DEMAND

•It shows the various amounts of a

product that consumers are willing and
able to purchase at each of a series of
possible prices during a specified period
of time.
Demand in Output Markets
ANNA'S DEMAND
• A demand schedule is a
SCHEDULE FOR table showing how much
TELEPHONE CALLS of a given product a
PRICE
QUANTITY
DEMANDED
household would be
(PER (CALLS PER willing to buy at different
$
CALL)
0
MONTH)
30
prices.
0.50
3.50
25
7
• Demand curves are
7.00 3 usually derived from
10.00 1
15.00 0
demand schedules.
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is a
TELEPHONE CALLS graph illustrating how
QUANTITY
PRICE
(PER
DEMANDED
(CALLS PER
much of a given product
$
CALL)
0
MONTH)
30
a household would be
0.50
3.50
25
7
willing to buy at different
7.00
10.00
3
1
prices.
15.00 0
 • The law of demand states
The Law of Demand that there is a negative, or
inverse, relationship
between price and the
quantity of a good
demanded and its price.
• All else equal, as price falls
the demand increases. As
price rises, the demand
decreases.
• This means that demand
curves slope downward.
Determinants of Demand
• Tastes / Customer Preferences
• Number of Buyers
• Income
• Superior or Normal Goods – products whose demands varies directly
with income.
• Inferior Goods - Goods whose demands varies indirectly with income.
• Customer / consumer Expectations
• Price of Related Goods
• Substitute Goods – one that can be used in place of another good.
• Complementary Goods – one that is used together with another good.
Shift of Demand Versus Movement Along a Demand
Curve

• A change in demand is
not the same as a change
in quantity demanded.
• In this example, a higher
price causes lower
quantity demanded.
• Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded

• When demand shifts to

the right, demand
increases. This causes
quantity demanded to be
greater than it was prior to
the shift, for each and
every price level.
A Change in Demand Versus a Change in Quantity
Demanded
To summarize:

Change in price of a good or service

leads to

Change in quantity demanded

(Movement along the curve).

Change in income, preferences, or

prices of other goods or services
leads to

Change in demand
(Shift of curve).
The Impact of a Change in Income

• Higher income • Higher income

decreases the demand increases the demand
for an inferior good for a normal good
 The Impact of a Change in the Price
of Related Goods
• Demand for complement good
(ketchup) shifts left

• Demand for substitute good (chicken)

shifts right

• Price of hamburger rises

• Quantity of hamburger
demanded falls
Supply

the various amounts of a product that

producers are willing and able to make
available for sale at each of a series of
possible prices during a specific period.
Supply in Output Markets
CLARENCE BROWN'S • A supply schedule is a
SUPPLY SCHEDULE FOR table showing how much of
SOYBEANS
a product firms will supply at
QUANTITY
SUPPLIED different prices.
PRICE (THOUSANDS OF • Quantity supplied
(PER BUSHELS PER
BUSHEL) YEAR) represents the number of
$ 1 0 units of a product that a firm
1.75 10
2.25 20 would be willing and able to
3.00 30 offer for sale at a particular
4.00 45
5.00 45 price during a given time
period.
The Supply Curve and
the Supply Schedule
• A supply curve is a graph illustrating how much
of a product a firm will supply at different prices.
CLARENCE BROWN'S

Price of soybeans per bushel ($)

6
SUPPLY SCHEDULE
FOR SOYBEANS 5
QUANTITY
SUPPLIED
4
PRICE (THOUSANDS
3
(PER OF BUSHELS
BUSHEL) PER YEAR) 2
$ 2 0
1.75 10 1
2.25 20
3.00 30 0
4.00 45
5.00 45 0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
The Law of Supply • The law of supply states that
there is a positive relationship
between price and quantity of
Price of soybeans per bushel ($)
6
5 a good supplied.
4 • As price rises, the quantity
3 supplied rises; as price falls,
2 the quantity supplied falls.
1
0
• This means that supply curves
0 10 20 30 40 50
typically have a positive slope.
Thousands of bushels of soybeans
produced per year
Determinants of Supply
• Resource Prices / Cost of PRoduction -The price of the good or
service.
• Technology
• Taxes and Subsidies
• Number of Sellers
• Producers Expectation
A Change in Supply Versus
a Change in Quantity Supplied

• A change in supply is
not the same as a
change in quantity
supplied.
• In this example, a higher
price causes higher
quantity supplied, and
a move along the
supply curve.
• In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
A Change in Supply Versus
a Change in Quantity Supplied

• When supply shifts

to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.
A Change in Supply Versus
a Change in Quantity Supplied
To summarize:

Change in price of a good or service

leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
MARKET EQUILIBRIUM is when Demand is
equal to Supply
• When supply exceeds Demand
there is surplus.
• When Demand exceeds Supply
there is shortage
LAW OF DEMAND AND SUPPLY
• Law of Demand and Supply states that In all other things equal, when
Demand is greater than Supply, Price increases. When Supply is
greater than Demand, Price Decreases.
• When Demand is less than Supply, Price Decreases. When Supply is
less than Demand, Price Increases.
Applications in the Analysis of Supply and
Demand
 Setting the Minimum Wage
 In the labor market, workers are the ones supplying labor
services. Laborers are willing to render more hours of
work if the price of labor (wage rate) is increased. Firms
are the ones consuming labor services and they are
willing to increase demand if the wage rate is decreased.
Applications in the Analysis of Supply and
Demand
(Minimum Wage)
 If the government
sets a minimum wage
above the equilibrium
wage rate determined
by the market, a
disequilibrium occurs.
 As a result, there will
be huge
unemployment
Applications in the Analysis of Supply and
Demand
 Exchange Rate Control
 The commodity sold is dollar and its price is shown in
terms of peso per dollar or currency exchange rate
 If the price of dollar is high, importers would demand less
of the foreign currency, while exporters will have the
incentive to increase exports.
Applications in the Analysis of Supply and
Demand
(Exchange Rate Control)
 Setting up a foreign
exchange control
which sets the price
of dollar below its
equilibrium exchange
rate of 70php per US
dollar (50 php) will
lead to an excess
demand of dollars
amounting to QmQy
Demand and Supply in the Black Market

 When the government intervenes in the

market, it can lead to a disequilibrium
situation which ultimately can end up with
the formation of a black market for the
regulated good
 Using the previous example, if the
government limits the supply of dollars, the
black market might occur, in this case the
supply curve of dollars will shift.
Demand and Supply in the Black Market
 At a price lower than 50, there
is no risk, but at price higher
than 60, the supply curve will
increase steeply (due to
danger and risk of illegal
operation) compared to the
original supply curve. At the
new supply curve the
equilibrium price of dollar can
be 90
 Therefore, it is possible that
the price set in the black
market for dollars be higher
than the equilibrium price if the
market was not controlled
Applications in the Analysis of Supply and
Demand
 Effect of Taxes on
Market Equilibrium
 Tax: A charge placed
on the production of a
good and service by
the government. A tax
will increase the cost
of production to the
producer. It is makes
it more expensive to
produce
Effect of Taxes and Subsidies on Market
Equilibrium
 Effect of Subsidies on
Market Equilibrium
 Subsidy: This is a payment
of money by the
government to a producer
in order to encourage them
to produce or supply a
certain good or service. A
subsidy will reduce the cost
of production to the
producer. It makes it
cheaper to produce.
Conclusion
 We have seen how the market system operates
in determining the value of various commodities.
Aside from showing how the equilibrium price
was established using demand and supply
analysis, we have seen several applications of
this simple framework in understanding the
consequences of disequilibrium situations
arising from setting the price beyond or below
the market determined level.