LESSON 4:
REVIEW OF
MARKET ANALYSIS
Demand
• Demand- refers to the amount of goods and services
consumers are willing to purchase given a certain price. If
the price of good is low, the quantity demand for good is
high, considering that other factors that may affect the
willingness of buyers to purchase the good are held
constant. There is an inverse relationship between price
and quantity because the decrease in price makes a
product attractive to consumers, while a price increase
makes a product less attractive to consumers
Getting the Slope of the Demand Curve
Price Elasticity of Demand
• The negative value of the
slope explains the inverse
relationship of price and
quantity demanded.
• The Price Elasticity of
Demand is an economic
measure of the change in the
quantity demanded or
purchased of a product in
relation to its price change.
Formula of the Price Elasticity of Demand
Unitary Elastic Demand Curve
% Change in Price = % Change in Quantity
Ep=1
Quantity Price
0 5
1 4
2 3
3 2
4 1
5 0
Relatively Inelastic Demand Curve
% Change in Price > % Change in Quantity
Ep < 1
Quantity Price
0 100
5 80
10 60
15 40
20 20
25 0
Relatively Elastic Demand Curve
% Change in price < % Change in quantity
Ep > 1
Quantity Price
0 5
2 4
4 3
6 2
8 1
10 0
Perfectly Elastic Demand Curve
• Slope = Infinity
Quantity Price
0 5
2 5
4 5
6 5
8 5
10 5
Perfectly Inelastic Demand Curve
Slope = 0
Quantity Price
3 10
3 8
3 6
3 4
3 2
3 0
Shifts in Demand and Its Determinants
Quantity demand is dictated by a change in price.
However, there are also other factors that influence
demand. There are cases when the demand curve shifts
either to the right or to the left. A demand shift indictes an
entirely different demand schedule.
The following are the determinants of demand:
1. INCOME. Most of the time, an increase in income yields an
increase in demand for certain goods. We call these “normal
goods”. There are also considered luxury and basic goods.
For some goods, an increase in income yields a
decrease in consumption, which means the consumer tends to
give up this good to get a preffered good.
2. TASTES AND PREFERENCES. A change in taste and
preferences can shift the demand curve to the right.
3. PRICE OF RELATED GOODS LIKE SUBSTITUTES
AND COMPLEMENTS. Let us say that A and B are
substitutes and price of A increases, quantity demanded for B
will increase. If the price of good A decreases, then quantity
demand for B decreases. Let us say that A and B are
complements, and price of A increased, then quantity
demanded for B will decrease
4. CHANGES IN SPECULATIONS. Consumers'
speculations determine changes in demand. The H1N1 flu
virus caused people to purchase flu vaccines . If the spread of
the disease was abated, the demand for the vaccines would
also decrease. In this case, the demand curve would shift to
the left.
5. POPULATION. Like income, population size also
influences demand. Population growth means an
increase in the size of the market demand, and a decline
in population means a decrease demand
SUPPLY
Supply - centers on the relationship between price and
quantity supplied. All things being constant, supply
refers to the willingness of sellers to produce and sell a
good at various possible prices. Since producers or
sellers seek more profit, we can therefore say that based
on the Law of Supply, the price and quantity supplied
have a direct relationship. This means that if the price of
a particular good is high, the quantity supplied or the
amount that producers would be willling to sell also be
high, considering all other factors being constant.
Getting the Slope of the Supply Curve
The formula for the slope of the Supply curve
Price Elasticity of Supply
• The Price Elasticity of
Supply is a measure used in
economics to show the
responsiveness, or elasticity,
of the quantity supplied of a
good or service to a change in
its price.
Unitary Elastic Supply Curve
% Change in Price = % Change in Quantity
Eps = 1
Quantity Price
0 0
1 1
2 2
3 3
4 4
5 2
Perfectly Elastic Supply Curve
Eps = Infinity
Quantity Price
0 5
2 5
4 5
6 5
8 5
10 5
Perfectly Inelastic Supply Curve
Eps = 0
Quantity Price
0 5
2 5
4 5
6 5
8 5
10 5
Shifts in Supply and Its Determinants
1. Prices of inputs or cost of producing the good. If one or
more input to price decreases, the supply curve shifts to
the right because it is cheaper to produce the said
product.
2. Technology. Effecient production through the use of
state-of-the-art equipment shifts supply curve to the right
because of an increase in output.
3. Taxes and Subsidies. Sin taxes added to the cost of
producing cigarettes, spirits and liquors, which will shift
the supply curve to the left. On the other hand, subsidies
and tax exemptions shift the supply curve to the right.
4. Number of sellers or firms in the industry. If firms
decided to increase their size or add more store or
outlets, then this will, in long run, shift the supply curve to
the right.
Determining the Equilibrium Point
Pt. Price Quantity
A 80 0
B 60 100
C 40 200
D 20 300
E 0 400
Pt. Price Quantity
F 20 100
G 40 200
H 60 300
I 80 400
J 100 500
Determining the Equilibrium Point
Pt. Price Quantity
A 80 0
P= a - mdQd
B 60 100
C 40 200 P= a + msQs
D 20 300
E 0 400
Qd - is the quantity demanded.
Pt. Price Quantity Qs - is the quantity supplied.
F 20 100 P - is the price.
G 40 200 -md -is the slope of demand curve, a is
H 60 300 the intercept if Qd is zero.
I 80 400
ms - is the slope of the supply curve, a
J 100 500
is the intercept if Qs is zero
Surplus, Shortage, and Government Interventions
In a competitive market, a surplus or a shortage may occur when there
are movements or changes within the supply and demand schedule. A
surplus i experienced when the price of a good is above the equilibrium
price. A surplus may also be experienced when governent sets a price
floor above equillibrium price.
On the other hand, a shortage occurs when the quantity demanded
exceeds the quantity supplied. This happens when the price is below the
equillibrium level. When a shortage existsin the market, the consumers
cannot buy as much of the good as they would like. A shortage may also
be experienced if government sets a price ceiling below the equillibrium
price.
END
