APPLICATION

OF
DEMAND
AND SUPPLY
 MARKETS

An institutional arrangements that enables buyers

and sellers to exchange goods and services. A market
cannot only be found in one physical location. Some
markets could function through advertisements,
letters, telephone calls, computer networks, personal
relationships and face to face discussions in various
places. It is a design in order for the buyer and seller
exchange goods and services
 TWO THINGS AS COMMON IN MARKETS

Demand by all the people for products or the

resources that make them.

A willingness by producers to supply those products

or resources
 DEMAND

Is defined as the different quantities of a resource,

good or service that consumers are willing and able
to buy or purchase at any given time at various
possible prices.

MARKET DEMAND

Is the sum of all individual demand,

 LAW OF DEMAND

The law of demand shows the inverse relationship

between price and quantity demanded. As the price
increases, the demand decreases.

QUANTITY DEMAND

Is the number of good that individuals are willing and

able to buy at a particular price during a particular period
of time.
 DEMAND SCHEDULE

Is a table showing the quantities of a product that would

be purchase at various prices at a given time and place.
Price Quantity Demanded

Php. 300. 00 10
Php. 250. 00 20
Php. 200. 00 30
Php. 150. 00 40
Php. 100. 00 50
 DEMAND SCHEDULE

The survey results explain the law of demand. According

to the demand schedule, the number of commodities that
a person willing and able to purchase was greater at lower
price that n a higher prices.
 DEMAND SCHEDULE

The survey results explain the law of demand. According to the

demand schedule, the number of commodities that a person
willing and able to purchase was greater at lower price that n a
higher prices.
 Price

300

250

200

150

100

Quantity Demand
10 20 30 40 50
 CHANGES IN QUANTITY DEMANDED

Quantity demanded refers to the number of units of a good that

individuals are willing and able to buy at a particular price.

Changes in quantity demanded is the movement from one point

to another point on the same demand curve caused by a change
in the price of a certain product.
 CHANGES IN DEMAND

The demand curve reflects the relationship between price and

quantity purchases of a certain product during the given period
of time. But the price is not the only thing that change that
influence the buyer’s willingness to purchase. When it occurs,
demand changes, it increases or decreases.
 DETERMINANTS OF DEMAND

CONSUMER TASTES AND PREFERENCES

A change in tastes and preferences in favour of a commodity will

mean that at each price, more will be demanded than previously.
On the other hand a change in tastes and preferences away from
a commodity will mean that at each price, less will be demanded
than previously.
 CONSUMER’S INCOME

The increasing and decreasing of an income will affect an

individuals demand for a particular good that may cause to
whether rise or fall.

POPULATION

Population growth affects quantity demanded in more or less the

same way as increases in average incomes. A larger population
will increase demand and fewer population will decrease
demand for a particular product.
 PRICES RELATED GOODS

A. SUBSTITUTE GOODS

When the price of a particular item increases, the consumer will

shift in the demand for a substitute or alternative.

A. COMPLEMENTARY GOODS

Items that often purchased together. A demand of a certain

commodity that needs a corresponding match in order to
function or be used. In accordance with it, if the price of a certain
product falls, the demand for its match will decrease too.
 EXPECTATIONS OF FUTURE PRICES

Future expectations may affect the demand for goods and

services. A consumer who expects that price of necessity goods
will increase during times of calamities, presumably demand for
necessity goods will increase.
 If any of these factors occur, the demand schedule and the
demand curve will change so that the quantity at any particular
price would be loess that in the original demand schedule. If the
demand increases the curve shifts to the right, and if demand
decrease, the curve shifts to the left.
 ELASTICITY OF DEMAND

Elasticity describes how much a change in price affects the

quantity demanded.

DETERMINANT OF THE ELASTICITY OF DEMAND

LUXURIES VS. NECESSITIES

The demand for necessities tends to be inelastic; the demand for

luxuries tends to be elastic.
 PROPORTION OF INCOME

Other things being equal, the larger a commodity shares in one’s budget,
the greater will be the demand elasticity for it.

SUBSTITUTABILITY

The more substitutes there are for a commodity, the greater the elasticity
of demand.

TIME

The longer the interval of time considered, the more elastic the demand for
the commodity.
 PRICE ELASTICITY OF DEMAND

Price elasticity of demand or elasticity of demand is defined as the ratio of

the percentage change in quantity demanded to the percentage change in
price that brings about the change in quantity demanded.

Elasticity of Demand = Percentage Change in Quantity Demand or Price

Remember that when the demand for an item is inelastic, a change in price
will have a relatively small effect on the quantity demanded. On the other
hand, when the demand for an item is elastic, a change in price will have a
relatively large effect on the quantity demanded
 SUPPLY

Is defined as the number of items that sellers are willing and able
to sell in the market at different prices during some specified
period or time.

MARKET SUPPLY

Is the sum of all individual supply.

 SUPPLY SCHEDULE

Is a table showing the quantity of an item seller would

offer for sale at different prices.
Price Quantity Demanded

Php. 300. 00 50
Php. 250. 00 40
Php. 200. 00 30
Php. 150. 00 20
Php. 100. 00 10
 SUPPLY CURVE

A supply curve is a graph of the supply schedule. It shows the

relationship between the price of an item and the number of the
unit sellers will offer. It slopes upward, from left to right.
 Price

300

250

200

150

100

Quantity Demand
10 20 30 40 50
 LAW OF SUPPLY

As the supply schedule shows, the seller would be willing to sell

more items at high prices than at lower price. The law of supply
states that sellers will offer more of an item at high price and less
at low price.

To make profit. The higher the price of a certain commodity , the

more a seller will be encouraged to sell to earn a profit.

Law of supply simply shows the direct relationship between price

and quantity supplied.
 QUANTITY SUPPLIED

The Number of goods that individuals are willing and able to sell
at a particular price during a particular period of time.

CHANGES IN QUANTITY SUPPLIED

A change in quantity supplied refers to a movement along a

supply curve. The only factor that can directly cause a change in
quantity supplied of good is a change in the price of a certain
product, or own price.
 CHANGES IN SUPPLY

A change in supply refers to a shift in the supply curve. Like demand,

supply in a market typically responds to different factors other than price.

TECHNOLOGICAL PROGRESS

Inventions and innovations tend to make it possible to produce more or

better products with the same resources.

NUMBER OF SELLERS

Increase in the number of sellers will increase the supply of goods and
services in the market.
 COST OF PRODUCTION

Changes in input prices also changes the supply of goods. Increase in

minimum wage of workers will increase the price of input and some
producers cannot afford to pay the increase in wages, supply will decrease
due to decrease in the number of workers.

EXPECTATIONS OF FUTURE PRICE

If producers expect prices to increase in the future, they may increase they
production now to gain profit when prices of that particular goods
increases. If prices are expected to decrease in the future, producers may
reduce production.
If any of these factors occur, the supply schedule and the supply
curve will change so that the quantity supplied at any particular
price would be less that in the original supply schedule. If the
supply increases, the curve shifts to the right, and if supply
decrease, the curve shifts to the left.
 ELASTICITY OF SUPPLY

Is measured as the ratio of proportionate change in the quantity

supplied to the proportionate change in price.

High elasticity indicates the supply is sensitive to changes in

prices, low elasticity indicates little sensitivity to price changes,
and no elasticity means no relationship with price. Also called
price elasticity of supply.
 PRICE ELASTICITY OF SUPPLY

Measures the responsiveness of quantity

supplied to a change in price. It is necessary
for a firm to know how quickly, and
effectively, it can respond to changing
market conditions, especially to price
changes.

ELASTICITY OF SUPPLY = Percentage

Change in Quantity Supplied/Percentage
Change in Price
 While the coefficient for elasticity of supply
is positive in values, it may range from 0, perfectly
inelastic, to infinite, perfectly elastic.

Consider the following example:

A firm’s market price increases from Php. 1.00 to

Php. 1.10, and the supply increases from 10 units
to 12.5 units.

ṢE = (12.5 – 10.0/10) / (1.10 – 1.00/1.00)

= (2.5/10) / (.10/1.00)
=.25/.1
=2.5
If a change in price has little effect on
the quantity of a good or service
offered for sale, the supply is inelastic.

When a small change in price

produces a large change in the
quantity offered for sale, then the
supply of the good or service is elastic.
DETERMINANTS OF THE ELASTICITY OF
SUPPLY

LIMITED AMOUNT OF RAW MATERIALS

The limited amount of raw materials could

limit the amount of a goods that can be
produced.

DIFFICULTY OF PRODUCING GOODS

If the good is very difficult to produce to the

producer, it becomes more inelastic.
 TIME PERIOD

MARKET PERIOD

It is a period in which producers of a product are

unable to change the quantity produced in response
to a change in its price and in which there is a
perfectly inelastic supply.

SHORT RUN

It is a period of time too short to allow or

adjustments to plant (fixed plant assumptions). More
labour can be applied, but plant and equipment are
fixed.
 LONG RUN

Producer has sufficient time respond to

increase in price, manufacturing firms can
build new facilities, allow entry and exit
from an industry. The elasticity of supply
becomes more elastic.
 PRODUCTION SURPLUS

A producer with unused capacity will

respond immediately when price changes.

INVENTORIES

A producer with a large number of goods

can quickly increase the amount of supply it
delivers to the market.
SUPPLY AND DEMAND: MARKET EQUILIBRIUM

Market equilibrium refers a condition

where a market price is established through
competition such that the amount of goods or
services purchased by buyers is equal to the
amount of goods or services produced by sellers.
To illustrate, the following table combines the
demand and supply schedules for T-shirts.

Table 3
Demand and Supply of T- shirts
Quantity Price Quantity Supplied Qs – Qi
Demanded (+surplus; -
shortage)
10 300.00 50 +40

20 250.00 40 +20

30 200.00 30 0

40 150.00 20 -20

50 100.00 10 -40
 Table 3 and Figure 6 shows that the
market price would be Php200.00
because at that price the quantity of
T-shirts demanded and the quantity
supplied are exactly equal. Once an
equilibrium price is established,
prices will go up and down some, but
they seldom stray far from
equilibrium.
 EXCESS QUANTITY DEMANDED

Supposes T- shirts sold for

Php150.00. according to the Demand
and Supply Schedule (Table 3), at that
price consumers would be willing and
able to buy 40 shirts. But you would not
be willing to sell T- shirts at low price.
You would supply only 20 shirts at that
price. At Php150.00 demand is greater
than supply. There would be an excess
demand of 20 shirts.
 You would sell your T- shirts at
higher price until the quantity that
you were willing to supply equalled
the quantity consumers were willing
and able to buy. An excess quantity
demanded will lead to price
increases which will continue until
demand and supply are equal.
 EXCESS QUANTITY SUPPLIED

Suppose you began selling T-shirts

at Php250.00 each. At that price (see
Table 3) only 20 students would be
interested in a shirt. However, you hope to
sell 40 shirts. There would be an excess
supplied of 20 shirts.

You would sell your T-shirts at lower

price until the quantity supplied exactly
equalled the quantity demanded.
 WHAT CAN CHANGE EQUILIBRIUM
PRICE AND QUANTITY?

EQUILIBRIUM PRICE AND QUANTITY

are determined by supply and demand.

Whenever price changes, supply changes,
or both change, equilibrium price and
quantity change.

The following figure illustrates the

different changes in supply and demand,
where either supply or demand changes:
DEMAND INCREASES, SUPPLY REMAIN
CONSTANT

The demand curve shifts rightward

from D1 to D2 and supply curve does not
move as a result of increase in demand
and constant supply, the equilibrium price
rises from P1 to P2, and the equilibrium
quantity rises from Q1 to Q2.
DEMAND DECREASES SUPPLY REMAIN
COMSTANT

The demand curve shifts leftward

from D1 to D2 and supply curve does not
move as a result of decrease in demand
and constant supply, the equilibrium price
decrease from P1 to P2, and the
equilibrium quantity decrease from Q1 to
Q2.
SUPPLY INCREASES, DEMAND REMAIN
CONSTANT

The supply curve shifts rightward

from S1 to S2 and demand does not move
as a result of increase in supply and
constant demand, the equilibrium price
increase from P1 to P2, and the
equilibrium quantity increase from Q1 to
Q3.
SUPPLY DECREASES, DEMAND REMAIN
CONSTANT

The supply curve shifts leftward

from S1 toS2 and demand curve does not
move as a result of decrease in supply and
constant demand, the equilibrium
quantity decrease from Q1 to Q3.
 DEMAND INCREASES, SUPPLY
DECREASES

The demand curve shifts rightward

from D1 to D2, and supply curve shifts
leftward from S1 to S2 by an equal
amount. As a result, the equilibrium price
rises from P1 to P2, and the equilibrium
quantity remains constant at Q1.
 DEMAND DECREASES, SUPPLY
INCREASES

The demand curve shifts leftward

from D1 to D2, and supply curve shifts
rightward from S1 to S2 by an equal
amount. As a result, the equilibrium price
decrease from P1 to P2, and the
equilibrium quantity is constant at Q1.
 DEMAND INCREASES BY A GREATER
AMOUNT, SUPPLY DECREASES BY A
SMALLER AMOUNT

The demand curve shifts rightward

from D1 to D2, and the supply curve shifts
leftward from S1 to S2. As a result, the
equilibrium price increase from P1 to P2,
and the equilibrium quantity increases
from Q1 to Q2.
 DEMAND INCREASES BY A SMALLER
AMOUNT, SUPPLY DECREASES BY A
GREATER AMOUNT

The demand curve shifts rightward

from D1 to D2 and the supply curve shifts
leftward from S1 to S2. The equilibrium
price increases from P1 to P2, and the
equilibrium quantity decreases from Q1
to Q4.
BASIC CONSUMER GOODS IN THE PHILIPPINES

Oil Products like gasoline, diesel, liquefied

petroleum gas (LPG)
Processed and Manufactured Commodities
Canned goods
Processed milk
Instant noodles
Bread
Commercial rice
Sugar
Cooking oil
Meat and poultry
Fish vegetables
Basic medicines
 WHAT CAUSES COMMODITIES PRICE TO
CHANGE?

1. When supply exceeds demand, prices fall and

when demand is greater than supply prices rise.

When people’s income increases, their

purchasing power increases and result to
greater demand for commodities to make their
life comfortable.
 Demand for crude oil and gasoline increase as
more people buy automobiles; demand for gold
increase because of greater demand for
jewelleries, and greater demand for commercial
rice, meat, poultry products, sugar, and coffee,
among others.

Changes in technology and decrease in

production costs, output increases. With the
increase in supply of goods, the company needs
to decrease their price to sell their surplus.
 2. Natural disasters can also cause prices to
change like the El Nino and La Nina climate
phenomenon, volcanic eruptions, earthquakes,
typhoon, and landslides, among others.

3. Production costs can also cause price to rise

or fall like the implementation of Salary
Standardization Law and Minimum Wage Law,
and the shifting of production from human to
technology.
 WHAT ARE THE ADVANTAGES OF RISING
AND FALLING OF PRICES OF COMMODITIES?

1. Consumers will benefits from low prices in

the form of cheaper gas or diesel, cheaper
utilities and lower inflation.

2. Consumers will benefits from low prices of

goods and services.

3. Industries like manufacturing, mining and

trade will benefits due to decrease in
production costs.
3. Producer’s profit will increase due to
increase in the price of their output.

4. Government income in the form of

taxation will increase due to increase in
business and employment opportunities
from both private and public sectors.
 WHAT ARE THE DISADVANTAGES OF RISING AND
FALLING OF PRICES OF COMMODITIES?

1. Falling oil prices will hurt the economies of oil

producing countries Brazil, Middle East, and Russia.

2. Low prices will discourage investors/producers to

invest/produce.

3. Government will be affected by falling prices of oil in the

Middle East. The Overseas Filipino Workers (OFW)
remittances will decline due to freeze hiring or outright
layoffs.

4. Unemployment will increase and government income

will be affected when the OFW’s working in the oil
producing countries return to their mother country.
WHEN CAN BE DONE TO STABILIZE PRICES OF BASIC
COMMODITIES?

1. Maintain an adequate food stocks in the local,

regional and national levels.

2. More investments on the infrastructure projects that

promote irrigation in the local and regional levels.

3. Implementation of House Bill No. 24190 (“An Act

Granting Stand-By Power to the President of the
Philippines to Control and Stabilize Prices of Prime
Commodities in times of Shortage, Emergency and/or
Calamity).