Demand & Supply

Microeconomics
What is a Market?
 The terms supply and demand refer to the behavior of people as they interact with one
another in competitive markets.
 A market is a group of buyers and sellers of a particular good or service.
• Buyers as a group determine the demand for the product
• Sellers as a group determine the supply of the product.
Forms of Markets
 Highly Organized. Example: markets for many agricultural commodities. (buyers and
sellers meet at a specific time and place, an auctioneer helps set prices and arrange sales)
 Less Organized. Example: markets for ice cream. (buyers of ice cream do not meet together
at any one time and sellers are in different locations and offer somewhat different ice creams.
There is no auctioneer. Each seller posts a price per ice-cream cone, and each buyer decides
how much ice cream to buy at each store)
o Consumers and producers of ice cream are closely connected
o Though not organized, the group of ice-cream buyers and ice-cream sellers forms
market
What is a Market?
 The key to markets is voluntary exchange, that is buyers and sellers willingly decides to
make a transaction.

Question: Is this that simple?

 Competition - exists when two or more firms are rival for customers. Each firm strives to
gain the attention and custom of buyers in the market.
 Perfectly Competitive market - market with many buyers and sellers, so that no single
buyer or seller has a significant impact on price.
 The idea of voluntary exchange is that sellers could not make themselves better off if they
don’t make buyers better off.
Types of Market Structures
1. Perfect Competition – Example: fruits, vegetables, scissors, papers, etc. There are thousands
of producers all growing identical products and is easy to get in the market.
2. Monopoly – Example: electricity, water, other utilities, etc. There is one large company that
produces the product with a very few substitute. Since high barriers prevent the
competition, a monopoly has a lot of control of the price.
3. Monopolistic Competition – Example: furniture, fast-food (Mcdonalds or Burger King). Is a
market with many producers with relatively low barriers to entry. Their products are similar
but not identical.
4. Oligopoly - Example: cellphones, laptops, cars, motorcycles, air travel, television channels,
etc. Is a market with higher barriers to entry and are controlled by few large companies.
Like monopolistic competition, their products are similar but not identical.
o Non-price competition – competition without changing the price (e.g. quality,
location, service, advertising). The goal is to distinguish their products from
competitors.
o Price Leadership – when one company changes the price, and its competitors
decided if they’re going to follow.
Factors Affecting Price
Question: What affects prices in the market to rise and fall?
 Demand and supply are the main forces that cause prices to increase or decrease.

Some Definition of Terms

 Price – Is the value of the a good in terms of money.
 Demand – reflects the consumer’s desire for a commodity.
 Supply – the amount of a commodity available for sale.
 Aggregate Demand – the totality of a group of consumer’s demand.
 Aggregate Supply – the totality of a group of producer’s supply.
 Demand Schedule – the quantities consumers are willing to buy of a good at various prices.
 Supply Schedule – the quantities producers are willing to offer for sale at various prices.
 Demand Function – shows how quantity demanded is dependent on its determinants.
 Supply Function – shows how quantity supplied is dependent on its determinants
 Equilibrium – the condition of balance or equality.
 Surplus – an excess of supply over the demand for a good.
The Market Mechanism
Analysis on the Interaction of Demand, Supply & Price
 Increase in Demand (i.e. demand for avocado) cause the price of that good to increase.
 Rising prices encourage producers to increase the supply of the good.
 If a good is overstocked, suppliers of this good will lower their prices so they can dispose of
their excess supply.
 Lower prices will attract consumers to buy the goods. Hence, a balance of equilibrium between
the buyers and seller.

The Law of Demand & Supply

 Law of Demand – when prices goes up – people will buy less. When prices goes down – people
will buy more.
The Law of Demand

DEMAND FUNCTION
70.00
65.00
60.00
55.00
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-
0 25 50 75 100 125 150 175 200 225 250
The Law of Demand

DEMAND FUNCTION
70.00
65.00
60.00
55.00
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-
0 25 50 75 100 125 150 175 200 225 250
Quantity Demanded (in kilos) (Initial) Quantity Demanded (in kilos) (Increase)
The Market Mechanism
Analysis on the Interaction of Demand, Supply & Price
 Increase in Demand (i.e. demand for avocado) cause the price of that good to increase.
 Rising prices encourage producers to increase the supply of the good.
 If a good is overstocked, suppliers of this good will lower their prices so they can dispose of
their excess supply.
 Lower prices will attract consumers to buy the goods. Hence, a balance of equilibrium between
the buyers and seller.

The Law of Demand & Supply

 Law of Demand – when prices goes up – people will buy less. When prices goes down – people
will buy more.
 Law of Supply – when prices goes up – producers will have the incentive to produce more. When
prices goes down – producers will produce less.
The Law of Supply

SUPPLY FUNCTION
70.00
65.00
60.00
55.00
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-
- 25 50 75 100 125 150 175 200 225 250
The Law of Supply

SUPPLY FUNCTION
70.00
65.00
60.00
55.00
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-
0 25 50 75 100 125 150 175 200 225 250
Quantity Supplied (in kilos) (Initial) Quantity Supplied (in kilos) (Increase)
Non-Price Factors affecting Change in Demand
Ceteris Paribus Assumption
Non-Price Factors Affecting
Quantity Demanded
• Tastes and preferences
• Income
• Expectation on future prices
• Prices of related goods (substitute
components and complements)
• Size of population
Non-Price Factors Affecting
Quantity Supplied
• Cost of Production
• Availability of economic resources
• Number of firms in the market
• Technology applied
• Producer’s goals
Ceteris Paribus Assumption
 In analyzing the functional relationships between price and quantity demanded, as
well as price and quantity supplied, these factors (non-price) are assumed to be
constant.
 The law of demand states “assuming other things constant, price and quantity
demanded are inversely proportional.”
 The law of supply states “other things assumed as constant, price and quantity
supplied are directly proportional”
 This known as the Ceteris Paribus Assumption.
Market Equilibrium
DEMAND & SUPPLY FUNCTION
70.00
65.00
Surplus
60.00
55.00
50.00
45.00
40.00
35.00
30.00
25.00
20.00
Deficit
15.00
10.00
5.00
-
0 25 50 75 100 125 150 175 200 225 250

Quantity Demanded (in kilos) (Initial) Quantity Supplied (in kilos) (Initial)
Market Equilibrium
Combining the demand and supply curves will show the point of market equilibrium.
 Market Equilibrium – the point where demand and is equal to supply.
Market Equilibrium
DEMAND & SUPPLY FUNCTION
70.00
65.00
60.00
55.00
50.00
45.00
40.00 Equilibrium
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-
0 25 50 75 100 125 150 175 200 225 250

Quantity Demanded (in kilos) (Initial) Quantity Supplied (in kilos) (Initial)
Thank You