Law of Demand - all else constant, as price falls, the quantity demanded rises. Similarly, as price increases, the corresponding quantity demanded falls. This relationship leads to the downward sloping demand curve. Rationale: 1.) Common sense and simple observation seems to substantiate this assertion 2.) Consumption is subject to diminishing marginal utility - consuming successive units of a particular product yields less and less extra satisfaction. For example; after the first hamburger getting a second hamburger is less appealing because the person is not as hungry. 3.) The income effect - a decline in the price increases the purchasing power of a buyer's money, enabling him or her to buy more of the product than before. 4.) The substitution effect - at a lower price, buyers have the incentive to substitute the cheaper good for similar goods which are now relatively more expensive. For example, at a lower price, beef is relatively more attractive and is substituted for pork, mutton, chicken, etc.

Determinants of Demand The determinants of demand are also known as demand shifters. They result in the leftward (decrease) or rightward (increase) shifts in the demand curve. 1.) tastes or preferences of consumers * an increased taste in a product increases its demand * a decreased taste in a product decreases its demand 2.) number of consumers in the market * more consumers increases a products demand * fewer consumers decreases a products demand 3.) the money incomes of consumers Superior goods or normal goods 1

a superior good's demand decreases * Superior goods are most common goods Inferior Goods * As income increases.* As income increases. demand for B decreases * As price of B decreases. 2 . demand for good B does not change 5.on a fixed demand curve * "change in demand" . demand for B decreases * Example: Nike's and Reeboks Complementary Goods * As price of A increases. gasoline and motor oil Independent Goods * As price of good A changes. an inferior good's demand increases 4. a superior good's demand increases * As income decreases. demand for B increases * As price of A decreases.) consumer expectations about the future prices and incomes * if consumers expect a price increase in near future.a shift in the entire demand curve either to the right (an increase in demand) or to the left (a decrease in demand). demand increases * if consumers expect a price decrease in the near future. an inferior good's demand decreases * As income decreases.) prices of related goods Substitute Goods * As price of A increases. demand decreases Terminology Clarification * "change in quantity demanded" .designates the movement from one point to another point .from one price-quantity combination to another . demand for A increases * Example: computers and computer games.

the market will shift toward equilibrium. * All else constant. a decrease in supply causes an increase in equilibrium price and a decrease in equilibrium quantity supplied. an increase in demand causes an increase in equilibrium price and quantity demanded. The ability of the competitive forces of supply and demand to establish a price where selling and buying decisions are synchronized or coordinated is called the rationing function of prices. Graphically. * 3 .Price Determination We always want to produce at the most economical quantity-price combination. Changing Supply and Demand Curves Demand Curve * All else constant. * A surplus occurs when there is too much supply and not enough demand at a particular price * A shortage occurs when there is too much demand and not enough supply at a particular price.where there is neither a shortage nor a surplus. a decrease in demand causes a decrease in equilibrium price and quantity demanded. Eventually. the intersection of the supply curve and the demand curve for the product will indicate the equilibrium point . Supply Curve * All else constant.

THE PRICE FOR SUBSTITUTE PRODUCT C FALL: With the entry of cheaper product substitutes for Product B. Complex Cases If both supply and demand curves change. 4 . 6. The 9/11 terror attacks on US soil and the resulting war on terrorism definitely have a negative impact on the travel industry worldwide (that is from airline to the hotel industries). 2) WHAT EFFECT WILL EACH OF THE FOLLOWING HAVE ON THE DEMAND FOR PRODUCT B: A. HOTEL ROOMS. THE PRICE OF COMPLEMENTARY PRODUCT D FALLS: This could bolster consumer preference for Product B. hence may result to continued consumer patronage and/or increase in demand. 2001 AND THE WAR ON TERRORISM ON THE DEMAND FOR THE FOLLOWING ITEMS IN THE UNITED STATES: AIRLINE TICKETS. With the exception of oil and gas products. demand for the items mentioned above dramatically fell. PRODUCT B WILL BECOME MORE FASHIONABLE: Demand for Product B will definitely rise. demand for Product B will remain unchanged. 3. DEMAND OFTEN EXCEEDS SUPPLY AND SUPPLY SOMETINES EXCEEDS DEMAND. GASOLINE. ASSESS THE EFFECTS OF THE TERRORIST ATTACKS OF SEPTEMBER 11. B.the changes on equilibrium price and quantity depend on how much each curve has changed. demand for Product B will definitely decrease.” “THE PRICE OF RICE RISES AND FALLS IN RESPONSE TO CHANGES IN SUPPLY AND DEMAND. demand for Product B is expected to decline over time. especially during the years immediately following the incident. E. INCOME DECLINES AND PRODUCT B IS AN INFERIOR GOOD: Decrease in consumer incomes and the poor quality of Product B. Demand for Middle East oil products was not affected. surge in consumer demand can expected in the near future—for the mean time. “IN THE RICE MARKET. an increase in supply causes a decrease in equilibrium price and an increase in equilibrium quantity supplied.” IN WHICH OF THESE TWO STATEMENTS ARE THE TERMS “SUPPLY” AND “DEMAND” USED CORRECTLY? EXPLAIN. Fashion trends have a direct influence on product demand. the result is indeterminate .All else constant. C. Middle East nationals became suspect while Arabic culture and literature turned out to be unpopular. BOOKS ABOUT AFGHANISTAN AND ARABIC INTERPRETERS. D. Since the attacks were perpetuated by terror groups based in the Middle East. CONSUMERS ANTICIPATE THAT THE PRICE OF B WILL BE LOWER IN THE NEAR FUTURE: Hence.

BE SURE TO LABEL THE AXIS OF YOUR GRAPH CORRECTLY.000 bushels. GRAPH THE DEMAND FOR WHEAT AND THE SUPPLY OF WHEAT.” DO YOU AGREE? EXPLAIN? The 3. the local rice Supply cannot cope with consumer demand. since in the Philippines more often than not. D. would result to more and more people competing to buy such supply items resulting to a natural increase in prices. on the one hand. C.40 price results to a shortage of 13. WHAT MIGHT PROMPT THE GOVERNMENT TO ESTABLISH THIS PRICE CEILING? EXPLAIN CAREFULLY THE MAIN EFFECTS.0 per bushel at the Equilibrium Quantity of 75.9 81 21 The Equilibrium Price is 4. the supply surplus is 0.7 73 -7 75 4.60 FOR WHEAT.90 a surplus of 21.” This statement is closer to the truth. DEMONSTRATE YOUR ANSWER GRAPHICALLY. Supply shortages.70 FOR WHEAT.6 79 14 60 4.4 72 -13 80 3.40 NOT BE THE EQUILIBRIUM PRICE IN THIS MARKET? WHY NOT 4. the Philippine government has been importing rice from a number of countries within the Southeast Asian region.3 77 7 65 4. WHAT 5 . SUPPOSED THAT THE GOVERNEMNT ESTABLIHSED A PRICE FLOOR OF 4. In order to correct the problem. NEXT. prices will tend to go down. SUPPOSED THAT THE GOVERNMENT ESTABLISHES A PRICE CEILING OF 3. LABEL EQUILIBRIUM PRICE P AND EQUILIBRIUM QUANTITY Q.0 75 0 70 4. SUPPOSED THE TOTAL DEMAND FOR WHEAT AND TOTAL SUPPLY OF WHEAT PER MONTH IN THE GRAINE MARKETS ARE SHOWN IN THE NEXT COLUMN: A.“IN THE RICE MARKET.000 bushels.000 would eventually drive prices down. 7. WHY WILL 3. when demand is below supply levels resulting to supply surpluses. With these price and quantity. WHAT IS THE EQUILIBRIUM PRICE? WHAT IS THE EQUILIBRIUM QUANTITY? FILL IN THE SURPLUS SHORTAGE COLUMN AND USE IT TO EXPLAIN WHY YOUR ANSWERS ARE CORRECT: THOUSANDS OF PRICE PER THOUSANDS OF SURPLUS (+) OR BUSHELS BUSHEL BUSHELS SHORTAGE (-) DEMANDED SUPPLIED 85 3.90? “SURPLUSES DRIVE PRICES UP.000 would drive prices up while surplus of 21.000 bushels and the price of 4. The importations boost local rice supply but hardly bring local rice prices down. B. We agree that consumer demand for wheat with a supply shortage of 13. SHORTAGES DRIVE THEM DOWN. DEMAND OFTEN EXCEEDS SUPPLY AND SUPPLY SOMETINES EXCEEDS DEMAND. On the other hand.

00 does in any way serve the interests of both consumers and suppliers. IF ANY.WILL BE THE MAIN EFFECTS OF THE THIS PRICE FLOOR. The magnitude of market changes determines how price and quantity would behave. GO THE USDA HOME PAGE AND SELECT CHARTS AND MAPS AND THEN AGRICULTURAL PRICES. DO YOU THINK THAT SUPPLY HAS INCREASE MORE RAPIDLY THAN DEMAND? IN WHICH OF THESE THREE CASES. 8. THE US DEPARTMENT OF AGRICULTURE. 6 . This respite on the part of consumers will be shortlived unless the shortage is addressed. 10. WHAT IMPACT DO YOU THINK THIS HAD ON THE SUPPLY OF CATTLE HIDE. IN WHICH OF THESE THREE CASES.70 (which is still below the Equilibrium Price of 4. The Price Floor of 4. the leather industry worldwide has made use of cheaper synthetic leather and other substitutes to satisfy consumer demand. THE SUPPLY OF LEATHER GOODS AND THE PRICE OF LEATHER GOODS.USDA. The government regulation to impose a Price Ceiling 3. 9. price and quantity would be expected to rise and fall over time. In addition. As consumer demand plunges. The cattle industry is not only confined to Europe—other countries such as the US. IN 2001 AN OUTBREAK OF FOOT AND MOUTH DISEASE IN EUROPE LED TO THE BURNING OF MILLIONS CATTLE CARCASSES. but not so significantly. IF ANY DO YOU THINK THAT DEMAND HAS INCREASE MORE RAPIDLY THAN SUPPLY? EXPLAIN YOUR REASONING. DECREASE OR STAYED THE SAME OVER THE PAST THREE YEARS. The Foot and Mouth disease outbreak. The impending supply surplus would marginalize many consumers.GOV/NASS PUBLISHES CHARTS ON THE PRICES OF FARM PRODUCTS. WWW.000 bushels.00) is intended to allow consumers to enjoy lower prices hopefully within a manageable supply shortage of 7. DEMONSTRATE THE ANSWER GRAPHICALLY. Both of these situations lead to market failures. THAT IS. HIDE PRICES. Changes in Demand and Supply directly affect both Equilibrium price and quantity— hence. DO PRICE AND QUANTITY RISE. supply surplus would accumulate as wheat sellers will not be able to sell their wheat stocks— driving them out of business. CHOOSE THREE FARM PRODUCTS OF YOUR CHOICE AND DETERMINE WHETHER THEIR PRICES HAVE GENERALLY INCREASES.60 which is above the Equilibrium Price of 4. FALL OR REMAIN UNCHANGED OR THE ANSWERS INDETERMINATE BECAUSE THEY DEPEND ON THE MAGNITUDE OF THE SHIFT? USE SUPPLY AND DEMAND DIAGRAMS TO VERIFY YOUR ANSWERS. which affected a significant portion of Europe’s cattle industry must have contributed to scarcity of raw materials for the world’s leather industry. Australia and New Zealand and several Latin American countries have a thriving livestock industry. WEB BASED QUESTION. HOW WILL EACH OF THE FOLLOWING CHANGES IN DEMAND AND/OR SUPPLY AFFECT EQULIPBRIUM PRICE AND EQUILIBRIUM QUANTITY IN A COMPETITIVE MARKET.

US Corn Prices and and Production Volume Prices of US Corn behaved unpredictably over the past three years (2007-2009).50 in 2008 and further rose to US$ 4. corn prices was at US$ 2.50 in mid-2008).00.00 in 2009 (after reaching an all time high of US$ 5. 7 . In 2007. then it rose to US$ 3.

00 in 2007 to US$5. US Hog Prices and Production Volume 8 . On the other hand.5 billion bushels which further rose to 13.1 billion bushels in 2007. However. It was more likely that the increase in demand drove corn prices up from US$ 2. in 2008 corn production shrunk to 12. the increase in demand was short lived as demand dwindled at the close of 2008 and continued up this time. US Corn production in 2006 was at 10.50 in 2008.However.1 billion bushels.

Prices of US Hogs ahave reamined on the averaged of US$ 43. US Milk Prices and Production Volume 9 .00 with production volume remaining fundamentally unchanged since 2000 up to the present at around 25 billions pounds annually.

00 2007. US$ 16. 190 billion pounds.00. the US has produced 177 billion pounds. This further increased in 2006 at 187 billion pounds and in 2007. US milk production as has been on the increase since 2001. 10 . By 2005.00 in 2008. On the other hand. In unprecedented production volume capacity beginning 2007 (since Us data is only up to 2007). The trend is broken 2009 when milk prices dropped to below 2006 level at US$ 11. US$ 18. milk supply must have yielded a surplus.US Milk prices began an increasing trend: from US$ 12.00 in 2006.

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