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Background:
Demand
Demand is how many people want the goods that are available. If many people want the goods available, there
is high demand. If there aren't many people who want the goods available, there is a low demand.
Determinants of Demand
1. Income. The amount of money people earns affects how much or how little
they buy.
2. Population. More people means more demand for goods and services.
3. Tastes and preferences. Demand for goods and services increases when
people like or prefer them.
4. Price Expectations. When people find out that prices are about to increase,
they buy more of these goods before the price changes.
5. Price of related goods. When the price of a certain good increases, people
tend to buy substitute products.
Law of demand
The law of demand is a fundamental principle of economics which states that at a higher price consumers will
demand a lower quantity of a good. Demand is derived from the law of diminishing marginal utility, the fact that
consumers use economic goods to satisfy their most urgent needs first
The Ceteris Paribus Assumption
The law of demand states that as price increases, quantity demanded
decreases, and as price decreases, quantity demanded increases. Such theory
is true if we apply the Ceteris Paribus assumption wherein it assumes that “all
other things equal or constant.” Meaning, the determinants of demand are
constant and are not considered as factors that will affect demand in the market.
Thus, the law of demand, using the Ceteris Paribus, can be restated as
“assuming that the determinants of demand are constant, price and
quantity demanded are inversely proportional to each other.”
Price Quality
Demand
5 35
10 30
15 25
20 20
25 15
30 10
35 5
From the table, it is shown that anindividual would tend to buy more whenits price is low than when the price is
high.
At a price of P35.00, quantity demandedby the consumers is 5 while a decreaseof price to P5.00 increases the
quantity
In Figure 1, price is presented on thevertical axis and quantity demanded on
he horizontal axis. The points can be connected in a continuous curve. We
abel our demand curve with D, which means demand, to indicate that it is the
entire demand schedule. It can be noted that the demand
curve is sloping down. It shows that price and quantity demanded are inversely
proportional. This inverse relationship between prices and quantity demanded
depicts the law of demand.
Supply
Supply is the amount of goods available at a given time. If there is a lot of
something available for sale, the supply is high. If there isn't enough of something
available for sale, there is a scarcity.
Determinants of Supply
1. Technology. This refers to the method of production or how something is
produced. Having modern technology means being able to produce more. This
means more supply.
2. Cost of production. This refers to the things a producer has to spend on to
keep making goods and services.
3. Number of sellers. More sellers or more factories means an increase in
supply.
4. Prices of other goods. Since a price increase means less demand, a
producer may choose to produce something else to continue gaining profit or
to have more profit.
5. Price expectations. If producers expect prices to rise very soon, they usually
keep their goods and then release them in the market when the prices are
already high.
Law of Supply
The law of supply is a basic principle in economics that asserts that, assuming all else being constant, an
increase in the price of goods will have a corresponding direct increase in the supply thereof. The law of supply
depicts the producer’s behavior when the price of a good rises or falls.
The Ceteris Paribus Assumption of Supply
The law of supply is only correct if we apply the assumption of ceteris
paribus. This means the law of supply is valid if the determinants of supply like
cost of production, technology, number of sellers and so forth, are held constant.