You are on page 1of 18

Assumptions of Supply and Demand Analysis

Appropriate to use when competition exists among

buyers and sellers.
The interaction of buyers and sellers covers all types
of prices and goods for which a market exists.
Interaction of supply and demand solves two major
economic problems simultaneously- the quantity sold
and the price.
Forces affecting supply and demand could come from
any number of influences.
Effects of a Change In Demand During an Immediate Period
Figure 5-1 (a) shows what happens Price S
in the immediate period (during the
typhoon), as consumers brace for
emergency. Supplies are fixed and
demand is fairly inelastic. An
increase in demand could lead to a
shift of the demand schedule –
more goods are bought as long as
these are available. The ensuing
price increase could be steep as
shelves are emptied.

The initial equilibrium price is P0 P0 --------------------------

and quantity is Q0 . After the
increase in demand, when all
supplies are being bought, the
price shifts to P1, but quantity stays
the same (in the immediate period D D’
the supplies are fixed.) 0 Q0 Quantity
Figure 5-1(a)
Supply and Demand for Fish during Typhoon

Figure 5-1(b) indicates the S’
short-run setting of a typhoon
period for a particular S

Fish catch will fall because

fishermen will not go to the

sea. The decline in fish supply
will cause the new equilibrium P0 --------------------------------

at P1 and Q1. The price of fish
will rise and quantity bought
will fall.

0 Q1 Q0 Quantity
Figure 5-1(b)
Interplay of Demand and Supply
Will the Price of Bangus Rise or
Fall After a Typhoon?
Normal equilibrium is P0 and Q0. Price
during a typhoon, fish pond
owners attempt to harvest bangus
for fear of losing fish if the ponds
overflooded and the fish got out. If
flooding occurs, there will be free
bangus harvests in main estuaries
caught by people in the area.
P0 ---------------------------

On the other hand, people who P2 ---------------------------------------

normally eat other types of fish will P1 ----------------------------------

experience a short period rise of
fish prices. Other fishes will have
fewer harvests because fishermen
go back to safety during a typhoon
and they have no catch. These
D D’
people will likely cause the
demand for bangus to increase
(shift D to the right). 0 Q0 Q1 Q2 Quantity
Prize Stabilization of Basic Commodities

Price stabilization is best undertaken through indirect

approaches by managing the supply of the commodity.
It could mean influencing only the market
conditions, mainly through the supply side, to avoid
extreme swings of prices.
Includes setting the prices of commodities that are
being stabilized.
Stabilizing Rice Prices S’’
Price S
Situation A:
Price stabilization Market supplies
getting depleted. S’
Price of grain could rise and
fall during the year without
price stabilization. During
normal times, P0 an Q0 are
equilibrium price and PP --------------------------

quantity. The price of grain P0 ------------------------------ Situation B:

could go to PP during times Market supplies
PH ---------------------------------- increasing
when supply is getting

depleted(situation A). But
during harvest time when
supply is increasing, the price
could go to PH(situation B).
The objective of stabilization D
is to set the price towards P0.
0 QP Q0 QH Quantity
Labor Supply, Population Growth and Wage

The wage rate, which represents the incomes of

workers, provides some indication of the standard of
High wages result from the interaction of the demand
and supply of labor.
In countries where the supply of labor is very
abundant, many workers are willing to accept low
wages in exchange for their services.
The Wage rate and the Supply and Demand for Labor
Wage rate

The wage rate is determined

by the balance of supply and
demand for labor. The supply Supply of Labor
of labor could be available at
a given wage rate, W*, if the
supply of labor is infinitely
elastic at that wage rate. But W*
beyond a given point such as
point a, when the labor
available at that wage is fully
employed, at point L*, the Demand for Labor
supply schedule of labor
could rise as shown in the L* Labor
Unequal Population Growth

Population Growth
Assume two countries identical
in all aspects including their
initial level of population. But A
has a 1.0% per annum growth
of population; B has 2.0%.
What happens 10 years later?

In country A, with a lower

population growth, the supply
curve of labor turns up more
quickly than SB. 10 years later A
has higher wages than B
because the labor supply is
greater in B where the
population growth is higher.
Unequal Output Growth
Growth in Demand for Labor
The two countries are identical in all
aspects, except that country T has a
stronger demand for labor than country
P 10 yrs. later. Policies in T encourage a
growth demand for labor that is faster
than in P.
Initially the two countries have an
identical demand for labor. 10 yrs. later,
because of sound economic policies
and growth of business investment and
productivity, the demand for labor is
higher in T than in P.
The result, T is securely on a rising
portion of the S schedule for labor. Also,
amount of new employment is more
than in P. L10 Years Later in T is higher than
in P. as important, W10 Years Later in T is
much higher than in P.
Labor Migration Within a Country

Labor Migration and Wages

At equilibrium before in-
migration, Urbanya has a a higher
wage than Probinsya which will
induce labor to move to Urbanya.
Suppose this movement is about
100 thousand man-years for a given
year, the labor supply in Probinsya
falls from SP to S’P by the amount
equal to 100 thousand man-years.
But the labor supply schedule for
Urbanya rises from SU to S’U . In
probinsya, equilibrium wage goes
up from WP to W’P while in
Urbanya, wage goes down from WU
to W’U.
Commodity Taxation: Price and Quantity After Tax
Effects of a Commodity Tax Price
The supply schedule before tax is S
and after tax is STAX. A commodity tax
has the effect of raising the price of
the good and reducing the quantity
sold. The extent of the changes in
price and quantity depends on the
elasticity of supply and demand. PTax ----------------------------

Equilibrium before tax is P0 and Q0. P0 ----------------------------------

the supply schedule after
tax, STAX, intersect the demand curve
at a ne equilibrium price, PTAX. The
new equilibrium quantity after tax is
QTAX. It is clear from this that the new D
price is higher than the old price and
the quantity after tax is smaller than 0 QTAX Q0 Quantity
the quantity before tax.
Exchange Rate of the Peso: The Value of Foreign
 Foreign exchange is the term used to denote the value of
foreign money in terms of local money.
 The exchange rate for the US dollar is the peso cost of buying a
US dollar.
 The peso appreciates in value when the amount of pesos to
acquire a US dollar becomes smaller which makes peso more
 Peso depreciates when the price of the US dollar increases in
terms of pesos.
 It is important to value foreign currency because the country
earns dollars when it imports and spends dollars when it buys
foreign goods.
Exchange Rate of the Peso: The Value of Foreign

Devaluation indicates an official action of the

government to reduce the value of the currency.
Foreign Exchange Market consists of the interaction
of countries to buy or to sell foreign currencies.
Principal currencies are US dollar, Japanese yen and
Europe’s Euro.
Exchange Rate of the Peso: The Value of Foreign

Supply of Foreign Exchange

 Consists of the receipts of dollars that the country earns or receives.
 The following activities contribute to supply of dollars.
Export earnings
Foreign tourism in the country
Use of services sold by Philippine companies:
transport, telecommunications and others.
Remittances of OFW
Proceeds from foreign loans
Short-term inflows of foreign capital for investment in the country
or deposit of foreign money in any Philippine-based bank.
Exchange Rate of the Peso: The Value of Foreign

Demand for Foreign Exchange

 Consists of the payments for the volume of imports that the country
buys to support the needs of businesses and citizens during a given
 These payments include:
Imports of goods for consumption and for investment.
Filipinos travel abroad for tourism or for business.
Filipinos and Philippine institutions use the service of foreign
Interaction of Supply and Demand
Foreign Exchange Market and Effects of
Capital Flow
At a, the supply schedule is positively sloped
which is a typical supply schedule. When the
peso price of the dollar is low, suppliers are
not willing to sell their dollars for they get
fewer pesos for their dollars. But when the
peso price of the dollar is high, then suppliers
will receive more pesos for every dollar they

In b, “good” developments dominate among

the transitory factors, capital inflow increase
so an upward shift of the supply schedule for
dollars happens.

In c, “bad” developments dominate capital

inflows decrease, so a downward shift of the
supply schedule for dollars happens.