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LAW OF DEMAND
ALL OTHER THINGS REMAINING CONSTANT (CETERIS
PARIBUS), PRICE AND QUANTITY DEMANDED ARE
INVERSELY PROPORTIONAL.
LAW OF DEMAND
AS THE PRICE OF THE COMMODITY INCREASES, ITS
QUANTITY DEMANDED DECREASES.
THERE IS A NEGATIVE RELATIONSHIP BETWEEN PRICE
AND QUANTITY DEMANDED.
CETERIS PARIBUS
LAT.: HOLDS OTHER VARIABLES CONSTANT
THREE FORMS OF REPRESENTATION OF DEMAND
1. DEMAND SCHEDULE A TABULAR REPRESENTATION SHOWING THE
PRICE AND QUANTITY DEMANDED FOR A PARTICULAR GOOD.
THIS SCHEDULE SHOWS THE DIFFERENT QUANTITIES OF GOOD X
THAT WILL BE BOUGHT BY BUYERS AT EACH OF THE GIVEN PRICE IF
THEY ONLY HAVE PHP 6,000.00
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
THE NEGATIVE SLOPE OF THE DEMAND CURVE COMES FROM
THE FACT THAT WHEN PRICE DECREASES, THE QUANTITY
DEMANDED INCREASES. THIS IS DUE TO INCOME EFFECT.
WHEN THE PRICE OF GOOD CHANGES, THIS CHANGE WILL
AFFECT THE CONSUMERS REAL INCOME
THREE FORMS OF REPRESENTATION OF DEMAND
2. DEMAND CURVE SHOWS RELATIONSHIP BETWEEN PRICE AND
QUANTITY SUPPLIES.
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
REAL INCOME IS OBTAINED FROM HIS MONEY INCOME.
INCREASE IN PURCHASING POWER MEANS AN INCREASE IN QUANTITY
DEMANDED FOR GOODS AND SERVICES
IF A GOOD BECOME MORE EXPENSIVE, THE REAL INCOME OF THE
CONSUMERS SUFFERS AND LESSENS THEIR PURCHASING POWER.
THREE FORMS OF REPRESENTATION OF DEMAND
2. DEMAND CURVE SHOWS RELATIONSHIP BETWEEN PRICE AND
QUANTITY SUPPLIES.
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
TO COPE WITH THIS PRICE INCREASE, THE CONSUMERS BUY LESS OF
THAT GOOD.
THE OPPOSITE HAPPENS WHEN THE PRICE OF CERTAIN GOOD
DECREASES. IN THIS CASE, THE CONSUMERS REAL INCOME
INCREASES AND THEY CAN BUY MORE OF THAT GOOD.
CHANGES BROUGHT BY PRICE FACTOR
MOVEMENT ALONG THE DEMAND CURVE/CHANGE IN QUANTITY DEMANDED.
THIS WILL HAPPEN IF THE PRICE FACTOR HAS BEEN CHANGED.
THE PRICE OF GOOD X RISES FROM PHP 3 TO PHP 5. THE CHANGES OCCUR
BASED ON THE SITUATION THAT THE DEMAND CURVE REMAINS ITS
POSITION BUT THE POINT WILL MOVE ALONG THE CURVE AS SHOWN IN THE
FIGURE BELOW. THE POINT MOVES FROM POINT A TO POINT B. WHEN PRICE
OF COMMODITY X INCREASES, QUANTITY DEMANDED WILL DECREASE.
CASE NO. 2.1.: PANEL A -RICE
B
5
A
3
Qd
9 15
CHANGES BROUGHT BY PRICE FACTOR
MOVEMENT ALONG THE DEMAND CURVE/CHANGE IN QUANTITY DEMANDED.
THIS WILL HAPPEN IF THE PRICE FACTOR HAS BEEN CHANGED.
AS THE PRICE OF GOOD X DECREASES FROM PHP 5 TO PHP 3. THE
QUANTITY DEMANDED INCREASES FROM 9 TO 15. THE POINT MOVES
FROM POINT A TO POINT B. WHEN PRICE OF COMMODITY X DECREASES,
QUANTITY DEMANDED WILL INCREASE.
CASE NO. 2.1.: PANEL A - SARDINES
A
5
B
3
Qd
9 15
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
SHIFT OF THE DEMAND CURVE OCCURS WHEN THE NON-PRICE
FACTOR CHANGED. THE FOLLOWING ARE THE NON-PRICE
FACTORS THAT AFFECT THE DEMAND CURVE.
1. NUMBER OF BUYERS (POPULATION)
2. INCOME
3. TASTE AND PREFERENCE
4. EXPECTATION
5. RELATED PRODUCT
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
1. NUMBER OF BUYERS OR POPULATION.
PHP 20,000 D2
D1
Qd
100 150
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
2. INCOME.
36,000 360,000
15,000 3,000 180,000
480,000
20,000 4,000 48,000 240,000
720,000
30,000 6,000 72,000 360,000
1,200,00
50,000 10,000 120,000 600,000 0
REMEMBER:
28 D2
D1
Qd
25 30
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
2. INCOME
FIGURE 2.3. PANEL B - SARDINES
THE DEMAND CURVE SHOWS THE CHANGE IN DEMAND CURVE OF
SARDINES. CONSIDERING THAT THE INCOME OF JOSEPH INCREASES,
THE DEMAND FOR SARDINES FROM 20 CANS TO 10 CANS. THE DEMAND
FOR SARDINES CHANGES EVEN IF THE PRICE OF SARDINE IS STILL 13.
THIS IS THE MASIN REASON WHY SARDINE IN THIS CASE IS
CONSIDERED AN INFERIOR GOOD.
P
13 D2
D1
Qd
10 20
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
3. TASTE AND PREFERNCE OF CONSUMER.
. THE BEHAVIOR OF CONSUMER WHICH IS AFFECTED BY WEATHER,
PERCEPTION, INFORMATION, OCCASION AMONG OTHERS.
CASE NO. 2.4.
20 D2
D1
Qd
3 10
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
3. TASTE AND PREFERENCE OF CONSUMER.
FIGURE 2.4. PANEL B - RAINY
THE DEMAND CURVE SHOWS THE CHANGE IN DEMAND CURVE OF
HALO-HALO WHEN THE SEASON CHANGES TO RAINY SEASON. UNLIKE
THE FIRST PANEL, THE DEMAND CURVES SHIFTS TO THE LEFT
BECAUSE ONLY FEW WANTS HALO-HALO DURING RAINY DAYS. PLEASE
NOTE THAT EVEN IF THE PRICE DID NOT CHANGE, THE DEMAND FOR
HALO-HALO DECLINES FROM 7 TO 3.
P
20 D2
D1
Qd
3 7
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
4. EXPECTATION OF THE CONSUMER.
. IF PEOPLE EXPECT THE PRICE OF GOOD TO INCREASE, THEY
WILL WANT TO BUY IT MORE AT PRESENT BEFORE THE PRICE
INCREASES. CONVERSELY, IF THE PEOPLE EXPECT A PRICE TO
DECLINE, THEY WILL PURCHASE LESS OF THAT GOOD AT
PRESENT.
CASE NO. 2.5.
PHP 300 D2
D1
Qd
25 30
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
4. EXPECTATION OF THE CONSUMER.
FIGURE 2.5. PANEL A AFTER VALENTINES DAY
PHP 300 D2
D1
Qd
25 30
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
5. PRICE OF RELATED COMMODITY.
. SUBSTITUTE GOODS ARE THOSE COMMODITIES WHICH
PERFORM THE SAME FUNCTION AND CAN SATISFY THE SAME
NEEDS AND WANTS. THESE GOOD ARE USED TO TAKE THE PLACE
OF ANOTHER GOOD. FOR EXAMPLE: BALLPEN OR PENCIL, SUGAR
OR HONEY, COFFEE OR TEAS, OMNUBUS SERVICES OR JEEP
SERVICES.
N.B.:
THE DEMAND CURVE SHOWS THE CHANGE IN DEMAND OF
P
OMNIBUS SERVICES AS ITS PRICE INCREASES. BECAUSE THE
CHANGE THAT OCCURS IS BROUGHT BY THE PRICE OF
OMNIBUS, FROM POINT A THE QUANTITY DEMANDED FOR
B OMNIBUS SERVICES DECLINES FROM 15 TO 10, AND MOVE TO
40 POINT B AS ITS PRICE INCREASES FROM PHP 20 TO PHP 40.
A
20
Qd
10 15
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
5. PRICE OF RELATED COMMODITY.
FIGURE 2.7. PANEL B JEEPNEY
N.B.:
THE PANEL SHOWS THE CHANGES IN DEMAND CURVE IN
JEEPNEY SERVICES BROUGHT BY THE CHANGES IN DEMAND
CURVE IN OMNIBUS SERVICES. BECAUSE THE PRICE OF
JEEPNEY SERVICES DID NOT CHANGE , THEREFORE, THE
P DEMAND FOR JEEPNEY SERVICES INCREASES AND THE
DEMAND CURVE SHIFTS TO THE RIGHT.
10 D2
D1
Qd
100 200
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
5. PRICE OF RELATED COMMODITY.
LAW OF SUPPLY
ALL OTHER THINGS REMAINING CONSTANT, PRICE AND
QUANTITY SUPPLIED ARE DIRECTLY PROPORTIONAL.
IN THE FIGURE BELOW, AS PRICE INCREASES FROM PHP 100 TO PHP 500, ITS QUANTITY
SUPPLIED ALSO INCREASES FROM 200 TO 1,000 YARDS OF CLOTH. SELLERS ARE MORE WILLING
TO SELL IF THE PRICE IS HIGH AND THEY ARE NOT WILLING TO SELL IF THE PRICE IS LOW.
500
400
PRICE
350
200
100
0
200 400 600 800 1000
QUANTITY
CHANGES IN SUPPLY BROUGHT BY PRICE FACTOR
(MOVEMENT ALONG THE SUPPLY CURVE/CHANGE IN QUANTITY SUPPLIED)
THE PRICE OF CORN IN THE MARKET INCREASES. WHAT WILL HAPPEN TO THE SUPPLY OF CORN.
THE ANSWWER IS SHOWN IN THE FIGURE BELOW.
THIS FIGURE PRESENTS THE MOVEMENT ALONG
P THE SUPPLY CURVE AS THE PRICE OF THE CORN
S INCREASES. THIS CONNOTES THAT AS THE PRICE
OF THE CORN INCREASES, THE SELLERS ARE
MORE WILLING TO SELL CORN. AS THE PRICE
INCREASES FROM PHP 50 TO PHP 60 PER KG OF
B CORN, SELLERS ARE MORE WILLING TO SELL
60 CORN. THE QUANTITY SUPPLIED FOR CORN
INCREASES FROM 100 KGS TO 150 KGS OF CORN.
50 A THIS SHOWS THE DIRECT RELATIONSHIP
BETWEEN PRICE AND QUANTITY SUPPLIED. THE
Qs MOVEMENT OF SUPPLY CURVE FROM POINT A TO
POINT B SHOWS A MOVEMENT ALONG THE
100 150 SUPPLY CURVE OR CHANGE IN QUANTITY
SUPPLIED BROUGHT BY PRICE FACTOR.
CHANGES IN SUPPLY BROUGHT BY NON-PRICE FACTOR
(SHIFT OF THE SUPPLY CURVE / CHANGE IN SUPPLY)
Qs
1000 5000
CHANGES IN SUPPLY BROUGHT BY NON-PRICE FACTOR
(MOVEMENT ALONG THE SUPPLY CURVE/CHANGE IN QUANTITY SUPPLIED)
CASE NO. 2.9.
A PHARMACIST CAN ONLY PRODUCE 1,000 TABLETS OF VITAMIN C A DAY WITH A SELLING PRICE OF 10
PESOS PER TABLET.
BUT BECAUSE HE ACQUIRED A MACHINE, HE CAN PRODUCE 5,000 TABLETS OF VITAMIN C A DAY.
WHAT IS THE CHANGE THAT OCCURS IN THE SUPPLY CURVE? HOW ABOUT IF AN EARTHQUAKE COMES AND
DESTROYS THE MACHINE AND THE BAKERY?
P S2
S1 AS MACHINE AND THE BAKERY WERE DESTROYED BY
AN EARTHQUAKE, PRODUCTIVITY AND SUPPLY
DECLINE.
SUPPLY CURVE WILL SHIFT TO THE LEFT FROM S1
TO S2 AND THE SUPPLY DECREASES FROM 5,000
TO 500 TABLETS OF VITAMIN C A DAY.
10
Qs
500 5000
LESSON 3
THE MARKET EQUILIBRIUM
MARKET EQUILIBRIUM
TAKES PLACE AT THAT PRICE AND QUANTITY WHERE THE
SUPPLY AND DEMAND ARE IN BALANCE.
TAKES PLACE WHERE QUANTITY SUPPLIED AND
QUANTITY DEMANDED ARE EQUAL.
IT MEANS THAT THE AMOUNT THAT BUYERS WANT TO PAY
IS JUST EQUAL TO THE AMOUNT THAT SELLERS WANT TO
SELL.
SUPPLY AND DEMAND SCHEDULE INDICATING EQUILIBRIUM
PRICE AND EQUILIBRIUM QUANTITY
PRICE
12
11
10 S
SURPLUS
Pe 8
SHORTAGE
D
6
4
2
QUANTITY
0
1 2 3 4 5 6 7 8 9 10
Qe
EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY
ESTABLISHED BY INTERACTION
BETWEEN DEMAND AND SUPPLY
PRICE
12
11
10 S
SURPLUS
Pe 8
SHORTAGE D
6
4
2
QUANTITY
0
1 2 3 4 5 6 7 8 9 10
Qe
EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY
ESTABLISHED BY INTERACTION
BETWEEN DEMAND AND SUPPLY
PRICE
12
11
10 S
SURPLUS
Pe 8
SHORTAGE D
6
4 S D
2
QUANTITY
0
1 2 3 4 5 6 7 8 9 10
Qe
SHIFT IN SUPPLY CURVE CHANGES EQUILIBRIUM
PRICE AND EQUILIBRIUM QUANTITY
PRICE LET US ASSUME THAT THE DEMAND CURVE IS CONSTANT AND THE
11 SUPPLY CURVE SHIFTED TO THE RIGHT DUE TO THE PRODUCERS USE
OF MODERN TECHNOLOGY.
10
9
QS
8
7
6
5
4
3
2 QD
1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1 Qe2
SHIFT IN SUPPLY CURVE CHANGES EQUILIBRIUM
PRICE AND EQUILIBRIUM QUANTITY
PRICE LET US ASSUME THAT THE DEMAND CURVE IS CONSTANT AND THE
11 SUPPLY CURVE SHIFTED TO THE RIGHT DUE TO THE PRODUCERS USE
OF MODERN TECHNOLOGY.
10
9
8 S1
S2
7
6 NOTE THAT THE MARKET PRICE
5 HAS BEEN REDUCED FROM P5
TO P4 WITH DEMAND BEING
4
CONSTANT AT 5.
3
2
QD
1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1 Qe2
SHIFT IN DEMAND CURVE CHANGES EQUILIBRIUM
PRICE AND EQUILIBRIUM QUANTITY
PRICE INCREASE IN INCOME INCREASES DEMAND
11 FOR GOODS AND SERVICES. DEMAND CURVE
SHIFTS TO THE RIGHT TO SHOW AN
10
INCREASE IN DEMAND.
9
8
7 D1
6
5
4
3
2
1 Q1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1
SHIFT IN DEMAND CURVE CHANGES EQUILIBRIUM
PRICE AND EQUILIBRIUM QUANTITY
PRICE INCREASE IN INCOME INCREASES DEMAND
11 FOR GOODS AND SERVICES. DEMAND CURVE
SHIFTS TO THE RIGHT TO SHOW AN
10
INCREASE IN DEMAND.
9
8
D2
7 D1
6
5 WITH A CONSTANT SUPPLY, AN
INCREASE IN DEMAND ALSO
4 INCREASES MARKET
3 EQUILIBRIUM PRICE.
2
Q2
1 Q1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1 Qe2
HYPOTHETICAL SHIFT IN THE MARKET DEMAND
AND MARKET SUPPY CURVES OF BETADINE
PRICE (P/GRAM) LET US SUPPOSE THAT THERE IS AN EQUAL
INCREASE IN THE DEMAND FOR BETADINE AND THE
3.00
SUPPLY OF BETADINE, WHAT WILL BE THE
EQUILIBRIUM PRICRE AND EQUILIBRIUM QUANTITY?
2.50
BOTH THE DEMAND AND SUPPLY
CURVES SHOW A RIGHTWARD
2.00 SHIFT. SINCE THE INCREASE IN
DEMAND IS PROPORTIONAL TO
THE INCREASE IN SUPPLY, THE
1.50
EQUILIBRIUM PRICE IS
MAINTAINED.
1.00 HOWEVER, THE EQUILIBRIUM
QUANTITY HAS INCREASED
FROM Qe1 TO Qe2.
.50
Q (IN GRAMS)
0 30 60 90 120 150 180
Qe1 Qe2
LESSON 4
ELASTICITY OF DEMAND AND SUPPLY
PRICE ELASTICITY OF DEMAND
THE NATURAL AND VARIED REACTION OR AN INCLINATION
OF BUYERS TO WILLINGLY AND TO BE ABLE TO PURCHASE
MORE GOODS AND SERVICES AT LOWER PRICES THAN AT
HIGHER PRICES.
P1 P1
P2 P2
A) INELASTIC B) ELASTIC
DEMAND CURVES AND THEIR ELASTICITY
P
P1
P2
D
Qd1 Qd2
D) PERFECTLY INELASTIC
PRICE ELASTICITY OF SUPPLY
THE RESPONSE OF QUANTITY OFFERED FOR SALE FOR EVERY
CHANGE IN PRICE.
es = Qs2 Qs1 Qs1
P2 P1 P1
FOR EVERY ONE PERCENT (1%) INCREASE IN INCOME QUANTITY DEMANDED WILL INCREASE BY
300%
IF QUANTITY DEMANDED IS GREATER THAN 1 INCOME IS ELASTIC AND THE GOOD IS SUPERIOR.
IF QUANTITY DEMANDED IS LESSER THAN 1 INCOME IS INELASTIC AND THE GOOD IS INFERIOR.
IF IT IS EQUAL TO 1 , IT IS UNITARY AND THE GOOD IS NORMAL.
CROSS ELASTICITY
THE COEFFICIENT OF CROSS ELASTICITY OF DEMAND RELATES A PERCENTAGE
CHANGE IN QUANTITY DEMANDED OF GOOD A IN RESPONSE TO A PERCENTAGE
CHANGE IN THE PRICE OF GOOD B.
ec= QA2 QA1 QA1 ec= 600 500 500 ec= 0.2 ec = 0.4
PB2 PB1 PB1 15.00 10.00 10.00 0.5
FOR EVERY ONE PERCENT (1%) INCREASE IN THE PRICE OF GOOD B QUANTITY DEMANDED OF
GOOD A WILL INCREASE BY 40%.
GOODS A AND B MAY BE RELATED IN 2 WAYS: SUBSTITUTES AND COMPLEMENTS.
IF THE COEFFICIENT OF CROSS ELASTICITY IS POSITIVE, GOODS A AND B ARE SUBSTITUTES.
AN INCREASE IN THE PRICE OF GOOD B WILL CAUSE CONSUMERS TO PURCHASE MORE OF GOODS
A, THE SUBSTITUTE GOOD, THUS CAUSING THE QUANTITY OF GOOD A TO INCREASE.
CROSS ELASTICITY
THE COEFFICIENT OF CROSS ELASTICITY OF DEMAND RELATES A PERCENTAGE
CHANGE IN QUANTITY DEMANDED OF GOOD A IN RESPONSE TO A PERCENTAGE
CHANGE IN THE PRICE OF GOOD B.
ec= QA2 QA1 QA1 ec= 600 500 500 ec= 0.2 ec = 0.4
PB2 PB1 PB1 15.00 10.00 10.00 0.5
ON THE OTHER HAND, IF THE CROSS ELASTICITY IS NEGATIVE, GOODS A AND B ARE COMPLEMENTS
AND ARE USED TOGETHER.
IF THE PRICE OF GOOD B INCREASES, THE DEMAND FOR GOODS B AND A DECREASES.
1. DEFINE THE FOLLOWING:
1.1. LAW OF DEMAND
1.2. LAW OF SUPPLY
1.3. MARKET EQUILIBRIUM