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Basic Elements of Demand and Supply.docx

Basic Elements of Demand and Supply.docx



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Basic Elements of Demand and Supply
The fundamental economic problem calls for making definite decisions onwhat goods to produce, how they shall be produced, and for whom they shall be produced. To address the problem, the market is used as the principal mechanism
A market exist when “buyers wishing to exchange money for a good or services formoney.” It is where people are left alone to make their own transactions. It is also where theforces of demand and supply interact. The meeting of these two opposing forces paves way toproviding answers to what good to produce, how they shall be produced, and for whom theyshall be produced. These happens because it is through the market where “buyers make knowntheir decisions to buy or not to buy and on hat terms, and sellers make known their willingnessand ability to sell or not to sell and on what terms.”
How a Market Functions.
Markets are strictly made up of buyers and sellers. The actions anddecisions of buyers constitute demand for a product or service, while the sellers’ decisions andactions constitute supply. Markets are important because they act as the mechanism by whichresources are allocated. For instance, when a buyer decides on purchasing a certain commodityon a regular basis, he is sending a signal to the seller to produce the wanted commodity on aregular basis. The collective desires of buyers to purchase a commodity constitute demand forthe commodity. If the sellers accede to the demand, economic resources will be forwarded tothe resource owners. The higher the demand is for product and services, the higher will be thedemand for economic resources.
Market Demand.
Market demand refers to “the buyers” willingness and ability to pay sum of money for some amount of a particular good or service. However, the quantity demanded of agood or service will depend on factors such as needs, preferences, income level, expectationsabout future, the prices of related commodities, the buyer’s situation, etc. The most importantconsideration, however, is the price. The relationship between price and quantity demanded isthe subject of the law of demand.Stated in simple terms, the law of demand
indicates that, “ the quantity of any goodwhich buyers are ready to purchase varies inversely with the price of the good.” This means thatpeople will tend to buy more of the product as its price decreases, assuming that all otherfactors influencing demand remain constant.
The Demand Curve.
 The demand schedule may be presented in graphic form. The price perunit is represented in the vertical axis, while the quantity demanded for each price level isindicated in the horizontal axis. Each amount in the “price” column of the demand schedule ispaired with the corresponding figure in the “quantity demanded” column. Each pair is, then,marked by a point in the graph. When the points are connected by a line, a slope becomesvisible. This slope represents the change in one variable when another variable changes.
 The table indicates that at P5, 000 per unit, the total quantity demanded for bicycles is 10, 000 units. Achange in price, however, affects demand. At P10, 000 per unit, demand goes down to 5, 000 units. Thismeans that a certain period in a given market, people will buy more of a product or service if its price islowered. Lower prices not only motivate current buyers to buy more of the commodity but also attract newbuyers to buy.
Basic Elements of Demand and Supply
 The graph shows a curve representing the inverserelationship between prices of goods and services and thequantity of goods and services demnded, which in this caserefers to bicycles.this curve is reffered to as the demandcurve. It will be noted that the slope of the demand curve inthe brpah is in a downward direction indicating that as price of bicycles decreases, demand for bicycles in increases., andvice versa.
 The law of demand applies only when all the factorsinfluencing demand remain constant. A change in any of thenonprice factors influencing demand remain constant. A change in anyof the nonprice factor of demand may affect the original set of demandfor a ceratin product or service. The demand for bicycle (as indicated in Table 1) is such because the price of the presumed substitute, themotorbike, remains constant. If the motorbike is really a substitute,then a change in its price will affect the demand for bicycles. Table 2shows the adjusted demand schedule for bicycles when there is achange in the price of motorbikes.
When in the demand schedule is plotted in a graph, the originaldemand curve (c
) will shift to the left(c
) when there is a decrease indemand, and shift to the right (c
) when there is an increase indemand.Shifts in demand curve happen not only when there are changes inincome but also when there are changes in the other factors.
ADJUSTED DEMAND SCHEDULE FORBICYCLEPriceperUnit(Php)OriginalDemandDemand forBicyclesIf price of motorbikeisIncreased(units)Decreased(units)5,00010,00011, 0009, 0006,0009, 00010, 0008, 0007,0008, 0009, 0007, 0008,0007, 0008, 0006, 0009,0006, 0007, 0005, 00010, 5, 0006, 0004, 000
Medina, Roberto G.
Principles of Economics.
Manila: Rex Bookstore, 1986
NonPriceDeterminants of Demand
1.Average incomeof consumers2.Size of the Marketa.Substitutesb.Complements3.Price andavailability of related goods4.Preferences or
Table 2
Basic Elements of Demand and Supply
Supply constitutes the one side of the marketequation of which the other one is demand. Supply maybe defined as “the quantity of a good or service whichsellers desire to sell at a given price.” The supply situation may be presented in twoways:1.The supply schedule2.The supply curve
Supply Schedule.
The supply schedule is a tabularpresentation showing the relationship between acommodity’s market price and the amount of thatcommodity that producers are willingto produce and sell, other things heldequal. Suppliers are encouraged toproduce and sell more of a particularcommodity if a higher price idn paidfor it by the buyers. The higher theprice, therefore, the higher thequantity supplied. A hypotheticalsupply schedule is shown in Table 3.
Supply Curve.
 The supply curve isthe graphical illustration of thesupply schedule. The supply curve moves in anupward, sloping direction, indicating the directrelationship between price and quantity supplied. The supply curve is manifestation of the law of supply which is stated simply as follows. As pricegoes up, the quantity of goods and services under consideration tends to increase. Inversely, asthe price goes down, the quantity supplied tends to decrease.
Effects of Changes in the NonPrice Determinants of Supply
ADJUSTED SUPPLY SCHEDULE FORBICYCLEPriceperUnit(Php)OriginalDemandDemand forBicyclesIf price of motorbikeisIncreased(units)Decreased(units)5,0005, 0004, 0003, 0006,0006, 0005, 0004, 0007,0007, 0006, 0005, 0008,0008, 0007, 0006, 0009,0009, 0008, 0007, 000
NonPriceDeterminants of Supply
1.Cost of Production2.Number osuppliers3.Prices of goodsand servicesrelated in

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