LESSON 2.

2 DEMAND AND SUPPLY RELATION TO THE PRICES OF BASIC

COMMODITIES
MARKET EQUILIBRIUM
- A situation in which the supply of an item is exactly equal to its demand. Since there is neither
surplus nor shortage in the market, price tends to remain stable in this situation.
-The equality means that the quantity that sellers are willing to sell is also the quantity that the
buyers willing to buy for a price. (Qd=Qs)
-The equilibruim price/point or also known as "Market Clearing Price" will be operated by the
market to maintain both demand and supply.
DETERMINATION OF MARKET EQUILIBRIUM
Market Equilibrium- (or Qd=Qs) is attained when the quantity demanded is equal to the quantity
supplied.
APPLICATION OF DEMAND AND SUPPLY IN RELATION TO HOUSING SHORTAGE
Housing in the country is a problem evident because of the rapid growth of the Philippine
population. More people will mean a higher demand for housing. The supply of houses is less than
the existing demand for them since more and more Filipinos are added to the population annually.
Rapid population growth leads to rapid increase in demand for housing.
When demand > supply = housing shortage
Demand and Supply- is a framework we use to explain and predict the equilibrium price and
quantity of goods.
Market Equilibrium- is a market state where supply in the market is equal to the demand in the
market.
Key Takeaways:
The primary factor influencing demand for housing is the price of housing. By the Law of
Demand, as the price decreases, the quantity of housing demand increases.
The quantity and price of housing traded is determined by the equilibrium of the housing
market.
Housing shortage occurs when there is a rapid population growth which causes a rapid
increase in demand for housing. Housing shortage results when the demand exceeds the supply of
housing.
ELASTICITIES OF DEMAND AND SUPPLY
Elasticity is a measure of how buyers and sellers respond to changes in market conditions.
Elasticity = (% Change in Quantity)/(% Change in Price)
In terms of how responsive demand and supply are, degrees of elasticity may be:
Elastic – a change in determinant will lead to a proportionately greater change in demand or
supply. The absolute value of the coefficient of elasticity is greater than 1.
Inelastic -– a change in determinant will lead to a proportionately lesser change in demand or
supply. The absolute value of the coefficient of elasticity is less than 1.
Unitary Elastic - – a change in determinant will lead to a proportionately equal change in demand
or supply. The absolute value of the coefficient of elasticity is equal to 1.
ELASTICITY OF DEMAND
Demand elasticity refers to how sensitive the demand for a good is to changes in other
economic variables, such as the prices and consumer income. Demand elasticity is calculated by
taking the percent change in quantity of a good demanded and dividing it by a percent change in
another economic variable. A higher demand elasticity for a particular economic variable means
that consumers are more responsive to changes in this variable, such as price or income.
There are three types of elasticity of demand that deal with the responses to a change in the
price of the good itself, in income, and in the price of a related good, which is a substitute or
complement. These are Price Elasticity of Demand, Income Elasticity of Demand, and Cross Price
Elasticity of Demand.
PRICE ELASTICITY OF DEMAND
Price elasticity of demand is a measure of the relationship between a change in the quantity
demanded of a particular good and a change in its price. Price elasticity of demand is a term in
economics often used when discussing price sensitivity. The formula for calculating price elasticity
of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
INCOME ELASTICITY OF DEMAND
-This measures how the quantity demanded changes as consumer income changes.
% of Change in Quantity Demanded
IE= % Change in income
- A positive sign signifies that the good demanded is a normal good, which is what a costumer
tends to buy more when his income increases.
-A negative sign indicates that demand for inferior goods, which are goods that are bought when
his income is low because low income prevents the costumers from buying higher priced goods.
CROSS PRICE ELASTICITY OF DEMAND
-this measures how quantity demanded changes as the price of a related good changes. Cross
elasticity (CE) measures the responsiveness of the demand for a good to the change in the price of
a substitute good or a complements are.
A+ (positive) sign for CE signifies that the two goods involved are substitute goods which means
that as the price of the substitute good increases, the demand for the other good will increase.
The - (negative sign for CE indicates that the two goods are complement which means that the
demand for a good will increase when the price of a complement decreases.
PRICE ELASTICITY OF SUPPLY
Price elasticity of supply (PES) 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. The following equation can be used to
calculate PES.
LESSON 2.4. MARKET STRUCTURES
Market Structure – refers to the competitive environment in which buyers and sellers operate. It is
best defined as the organizational and other characteristics of a market.
Competition – rivalry among various sellers in the market trying to achieve goals such as
increasing profits, market share, and sales volume by varying the elements of the marketing mix:
price, product, distribution, and promotion.
Market – is a situation of diffused, impersonal competition among sellers who compete to sell their
goods and among buyers who use their purchasing power to acquire the available goods in the
market.
Factors that cause varying degrees of competition in the market:
 Number and size of buyers and sellers
 Similarity or type of product bought and sold
 Degree of mobility of resources
 Entry and exit of firms and input owners
 Degree of knowledge and economic agents regarding prices, costs, demand and supply
conditions
PERFECT COMPETITION
As the term suggest, Perfect competition implies an ideal situation for the buyers and sellers. The
following are characteristic of a perfectly competitive market:
* There are so many buyers and sellers that each has negligible impact on market price. Change in
output of a single firm will not perceptibly affect market price of a good. No single buyer can
influence the price since he/she purchases only a small amount.
* A homogeneous product is sold by sellers, which means the product are highly similar in such a
way consumers will have no preference in buying from one seller over another.
* Perfect mobility of resource refers to the easy transfer of resource in terms of use or in terms of
geographical mobility.
* There is perfect knowledge of economic agents of market conditions such as present and future
price, cost, and economic opportunities.
* Market price and quantity of output are determined exclusively by force of demand and supply.
In this market there are large number of buyers and sellers. Sellers offer a standardized
product, a homogenous good that is not different from the others in the market. The sellers can
easily enter into or exit from the market as there are no barriers to entry to and exit from the
industry. The buyers and sellers are well informed about price and source of the goods.
The standardized product offered by seller’s means that the buyers do not perceive
difference between the products of one seller from that of another. Easy entry into and exit from
the market means there are no significant barriers or special cost of discourage new entrants and
likewise there are no barriers that will prevent the sellers from exiting the market.
So, if perfect competition realistic? The answer is yes, just like the market for wheat. The
model of perfect competition is powerful and many markets, while not strictly perfectly
competitive, come reasonably close.
IMPERFECT COMPETITION
The situation prevailing in a market in which elements of monopoly allow individual producers or
consumers to exercise some control over market prices.
MONOPOLY
Monopoly exists when a single firm that sells in the market has no close substitutes.
Monopoly can exist for the following reasons:
• A single seller has control of entire supply of raw materials.
• Ownership of patent or copyright is invested in a single seller.
•The producer will enjoy economies of scale, which are savings from a large range of
outputs.
• Grant of a government to a single firm.
Monopolistic Competition
Monopolistic competition is a type of imperfect competition such that many producers sell
products that are differentiated from one another (e.g. by branding or quality). The monopolistic
competition describes a common market structure in which firms have many competitors, but each
one sells a slightly different products.
Characteristics:
✔ a blend of competition and monopoly;
✔ firms sell diferrentiated products, which are highly substitutable but are not perfect substitute;
✔ many sellers offer similar but not identical and satisfy the same basic need;
✔ changes in product characteristics to increase appeal as means to attract customers;
✔ there is a free entry and exit in the market that enables the existence of many sellers; and
✔ it is similar to a monopoly in that the firm can determine characteristics of product and has some
control over price and quantity.
Oligopoly
Oligopoly is a market dominated by a small number of strategically interacting firms. These
interacting firms try to raise their profits by colluding with each other to raise prices to the
detriment of consumers.
Characteristics:
 action of each firms affects other firms.
 interdependence among firms.
SIGNIFICANCE OF THE MARKET STRUCTURE
It affects market outcomes through its impact on the motivations, opportunities and decisions of
economic actors participating in the market and it will depend on what type of market structure
used that will determine its market power.