APPLICATION OF

DEMAND AND SUPPLY

 MARKET
It is an interaction
between buyers and
sellers of trading or
exchange.
 THREE TYPES OF MARKET
1. Goods Market- it is where consumers buy
goods.
2. Labor Market- it is where workers offer
services and look for jobs, and where
employers look for workers to hire.
3. Financial Market- which includes the stock
market where securities of corporations are
traded.
 DEMAND
It is the willingness of a
consumer to buy a commodity
at a given price.
Demand Function- it shows how the quantity demanded of
a good depends on its determinants, the most important of
which is the price of the good itself.

Qd = f(P)

This signifies that the quantity demanded for a good

is dependent on the price of that good.
 Demand Schedule- it shows the various quantities
the consumer is willing to buy at a various price.
Qd = 6 – P/2
Table 2.1 Hypothetical Demand Schedule of Martha for Vinegar (in bottles)

Price per bottle Number of bottles

P0 6
2 5
4 4
6 3
8 2
10 1
Figure 2.1 Hypothetical Demand Curve of Martha for Vinegar (in bottles) for One Month
The downward slope of the curve indicates that
as the price of vinegar increases, the demand
for this good decreases. The negative slope of
the demand curve is due to income and
substitution effects.
Income Effect- it is felt when a change in the price
of a good changes consumer’s real income or
purchasing power, which is the capacity to buy with a
given income.

Substitution Effect- it is felt when a change in the

price of a good changes demand due to alternative
consumption of substitute goods.
 LAW OF DEMAND
As price increases, the quantity
demanded for that product decreases.
 NON-PRICE DETERMINANTS
OF DEMAND
1. If consumer income decreases, the capacity to
buy decreases and the demand will also decrease
even when price does remain the same.
2. Improved taste for a product will cause a
consumer to buy more of that good even if its price
does not change.
3. Consumer’s expectations of future price and
income. Consumers tend to anticipate changes in
the price of a good.
 NON-PRICE DETERMINANTS
OF DEMAND
4. Prices of related goods as substitutes or
complements also determine demand.
a) Substitute Goods are those that are used in
place of each other. An increase in demand for
one good leads to a decrease in the demand for
the other good.
b) Complementary Goods are goods that are used
together. An increase in demand for a good will
lead to an increase in demand for the
compliment.
 NON-PRICE DETERMINANTS
OF DEMAND
5. The number of consumers is also an important
determinant that will affect market demand for a
good. The population makes up the group of
consumers who will buy the product. The higher
the population, the more consumers and the
higher will be the demand for the good.

D = f(P, T, Y, E, PR, NC)

 SHIFTS OF THE DEMAND CURVE
When a change in the price of a good causes the quantity demanded for that good to
change, this is illustrated on the same demand curve and is simply a movement from
one point to another on that curve.
 SUPPLY
It refers to the quantity of goods that a
seller is willing to offer for sale.

Supply Function
It shows the dependence of supply on the
various determinants that affect it.
 Supply Schedule
It shows the different quantities the seller is willing to sell at various price.
Qs = 100 + 5P
 LAW OF SUPPLY
As price increases, the quantity
supplied of that product also increases.
 NON-PRICE DETERMINANTS
OF SUPPLY
1. Cost of Production- it refers to the expenses
incurred to produce the good.
2. Technology- the use of improved technology in
the production of a good will result in the
increased supply of that good.
3. Availability of Raw Materials and Resources-
since more resources can be used to produce a
bigger output of the good, then supply increases.
 The leftward
shift of the
curve indicates
decrease in
supply. The
rightward
shift indicates
an increase in
supply.
 MARKET EQUILIBRIUM
Equilibrium- is a state of balance when demand is equal to
supply. It is an implicit agreement between how much
buyers and sellers are willing to transact.

Equilibrium Price- the price at which demand and supply

are equal.

Market Equilibrium- is attained at the point of intersection

of the demand and supply curves. It is attained when the
quantity demanded is equal to the quantity supplied.
SHORTAGE
- Price below Market Equilibrium
- Quantity Demanded is greater than Quantity Supplied
- As price increases some buyers drop out and more sellers enter.

SURPLUS
- Price above Market Equilibrium
- Quantity Demanded is lower than Quantity Supplied
- As price drops, some sellers drop out and more buyers enter.
 THE MARKET EQUILIBRIUM
POINT IS THE ONLY POINT
WHERE THE PRICE IS STABLE.
DETERMINATION OF MARKET EQUILIBRIUM