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INC.
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Accredited by ACSCU-ACI
Landline No. (082) 291 1882

BACC 1
BASIC MICROECONOMICS

LEA
RNING MODULE
SY 2020 - 2021

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Week 3

Unit 1: The Basic Analysis of Demand and Supply

Topic: Market

Learning Outcomes:
1. Define and know the difference between demand and
supply
2. Identify the ways forces of demand and supply
affect its curve
3. Categorize the forces or factors that affect the
level of demand and supply

Concepts Digest (Discussion)

Demand is generally affected by the behavior of consumers,

while supply is usually affected by the conduct of
producers. The interplay between these two is the foundation
of economic activity. Thus, the consumer identifies his or
her needs, wants, and demands, while producers address these
by accordingly producing goods and services. In the end, the
consumer gains satisfaction while the producer gains profit.

As the economy cannot operate without this interaction

between the consumer and the producer, it is essential,
therefore, that students understand the different movements
of the demand and supply curves, as well as the concept of
market equilibrium.

Market
Take note that when there is demand for a good or service,
there is a market. A market is where a buyer and sellers
meet. It is the place where they both trade or exchange
goods or services in other words, it is where their
transaction takes place. There are different kinds of
markets, such as wet and dry. Wet market is where people
usually buy vegetables, meat, etc. on the other hand, dry
market is where people buy shoes, clothes, or other dry
goods. However, in economic, the terms market does not
necessarily refer to a tangible area where buyers and
sellers could be seen transacting. It can represent an
intangible domain where goods and services are traded, such
as the stock market, real estate market, or labor market
where workers offer their services, and employers look for
workers to hire.

Demand
Demand pertains to the quantity of good or service that
people are ready to buy at given prices within a given time
period, when other factors besides price are held constant.
Simply put, the demand for a product is the quantity of good
or service that buyers are willing to buy given its price at
a particular time. Demand therefore implies three times:

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  Desire to possess a thing (good and service)
 The ability to pay for it or means of purchasing it
(price) and
 Willingness in utilizing it

Methods of Demand Analysis

Demand can be analyzed in several ways. However, the most
common way of analyzing demand is through demand schedule,
demand curve, and demand function.

Demand Schedule
A demand schedule is a table that shows the relationship of
prices and the specific quantities demanded at each of these
prices. Generally, the information provided by a demand
schedule can be used to construct a demand curve showing the
price-quantity demanded relationship in graphical form.
Table 2.1 presents a hypothetical demand schedule for rice
per month.
Table 2.1
Hypothetical Demand Schedule for Rice per Month
situation Price(p) Quantity (kg)
A 5 8
B 4 13
C 3 20
D 2 30
E 1 45

The table shows the various prices and quantities for the
demand per month. For instance, at a given price of P5 the
buyer is willing to purchase only 8 kilos of rice (situation
A); however, at a price of P1, he is willing to buy 45 kilos
of rice (situation E).

Take note that as the price goes up (down) the quantity of

rice being purchased by the consumer goes down (up). This
implies that quantity demanded is inversely related with
price. In other words, consumers are not willing to purchase
more rice at higher prices but will consume more if the
prices are low.

Demand Curve
As we have said earlier, the demand curve is a graphical
presentation showing the relationship between the price and
quantities demanded per time period. A demand curve has
negative slope, thus it slopes downward from left to right.
The downward slope indicates the inverse relationship
between price and quantity demanded.
Take note that the most demand curve slope downwards because
(a) as the price of product falls, consumers will tend to
substitute this (now relatively cheaper) product for others
in their purchases; (b) as the price of the product falls,
this serves to increase their real income allowing them to
buy more products.
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Let us assume that the price of good A is at price P o. At
this price level, quantity demanded for good A is at Qo and
therefore demand will be at point D oalong the demand curve
D1. However, if price will increase to P 1, quantity demanded
will decrease to Q1and the demand will move upwards toward
point D1along the same demand curve. The reason why quantity
demanded decreased after the price increased to P 1, because
of the inverse relationship price and quantity demanded.
Thus, in such situation, consumers will purchase less of
good A at higher prices than when it was at its original
price Po.
But what will happen to quantity demanded if price will
decline to say P2? It you said quantity demanded will
increase to Q2, then you are correct. Why? Because as we can
see in the same figure, if price will decrease to P2quantity
demanded will increase to Q2 and demand will there be at
point D2. Observe again that the reverse happened when price
of good A declined to P2. In this case quantity demanded
increased to Q2. Why? Because consumer will purchase more of
good A at lower prices than when it was at its original
price Po. This brings us now to the Law of Demand which
states that “if price goes UP, the quantity demanded of a
good will go Down, the quantity demanded of a good will go
UP ceteris paribus’. The reason for this is because consumer
always tend to MAXIMIZE SATISFACTION.

Demand function
Demand can also be analyzed mathematically through a demand
function. A demand function also shows the relationship
between demand for a commodity and the factors that
determine of influence this demand. These factors are the
price of the commodity itself, prices of other related
commodities, level of incomes, taste and preferences, size
and composition of level of population, distribution of
income etc. demand function is expresses as a mathematical
function. Thus, we can show our mathematical function for
demand as: QD=f products own price, income of consumers,
price of related goods, et.)

We can therefore come up with the demand equation as:

QD= a-bP

Where:
QD = quantity demanded at a particular price
a= intercept of the demand curve
b = slope of the demand curve
P = price of the good at a particular time period

We can now illustrate our demand function using a

hypothetical example. Let us assume that the current price
of good A is P5.00. The intercept of the demand curve is 3
while the slope is 0.25. If we want to determine how much of

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good A will be demanded by consumer X, we can simply
substitute the given values to our equation, thus:

QD= 3-0.25(5)
= 3-1.25
QD= 1.75 units of good A

But, what if the price of good A will increase to P6.00?

What will now be the new quantity demanded by consumer X? If
you say 1.5 units, then you are correct. Again, by simply
substituting our values to our demand equation, you will
arrive at the new quantity demanded. What happened to
quantity demanded? There is a decrease of 0.25 units because
of the increase in price. Again, this is because of the
inverse relationship between price and quantity demanded.

Change in Quality Demanded vs. Change in Demand

Before we go further with our discussion of the concept of
demand, let us first distinguish change in quantity demanded
and change in demand. This is important since a change in
quantity demanded must not be confused with a change in
demand.

Change in quantity demanded

We can say that there is change in quantity demanded
(symbolized as rQD). If there is a movement from one point
to another point or from one price-quantity combination to
another along the same demand curve. A change in quantity
demanded is mainly brought about by an increase (a decrease)
in the product’s own price. The direction of the movement
however in inverse considering the Law of Demand.

Change in demand
There is a change in demands if the entire demand curve
shifts to the right(left) resulting to an increase
(decrease) in demand due to other factors other than price
of the good sold. At the same price, therefor, more amounts
of a good or service are demanded by consumers.

Forces that cause the demand curve to change

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There are several reasons why demand changes and thus cause
the demand curve to move either upwards or downwards. The
following are the more general reasons for the change in
demand.

Taste or preferences
Tastes or preferences pertain to personal likes or dislikes
of consumers from certain goods and services. If tastes or
preferences change so that people want to buy more of a
commodity at a given, then an increase in demand will result
or vice versa.

Changing incomes
Increasing incomes of households raise the demand for
certain goods or services or vice versa. This is because an
increase I one’s income generally raises his or her capacity
or power to demand for goods or services.

Occasional or seasonal products

The various events or seasons in a given year also result
the demand curve with reference to particular goods.

Population change
An increasing population leads to an increase in the demand
for some types of goods or service, and vice versa. This
simply means that more goods or services are to be demanded
because of rising population.

Substitute and complementary goods

Substitute goods are goods that are interchanged with
another good. In addition where the price of a particular
good increases, a consumer will tend to look for closely
related commodities. Substitute goods are generally offered
at cheaper price, consequent making it more attractive for
buyers to purchase.

Nominal good and inferior good

Normal goods can be defined as those goods for which demand
increases when the income of the consumer increases.

Other types of goods

 Necessity good – something needed for basic human
existence, e.g. food, water, housing, electricity.
Though this becomes a subjective term, is electricity a
necessity? Is broadband internet a necessity?
 Comfort good – a good which isn’t a necessity, but
gives enjoyment/utility, e.g. subscription to Netflix
or take-away food. A comfort good may become a luxury.
 Complementary Goods. Goods which are used together,
e.g. TV and DVD player. see: Complementary goods
 Substitute goods. Goods which are alternatives, e.g.
Pepsi and Coca-cola. See Substitute goods.

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  Giffen good. A rare type of good, where an increase in
price causes an increase in demand. The reason is that
the income effect of a rise in the price causes you to
buy more of this cheap good because you can’t afford
more expensive goods. For example, if the price of
wheat rises, a poor peasant may not be able to afford
meat anymore, so has to buy more wheat. See: Giffen
goods
 Possible examples of Giffen good – rice, potatoes,
bread.
 Veblen / Snob good. A good where an increase in price
encourages people to buy more of it. This is because
they think more expensive goods are better. See: Veblen
good
 Example of Veblen / Snob good – some forms of art,
designer clothes.

Market Failure
 Public goods – goods with characteristics of non-
rivalry and non-excludability, e.g. national defence.
See: Public Goods
 Quasi-public good – goods which have some of the
characteristics of non-rivalry and non-excludability,
but not 100%. For example, interest is mostly very
cheap to access. Once provided, you can access most
website – though some websites may charge to view (e.g.
newspapers).
 Merit goods. Goods which people may underestimate
benefits of. Also often has positive externalities,
e.g. education. See: Merit goods
 Demerit goods. Goods where people may underestimate the
costs of consuming it. Often has negative
externalities, e.g. smoking, drugs. See: Demerit goods
 Private goods – goods which do have rivalry and
excludability. The opposite of a public good
See: private goods
 Free goods – A good with no opportunity cost, e.g.
breathing air. See: Free good

Activities (Formative)
Title: matching type
Things to do:
Read the description below and select the correct answer in
the box provided. Write your answer on the space provided
each letters indicated below.

Profit Market Equilibrium

Shortage Satisfaction ↑ in demand
↑ in supply ↓ in demand ↓ in supply
Surplus Consumer population change
changing income weather condition
technological change if there is
shortage

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changes in expectation taste of references
factors of production substitute goods

_____a. He demands for goods and services

_____b. Higher demand, less supply
_____c. The main goal of firms
_____d. A taste of balance
_____e. the place where buyer and trade
_____f. when supply curve shifts to the left
_____g. when demand curve shifts to the right
_____h. when supply curve shifts to the right
_____i. when demand curve shifts to the left
_____j. price ceiling
_____k. forces that affect the slope of demand
_____l. floor price
_____m. forces that affect the slope of supply

Assessment (Summative)
Title: Composition
Date of Submission:
Rubric Used:
Things to do:
1. What are the reasons why he demand curve increases
or decreases?
_________________________________________________
_________________________________________________
_________________________________________________
2. What are the reasons why the supply curve increases
or decreases?
_________________________________________________
_________________________________________________
_________________________________________________

References:

R1: Basic Microeconomics Avila-Bato/ Malveda/Vira

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