DEMAND AND SUPPLY

Group 1
Billote, Andrea
Jacobe, Justine
Macabinguel, Rochelle
Marcelo, Cayberjon
Quinones, Eula
Learning Outcomes
● Familiarize with the concepts of demand and supply
● State the Law of Demand and Supply
● Identify the determinants of demand and supply
● Explain how forces of demand and supply interact to attain equilibrium in the market; and
● Apply the Law of Demand and Supply to different economic situations
Topics
● The Market Mechanism
● The Law of Demand
● The Law of Supply
● The Dynamics of Demand and Supply
The Market Mechanism
Market - situation in which potential buyers and potential sellers of a good or service come together for
the purpose of exchange.

Mechanism - structure

So,

Market Mechanism - interaction of demand and supply, resulting in an equilibrium quantity and price
being set by the market.
Example
Demand
● Willingness and capacity of a consumer to buy a commodity at alternative prices at a given point
in time.
Demand Schedule
● Tabulation form of the quantity demand at a given price
Hypothetical Demand Schedule of Milk
Price Quantity Demanded

$15 1

$12 2

$9 3

$6 5

$3 7
Demand Curve
● Graphical illustration of the demand schedule
Law of Demand
● Inverse Relationship
● If the price of the commodity increases, the
quantity demanded decreases and if the price of
the commodity decreases, the quantity demanded
increases at ceteris paribus

CETERIS PARIBUS - all other factors that may affect the

demand are not changing or being held constant.

● The only factor that influences the level of

demand or consumption is the price of the
commodity itself.
Other Factors Affecting the Demand of
a Commodity
● Income
● Prices of Other Commodities
● Expectation
● Taste
● Market
Income
● A higher level of income will give him higher capacity to consume while a lower income will give
him limited purchasing power. As a result, we observed that richer families have higher levels of
consumption while poorer families have lower and limited consumption basket.
Price of Other Commodities
● If the other good is a substitute, the increase in the price of the substitute good may increase the
demand for the commodity at hand.
● On the other hand, if the other good is a complementary good, a decrease in its price will impact
positively on the demand of the good being investigated.
Expectation
● In addition to the price of the commodity, the expectation or prospect on what is going to happen
to the price can influence the demand for the commodity.
Taste
● Taste or preference is another important factor that may influence the demand for a commodity.
The formation of taste is influenced by several factors. Some of them can be shaped by cultural
values, others through peer pressure or the power of advertising.
Market
● The size and characteristic of the market can also influence the demand for a commodity. An
increasing population can contribute to the expansion of existing markets for various
commodities. A lower birth rate, on the other hand, coupled with an ageing population may alter
the composition of demand by shifting the demand towards the needs of the elderly and away
from goods and services that target the youth.
Why is the Demand Curve Downward
Sloping?
● The inverse or negative relationship between the price of the commodity and the quantity
demand shown in the demand curve can be explained through the substitution effect and income
effect of a price change.
Substitution Effect
● The substitution effect describes the decision of a consumer to substitute an expensive good with
cheaper goods when there is a price change.
Income Effect
● Income effect refers to the modification of the consumption of a commodity due to the change in
the purchasing power of the consumer resulting from a price change. An increase in the
purchasing power will enable the consumer to buy more of the good while a reduction in
purchasing power will reduce its capacity to purchase. We know that an increase in the price of a
good will reduce the purchasing power of the consumer’s income while a decrease in price will
increase the consumer ability to purchase.
Principle of Diminishing Marginal Utility
● According this major economic principle as a buyer continues to consume a good his total
satisfaction or utility increases; however, the additional or marginal satisfaction decreases as a
buyer consumes an additional unit of good. This reduction in marginal satisfaction is attributed to
the fact that consumers can have a feeling of satisfaction when they continuously increase the
consumption of a particular commodity. Diminishing marginal utility implies that the additional
satisfaction provided by an additional commodity consumed is lower than the additional
satisfaction given by the previous level of consumption of the commodity.
Changes in Demand Curve
● Movement along the demand curve
● Shift in the demand curve
Movement along the Demand Curve
● Refers to the change in quantity demand
resulting from the change in the price of the
commodity. Thus, as the price of the
commodity decreases, the movement along
the curve will lead to an increase in the
quantity demand of the commodity. Similarly,
an increase in the price will result in the
decrease in quantity demand as shown in the
movement along the demand curve.
Shift in Demand Curve
● Changes in demand curve caused by any of the
other factors beside the price of the commodity.
Taste, price of other goods, income and other
factors may affect the demand of a commodity
positively or negatively.
● A positive effect will shift the demand curve to the
right. This means that in each price point there is
an increase in the demand of the commodity. On
the other hand, a negative impact of these other
factors on the demand for a commodity will shift
the demand curve to the left implying a decrease
in the demand for the commodity in each point.
Supply
● Refers to the quantity of goods that producer or seller is willing to sell at alternative prices at a
given point in time.
Supply Schedule
● Tabulation form of the different quantities of goods seller is willng to sell a various prices
Hypothetical Supply Schedule of Coffee
Price Supply

$6 30

$5 25

$4 20

$3 15

$2 10

$1 5
Supply Curve
● Graphical illustration of the supply schedule
 Law of Supply

● Direct Relationship
● If the price of the commodity
increases, the quantity supplied
increases and if the price of the
commodity decreases, the
quantity supplied decreases at
ceteris paribus

CETERIS PARIBUS - all other factors

that may affect the supply are not
changing or being held constant.
Other Factors Affecting Supply of a
Commodity
● Price of Production Inputs
● Taxes
● Technology
● Expectation
Prices of Production Inputs
● Intermediate Inputs/Raw Materials - materials that are still going to be processed or transformed
into higher level of outputs.
● Factor Inputs - processing or transforming inputs. Some examples are labor, capital, land and
entrepreneurship. These are the ones adding value to the raw materials through the process of
production.
Taxes
● Business establishments are required to pay a number of taxes to various levels of government.
Since it is a monetary expense on the part of the firm, the payment of taxes can be considered as
part of cost of production. Although, taxes are not factor inputs nor raw materials they are still
considered part of the costs of operating business.
Technology
● The manner in which various factor inputs process the raw materials is done through the use of
technology. Some firms may use labor-intensive technology if the cost of labor is relatively cheap.
On the other hand, firms may use capital-intensive technology if wages are very high.
Expectation
● The expectation or anticipation on what is going to happen on the price of the commodity can
also influence the amount supplied in the market.
Why is the Supply Curve Upward
Sloping?
● The supply curve shows a positive or direct relationship between the price of the commodity and
the quantity supplied in the market. The main motivation to supply goods is to gain profit which is
based on the costs of production of a firm and the price of the commodity.
Variations in the Unit Cost of
Production
● The simplest reason for the direct relationship between the price and quantity supplied is due to
variation of the costs of production among producers.
● The inefficient producers at lower prices have become efficient and competitive as the price of
the commodity increases
Principle of Diminishing Marginal
Productivity and Increasing Marginal
● According to this perspective, as the production of a good increase not only does its total cost
Costs
increases but the additional or marginal cost increases as well. This means that the additional cost
of an additional unit of production is higher than the previous unit of production. This increase in
marginal cost is due to the principle of diminishing marginal productivity of resources. According
to this principle, as a fixed factor input, capital or land, is mixed with a variable factor input, labor,
the employment of additional laborers will increase total production but will increase it at a
decreasing rate. This means that although total production is increasing, the additional or marginal
contribution of the additional labor to total production is declining. This is because the
productivity of the variable input is constrained by a fixed input, capital or land.
Changes in the Supply Curve
● Movement along the supply curve
● Shifts in the supply curve
Movement along the Supply Curve
● It is brought about by changes in the price of the commodity. An increase in price will increase the
quantity supplied as shown by movement towards northeast along the supply curve. On the other
hand, a decrease in the price of the commodity will cause the decrease in quantity supplied as
shown by the movement toward the southeast along the supply curve.
Shift in the Supply Curve
● It is caused by changes in the other factors affecting supply except the price of the commodity.
● As the supply curve shifts to the left, the supply will declined since all possible quantities to be
supplied decreases at all alternative prices.
Dynamics of Demand and Supply
● Equilibrium Price
● Changes in Equilibrium Price and Output
● Simultaneous Changes in Demand and Supply
Equilibrium Price
● When buyers and sellers transact in a market they agree on the price of the commodity and the
amount to be sold and bought. This agreed price is called the equilibrium price.
Disequilibrium
● It occurs when there are disagreements among buyers and sellers on the price and quantity.
Excess Demand
● If the quantity demanded is greater than quantity supplied, there is an excess demand at the
prevailing price. Because of this, there will be competition among buyers to have their wants
served. They will compete for the limited supply and this is done through a price increase. As the
price of the commodity increases, the quantity demand will decline and the quantity supplied will
increase thus eliminating the excess demand.
Excess Supply
● If the quantity demand is lower than quantity supplied, there is excess supply at the prevailing
price. Given this situation, there is motivation among suppliers to remove this excess supply by
lowering their prices. A decrease in price will decrease quantity supply and encourage consumers
to increase quantity demand. These adjustments coming from the suppliers and buyers will
eliminate the excess supply.
Changes in Equilibrium Price and
Output
● The impact of changes in demand and in supply brought about by various factors on the
equilibrium price and quantity can be analyzed through price mechanism in the market system.
Through changes in price, suppliers and consumers adjust to attain a new equilibrium situation.
These adjustments are very useful in understanding price changes in some commodities.
Shifts in the Demand Curve
● Shift in the Demand Curve to the Right
● Shift in the Demand Curve to the Left
Shift in the Demand Curve to the Right
Shifts in the Demand Curve
● Shift in the Demand Curve to the Right
● Shift in the Demand Curve to the Left
Shift in the Demand Curve to the Left
Shifts in the Supply Curve
● Shift of the Supply Curve to the Right
● Shift of the Supply Curve to the Left
Shifts in the Supply Curve to the Right
Shifts in the Supply Curve
● Shift of the Supply Curve to the Right
● Shift of the Supply Curve to the Left
Shifts in the Supply Curve to the Left
Simultaneous Changes in Demand and
Supply
● Shift of the Demand Curve to the Right and Shift the Supply Curve to the Right (Equal
Proportion)
● Shift of the Demand Curve to the Right and Shift the Supply Curve to the Left (Unequal
Proportion)
Shift of the
Demand
Curve to the
Right and
Shift the
Supply Curve
to the Right
(Equal
Simultaneous Changes in Demand and
Supply
● Shift of the Demand Curve to the Right and Shift the Supply Curve to the Right (Equal Proportion)
● Shift of the Demand Curve to the Right and Shift the Supply Curve to the Left (Unequal
Proportion)
Shift of the
Demand Curve
to the Right and
Shift of the
Supply Curve to
the Left
(Unequal
Proportion)
Points to Remember:
● Market Mechanism - interaction of demand and supply, resulting in an equilibrium quantity and
price being set by the market.
● Demand - willingness and capacity of a consumer to buy a commodity at alternative prices at a
given point in time.
● Demand Schedule - tabulation form of the quantity demand at a given price
● Demand Curve - graphical illustration of the demand curve
● Law of Demand - If the price of the commodity increases, the quantity demanded decreases and
if the price of the commodity decreases, the quantity demanded increases at ceteris paribus.
● Ceteris Paribus - all other factors that may affect the demand are not changing or being held
constant.
Points to Remember:
● Other Factors Affecting the Demand of a Commodity
1. Income
2. Prices of Other Commodities
3. Expectation
4. Taste
5. Market
● Why is the Demand Curve Downward Sloping?
1. Substitution Effect
2. Income Effect
● Principle of Diminishing Marginal Utility
Points to Remember:
● Changes in Demand Curve
1. Movement along the Demand Curve
2. Shift in Demand Curve
● Supply - refers to the quantity of goods that producer or seller is willing to sell at alternative
prices at a given point in time.
● Supply Schedule - tabulation form of the different quantities of goods seller is willing to sell a
various prices
● Supply Curve - graphical illustration of the supply schedule
● Law of Supply - If the price of the commodity increases, the quantity supplied increases and if the
price of the commodity decreases, the quantity supplied decreases at ceteris paribus.
Points to Remember:
● Other Factors Affecting the Supply of a Commodity
1. Price of Production Inputs
2. Taxes
3. Technology
4. Expectation
● Why is the Demand Curve Downward Sloping?
1. Variations in Cost of Production
● Principle of Diminishing Marginal Productivity and Increasing Marginal Cost
● Changes in Demand Curve
1. Movement along the Demand Curve
2. Shift in Demand Curve
Points to Remember:
● Equilibrium Price - when buyers and sellers transact in a market they agree on the price of the
commodity and the amount to be sold and bought. This agreed price is called the equilibrium
price.
● Disequilibrium - it occurs when there are disagreements among buyers and sellers on the price
and quantity.
● Excess Demand - if the quantity demanded is greater than quantity supplied, there is an excess
demand at the prevailing price.
● Excess Supply - if the quantity demand is lower than quantity supplied, there is excess supply at
the prevailing price.
● Shifts in the Demand Curve
1. Shift in the Demand Curve to the Right
2. Shift in the Demand Curve to the Left
Points to Remember:
● Shifts in Supply Curve
1. Shift of the Supply Curve to the Right
2. Shift of the Supply Curve to the Left
● Simultaneous Changes in Demand and Supply
1. Shift of the Demand Curve to the Right and Shift the Supply Curve to the Right (Equal
Proportion)
2. Shift of the Demand Curve to the Right and Shift the Supply Curve to the Left (Unequal
Proportion)
THANK YOU!