Basic Analysis of Demand and Supply

Market

Where buyers and sellers meet

Where transactions take place

Where do transactions take place?
Basic Analysis of Demand and Supply
Demand
Ability to
pay for it
You cannot always
buy them just by Desire to Willingness
want/desire possess a in utilizing
because you face
constraints
thing it

Demand
Opportunity Cost
• Every decision to buy one thing is a
choice NOT to buy the other. The
option not chosen is the
opportunity cost.
Basic Analysis of Demand and Supply
Law of Demand

Price

Demand

*Ceteris Paribus
Ceteris Paribus
• Ceteris Paribus is a Latin term for
all other things being equal or held
constant.
Validity and Justification of Law of Demand
Basic Analysis of Demand and Supply
Determinants of Demand
• Factors that actually influence the
quantity of demand.
 Determinants of Demand
Consumer’s
Population Income
Change

Expectation
Consumer
of Future
Tastes
Prices

Occasional/S Price of
easonal Related
Products Products

PC C
CT E
O P
 Consumers’ Income

PC C

CT E
O P *changes demand depending on the types of goods
 PC C

CT E
O P
 Determinants of Demand

Population Consumer’s
Change Income

Expectation
Consumer
of Future
Tastes
Prices

Occasional/S Price of
easonal Related
Products Products

PC C
CT E
O P
 Expectations of Future Prices
• Prices expected in future periods

PC C
CT E
O P
 Determinants of Demand

Population Consumer’s
Change Income

Expectation
Consumer
of Future
Tastes
Prices

Occasional/S Price of
easonal Related
Products Products

PC C
CT E
O P
 Prices of Related Products
• Changes in prices of related goods
• The direction in which demand would
change depends on the relationships
of products.

PC C
CT E
O
P
 Relationships of Products

Substitute Products Complementary Products

Goods that can be used in place of other Goods that go together/cannot be used
goods without the other
Gasoline and LPG Mini4WD and Accessories

PC C
CT E
O
P
 Determinants of Demand

Population Consumer’s
Change Income

Expectation
Consumer
of Future
Tastes
Prices

Occasional/S Price of
easonal Related
Products Products

PC C
CT E
O P
 Occasional/Seasonal Products
• Demand increases in various events/seasons in a given year

PC C
CT E

O P
 Determinants of Demand

Population Consumer’s
Change Income

Expectation
Consumer
of Future
Tastes
Prices

Occasional/S Price of
easonal Related
Products Products

PC C
CT E
O P
 Consumer’s Tastes/Preferences

etc

Age Tradition

Culture

Religion

PC C
CT E
O P
 Determinants of Demand

Population Consumer’s
Change Income

Expectation
Consumer
of Future
Tastes
Prices

Occasional/S Price of
easonal Related
Products Products

PC C
CT E
O P
 Population Change

PC C
CT E
O P
Basic Analysis of Demand and Supply
Demand Function
• Formula for showing the relationship between demand and its
determinants

• 𝑄𝑑 = 𝑓 (𝑃𝐺𝑆 , 𝐼, 𝐸𝑐 , 𝑃𝑅𝑃 , 𝑇𝑐 , 𝑃𝑜𝑝 )

• Where:
– PGS = Price of good/service
– I = Income
– Ec = Consumer’s Expectations
– PRP = Price of Related Products
– Tc = Consumer’s Tastes
– Pop = Population
Demand Schedule
• Table showing the relationship of price and demand

Points Price (Millions) Quantity Demanded

A 0 4000
B 1 3500
C 2 3000
D 3 2500
E 4 2000
F 5 1500
G 6 1000
H 7 500
Demand Curve
• Graph of the price and demand ceteris paribus
Price
8

0
0 500 1000 1500 2000 2500 3000 3500 4000 4500

Quantity Demanded
Basic Analysis of Demand and Supply
Supply
Services sold
at given price
to maximize
profit
You cannot always Maximum
sell them just to quantity of
Goods/services
maximize profit goods
willing to sell
because you face producers are
constraints willing to offer

Supply
Market Price
• It is the price that the sellers can
charge their product in a
competitive market.
Cost of Production
• The costs of the production
process and the prices of inputs
that they have used to make the
product
Basic Analysis of Demand and Supply
Law of Supply

Price Because Supply

↑ Price = ↑Profit

*Ceteris Paribus
Basic Analysis of Demand and Supply
 Technological Change

Cost of Inputs

Future Price Expectations

Price of Related Products

Determinants of Supply

Optimization of Production
Factors

Gov’t Regulation and Taxes

Gov’t Subsidies

Weather Conditions

Number of Firms
 Technological Change
*Due to state-of-
the-art machineries Production
able to mass
produce Cost
goods/services

Supply

*because profit increases as supply increases

Cost of Inputs Used
Cost of
Production
Quantity
supplied
*because profit decreases as supply decreases
Future Price Expectations

Price
The future Keep
expectation goods till
of price is the price
to go up rises

Supply
Price of Related Products
• Changes in the supply of goods have
significant effect in the supply of such goods.
Optimization of Production Factors
• The process/methodology of making
something as fully perfect, functional, or
effective as possible.
• Efficient use of resources
Gov’t Regulation and Taxes

Profit
Production
Cost
Tax
Supply
Gov’t Subsidies

Government Production Cost

Subsidies
(financial
Aids/Assistance)

More Profit
Weather Conditions

Bad
Weather

Good
Weather
Number of Firms or Sellers in the Market

Profit
Supplies

Dealers
Basic Analysis of Demand and Supply
Supply Function
• Formula for showing the relationship between Supply and its determinants

• 𝑄𝑠 = 𝑓 (𝑃𝐺𝑆 , 𝑇, 𝐶𝐼 , 𝑃𝐸 , 𝑃𝑅𝑃 , 𝑂𝐹𝑃 , 𝑇𝐺𝑅 , 𝑆𝐺 , 𝑊, 𝑁𝐹 )

• Where:
– PGS = Price of good/service
– T = Technology
– CI = Cost of Inputs
– PE = Expectation of Future Price
– PRP = Price of Related Products
– OFP = Optimization of Factors of Production
– TGR = Gov’t Regulations and Taxes
– SG = Gov’t Subsidies
– W = Weather Conditions
– NF = Number of Firms in the Market
Supply Schedule
• Table showing the relationship of Price and Supply

Points Price (Millions) Quantity Supplied

A 0 -2000
B 1 -1000
C 2 0
D 3 1000
E 4 2000
F 5 3000
G 6 4000
H 7 5000
Supply Curve
• Graph of the price and Supply ceteris paribus
8

7 5000, 7

6 4000, 6

Price (millions)
5 3000, 5

4 2000, 4
Price
3 1000, 3

2 0, 2

-1000,1 1

-2000, 0 0
-3000 -2000 -1000 0 1000 2000 3000 4000 5000 6000
Quantity Supplied
Basic Analysis of Demand and Supply
Market Equilibrium
Equilibrium
Demand Supply

D S
D S
D S

Equilibrium Market Price

Equilibrium Market Price
Buyer

Equilibrium
Market
Price

Seller
Equilibrium using Demand and Supply Schedule
Price Quantity Quantity State of Pressure on
Points
(millions) Demanded Supplied Market Price
Shortage
A 0 4000 -2000 Upward
-5000
Shortage
B 1 3500 -1000 Upward
-4500
Shortage
C 2 3000 0 Upward
-3000
Shortage
D 3 2500 1000 Upward
-1500
Equilibrium
E 4 2000 2000 Neutral
0
Surplus
F 5 1500 3000 Downward
1500
Surplus
G 6 1000 4000 Downward
3000
Surplus
H 7 500 5000 Downward
4500
Equilibrium using Demand and Supply Curves
8

6
Equilibrium
Point
Price (Millions)

4
Demand
Supply
3

0
-3000 -2000 -1000 0 1000 2000 3000 4000 5000
Quantity Demanded

What happens when there is a market disequilibrium?

Shortage
Shortage
8

6 Shortage
Quantity Supplied

4
Demand
Supply
3

0
-3000 -2000 -1000 0 1000 2000 3000 4000 5000
Quantity Demanded

Prices have the tendency to go UP to restore the equilibrium

(without government intervention)
Equilibrium using Demand and Supply Schedule
Price Quantity Quantity State of Pressure on
Points
(millions) Demanded Supplied Market Price
Shortage
A 0 4000 -2000 Upward
-5000
Shortage
B 1 3500 -1000 Upward
-4500
Shortage
C 2 3000 0 Upward
-3000
Shortage
D 3 2500 1000 Upward
-1500
Equilibrium
E 4 2000 2000 Neutral
0
Surplus
F 5 1500 3000 Downward
1500
Surplus
G 6 1000 4000 Downward
3000
Surplus
H 7 500 5000 Downward
4500
Surplus
Surplus
8

6 Surplus
Quantity Supplied

4
Demand
Supply
3

0
-3000 -2000 -1000 0 1000 2000 3000 4000 5000
Quantity Demanded

Prices have the tendency to go DOWN to restore the equilibrium

(without government intervention)
Equilibrium using Demand and Supply Schedule
Price Quantity Quantity State of Pressure on
Points
(millions) Demanded Supplied Market Price
Shortage
A 0 4000 -2000 Upward
-5000
Shortage
B 1 3500 -1000 Upward
-4500
Shortage
C 2 3000 0 Upward
-3000
Shortage
D 3 2500 1000 Upward
-1500
Equilibrium
E 4 2000 2000 Neutral
0
Surplus
F 5 1500 3000 Downward
1500
Surplus
G 6 1000 4000 Downward
3000
Surplus
H 7 500 5000 Downward
4500
Basic Analysis of Demand and Supply
Market Interference
• utilized supply and demand models are only
possible in an unregulated market
• In real world situations, governments around
the world try to control prices because:
– Some sectors do not benefit
– Some sectors take advantage of price controls
Price Control
• Specification of MINIMUM PRICE and/or
MAXIMUM PRICE of goods and services
by the government.
Price Ceiling
• Legal maximum price imposed by the
government.
• Used only by the government if there is a
persistent SHORTAGE OF GOODS
Price Ceiling
8

6
Quantity Supplied

4
Demand
Supply
3

0
-3000 -2000 -1000 0 1000 2000 3000 4000 5000
Quantity Demanded

*to protect the consumers from the rising price of supplies

Price Floor
• Legal MINIMUM PRICE imposed by the
government.
• Used only by the government if there is a
persistent SURPLUS OF GOODS
Price Floor
8

6
Quantity Supplied

4
Demand
Supply
3

0
-3000 -2000 -1000 0 1000 2000 3000 4000 5000
Quantity Demanded

*to protect the producers from the falling price of supplies

 Humans and animals are both selfish. They virtually don’t
care about others. They say clever things, make relationships
where both sides use each other, and look for a way to profit
themselves while limiting the loss for the other group.