Graph No. 6, as a result of an increase in income, the
demand curve shifts to the right (D2) which shows the increase in
demand to 800 pieces. And the supply curve shifts to right (S2). The
second equilibrium point is formed at E2. At the same price, ₱80.00, the
consumers and suppliers agree to buy and sell 800 pieces of slippers.

Role of the Government in Maintaining the Market Equilibrium

- The agreement of consumers and producers is important in the market. The interaction of
demand and supply leads to the establishments of a market price. There are times when the
government sets the price of commodities based on government policies to protect public from
sudden change of price in the market.

Price Act

- Republic Act 7581, which is known as the Price Act, was approved to help the government in the
implementation of price control on basic commodities.

National Price Coordinating Council

- An agency formed to implement the Price Act. It’s main objective and function is to guard and
monitor the prices after the announcement of a price ceiling.

Price Ceiling

- Refers to the highest price or maximum price declared by the government for a particular
product. In other words, it is the selling price of the product approved by the government.
o Penalty for Violation of Price Ceiling
 Imprisonment for a period of not less than one year nor more than ten years.
 Fine of not less than five thousand pesos nor more than one million pesos.
 Both, at the discretion
Prices during Calamities

- Price control is implemented when a state of calamity is declared. The price declared is lower
than the equilibrium price in the market. It is the government’s way of making the basic
commodities affordable to everybody in times of emergency.
- Government also implements Price Freeze if there is a calamity. Prices of the basic commodities
must not increase nor change. This is the way of the government to help the people specially
the marginal sector of society.

Effect of Price Ceiling

Price Floor

- Refers to the lowest price for buying the products of farmers. The price of palay depends on
how much support the government will declare. This is done in consultation with farmer.
- Price support is implemented to help the producer recover their production cost and to gain
some profit. Price support is higher than the equilibrium price in the market. Producers assume
that the equilibrium price is not enough to support their production cost and their needs
Role of the Government in Maintaining the Market Equilibrium

- Disequilibrium Pricing is a government pricing policy that regulates or fixes the price of certain
goods at a higher or lower than equilibrium price.

Price Ceiling

- This is a government mandated price which is normally set below equilibrium price. The
government uses this pricing policy if it sees the need to protect the buyers from higher prices.
However, because the price is very low, sellers will be less willing to sell but buyers will be more
willing to buy units of the good. This will result to a shortage.

Price Floor

- This is a government-mandated minimum price that is fixed above the equilibrium or market
place. This pricing policy is normally used when the government would want to protect the
interest of the sellers or to induce sellers to sell more. Since the price is too high, sellers are very
much willing to sell more but buyers will just buy fewer units of the good. This will result to a
surplus.