Introduction to
Supply and Demand
and Market
Equilibrium
“The demand and
supply and market
equilibrium discussion
is the bread and butter
of the study of
Economics’’.
Graph
Two dimensional representation of
a set of numbers or data. The most
common method of graphing two
variables is the Cartesian coordinate
system. The system is constructed by
drawing two perpendicular lines:
horizontal line or X-axis and vertical
line or Y-axis.
Demand
The willingness and
ability of the consumer
to purchase or buy.
Factors or
Determinants
Affecting
Demand
1. Average Income
Higher income means
higher demand and
lower income means
lower demand.
Classification of Goods
A. Inferior goods – inversely
related to income, higher
income but has lower demand to
a particular good.
B. Normal goods – directly
related to income, higher income
implies higher demand to some of
the goods.
2. Size of the market
Referring to the
population.
A.Urban – higher demand
because of higher in
population.
B. Rural – lower demand
because of lower in
population.
3. Prices of related
goods
The benchmark for
competition.
Classification of Goods
A.Substitute goods – goods that are
lower in price as of the other goods,
can only be a substitute goods if it
has the same use value.
Example: Detergent powders like Tide
and Surf. If the price of product Y like
TIDE increases, there will be higher
demand for product X like SURF
Classification of Goods
B. Complementary goods –
goods that one cannot function
without the other.
Example: Toothpaste and
toothbrush or bun and patty for
hamburger or gas and automobile.
4. Taste and Preferences
A. Age
B. Location
C. Quality and Brand
name
D. Sex
E. Advertisements
5. Special Influences
A. Weather condition
B. Buyers expectation
Demand Schedule
Shows an inverse
relationship between
price and quantity
demanded.
Demand Curve
The graphical
representation of the
demand schedule. Its
characteristic is
downward sloping.
Change in Demand vs. Change in
Quality
Change in Demand denotes
a shift of the demand curve. If
demand curve shifts right, it
increases. If demand shifts left, it
decreases. The shift is caused by
the factors affecting demand.
Examples of how the determinants of demand
other than price can shift the demand curve.
1. Income of buyers
2. Consumer trends
3. Expectations of future
price
4. The price of related goods
5. The number of potential
Law of Demand
The higher the price, the
lower the quantity that
consumers are willing and able
to buy or purchase, on the other
hand, lower the price, the higher
the quantity that consumers are
willing to buy or purchase.
Supply
The willingness
and the ability of the
supplier to supply or
sell.
Factors or Determinants Affecting Supply
1. Prices of
inputs/factors of
production
A. Land – rent
B. Labor – wage
Factors or Determinants Affecting Supply
2. Technology – the use of
technology increases supply
but part of it is the cost, the
advance the technology is the
bigger the cost so higher cost
discourages suppliers to supply
more.
Factors or Determinants Affecting Supply
3. Prices of related goods –
promotions and marketing is
important in this factor, this the
only means that the supplier can
create their strategy to augment
their profit. The supplier will have
to know its substitute goods and
its complementary.
Factors or Determinants Affecting Supply
4. Government policy –
the economic role of the
government is important as
one factor affecting supply.
Factors or Determinants Affecting Supply
5. Special influences
A. Weather condition
B. Sellers expectation
Supply schedule – shows
a direct relationship
between prices and quantity
supplied.
Supply curve – the
graphical representation of
the supply schedule.
Change in Supply vs. Change in Quantity
Change in supply - denotes a
shift of the supply curve. If
supply curve shift left, supply
decreases and if supply curve
shifts right, supply increases.
The shift in supply is caused by
the factors affecting supply
Change in Supply vs. Change in Quantity
Change in Quantity
supplied – denotes a
movement of points along the
supply curve, the movement
of the points along the supply
curve is caused by the
changes in the price.
Law of Supply
The higher the price, the
higher the quantity that sellers or
producers are willing and able to
supply, on the other hand, the
lower the price, the lower the
quantity that sellers or producers
are willing to and able to supply.
Market
The interaction between
buyers and sellers determined
by price. Recalling the law of
supply and demand that the
consumers and sellers
decision is primarily based on
the price.
Surplus
Known as excess supply,
which means that supply is
greater than demand. The
solution for surplus is to lower
the price until such time that
the market will reach its
equilibrium.
Market Equilibrium
The intersection of demand and
supply, it means that demand is equal to
supply. The point of intersection is the
equilibrium price and quantity. It is at this
point that suppliers agreed to supply at a
certain quantity at a certain price and
buyers agreed to buy at a certain quantity
at a certain price. Above the equilibrium
point is surplus. Below the equilibrium
point is shortage.
Shortage
Known as excess
demand, which means that
demand is greater than
supply. The solution of
shortage is to increase the
price until such time that the
market will reach its
Price Floor
A minimum price
below which exchange is
not permitted. If a price
floor is set above the
equilibrium price, the price
result will be excess supply.
Price Ceiling
A maximum price
that sellers may charge
for a good usually set by
government.
