DEMAND AND SUPPLY

● Demand Curve
○ Quantity of a good a person is willing to buy
depends on the good’s price
○ Relates quantity demanded to price
○ Downward sloping
○ Variables held constant by cet.par.
■ Population
■ Income
■ Tastes
■ Prices of other goods
■ Special influences (subsidies, expectations
of future prices, etc.)
○ ↑P, ↓Q
○ Negative Slope
■ Substitution Effect
● Lowering price brings in new buyers
■ Income Effect
● Can afford to buy more of the same good
○ Market Demand
■ Sum total of all individual demands
■ Found by adding together quantities demanded by all individuals at each
price
Individual A Individual B Market Demand

Php 8 5 4 9

Php 10 4 3 7
○ Shifts
■ When one of the variables in the cet.par. Assumption changes
■ Increase or decrease in demand

Increase in demand
● Supply Curve
○ Quantity of the good that a producer is willing to
produce depends on the good’s price
○ Relates quantity supplied to price
○ Upward sloping
○ Variables held by cet.par.
■ Technology
■ Input prices
■ Prices of related goods
■ Government policy
■ Special influences
○ ↑P, ↑Q
○ Market Supply
■ Aggregate the supply of all individual
producers
Producer A Producer B Market Supply

Php 8 3 2 5

Php 10 5 3 8
○ Shifts
■ When one of the variables in cet.par. Assumption changes
■ Increase or decrease

● Market
○ Impersonal mechanism of bringing together buyers and producers/sellers of a
good or service
○ Price System
■ Acts as a signal to buyers and producers/sellers of a good or service
● Adam Smith
○ Laissez faire
■ French term meaning “leave alone”
■ Free market capitalism
● Government leaves markets alone
○ Invisible Hand
■ Pursuit of individual self-interest and freedom of production and
consumption in free market economy
 ■ Greatest welfare for society is attained
● Market Equilibrium
○ Intersection of supply and demand curves
○ Willingness to buy = willingness to make
○ Point where everybody is happy
○ Shortage and surplus will regulate and return this
point
● Government
○ Address market failures
○ Provide legal framework under which the economy
operates
● Shifts
○ Shift of Demand

■
■ Movement along the supply curve
○ Shift of Supply

■
■ Movement along the demand curve
● Applications
○ Consumption of a good brings together a willing buyer and a willing seller in the
market