Chapter 2 Demand and Supply

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: Basic Microeconomics 2nd Semester-2020-2021
College College: __BUSINESS EDUCATION

Logo Campus :__Bayombong_____
DEGREE COURSE NO. ECO1

PROGRAM
SPECIALIZATION COURSE TITLE Basic Microeconomics
YEAR LEVEL TIME FRAME WK NO IM NO.
I. UNIT TITLE/CHAPTER TITLE
Demand and Supply
II. LESSON TITLE
Demand and Supply
III. LESSON OVERVIEW
This explains the rudiments of demand, the law of demand, and applications in the economy. This also
explains the rudiments of supply, the law of supply, and its application in the economy. This also
explains how prices are determined in the market with the use of the law of supply and demand.
IV. DESIRED LEARNING OUTCOMES
This chapter hopes to provide a review of the fundamentals of demand, supply and market equilibrium
analysis. Thus, at the end of the chapter the student is expected to be able to:
1. Understand the underpinnings of demand and supply and use these concepts to analyze (qualitatively and
quantitatively) changing market conditions; and
2. Explain elasticity concepts and determine their measurements.
V. LESSON CONTENT
Chapter 2
DEMAND, SUPPLY AND MARKET EQUILIBRIUM
THE CONCEPT OF DEMAND – Demand refers to the various quantities of goods and services that consumers
are willing to purchase at a given price, ceteris paribus (holding all other factors constant).
THE LAW OF DEMAND – asserts that the quantity demanded of a good or service is negatively or inversely
related to its own price.
When the price increases, less of the good or service will be bought.
When the price decreases, more of the good or service will be bought.
Two reasons for the Inverse Relationship

1. Substitution effect - when price of a good decreases, the consumer substitutes the lower priced good
for the more expensive ones.
- when price of a good increases, the consumer tends to substitute it with the lower priced goods.
2. Income effect - When price decreases, the consumer’s real income (or purchasing power) increases, so
he tends to buy more.
“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced for educational
purposes only and not for commercial distribution,”
NVSU-FR-ICD-05-00 (081220) Page 1 of __
Prepared by Gayon P. Sarmiento, Ag Economics UPLB
- When price increases, the consumer’s purchasing power (or real income) decreases, so he tends to
buy less.
Three ways of presenting the demand relationship

The relationship between quantity purchased and alternative prices may be presented in 3 ways:
Demand schedule – in tabular form
Demand curve – in graphical form
Demand function – in equation form
Demand schedule
Table 1.1 Demand Schedule for Denim Pants

Price of Denim Pants Quantity Demanded per Month
(in Pesos) (No. of Pants)
0 8
50 7
100 6
150 5
200 4
250 3
300 2
350 1
400 0
Demand Curve – this refers to various quantities of goods and services that consumers are willing to purchase in
the market at all possible prices, per unit of time.
Demand Curve
P
400
Price (in pesos)
300
200
100
D
0 2 4 6 8 Q
Quantity
Figure 1.1. Demand Curve. The negative slope of the

demand curve depicts the inverse relationship between
price and quantity demanded.
Demand function
 Quantity demanded (Q) is expressed as a mathematical function of price (P). The demand function may thus be
written as:
Qd = a - bP
where
 a is the horizontal intercept of the equation or the quantity demanded when price is zero
 (-b) is the slope of the function.
Example: Qd = 8 - 0.02P
Factors Affecting Demand
 Price of the commodity – normally when the price of a commodity increases, the consumer tends to buy less
(decrease). This behavior is due to two reasons: Income effect and substitution effect
 Prices of related commodities (substitutes and complements) – there are two types of goods in this aspect:
substitutes and complements. For substitute goods, when the price of a substitute good increases the quantity
demanded for good X will increase as some of those buying the substitute good will shift to Good X. On the
other hand, when the price of a substitute good decreases, some of those buying good X will shift to the substitute
good bringing a decrease in quantity demanded of Good X.
 Consumer incomes – When income increases, more goods can be bought. Therefore, when income increases,
demand is likely to increase.
 Tastes and preferences – When taste and preferences of consumers change, demand for the goods and services
change. The demand for preferred goods and service would increase while demand for goods and services that
are not preferred would decline.
 Number of consumers – when the number of consumers increase, there will be more demand and when the
number of consumers will decrease, the demand for goods and services will decrease.
 Price expectations - When people expect that the price of a good or services increases in the future, consumers
would purchase the good or services today while prices are low. This would increase demand today.
The demand function would be presented this way:
Qdx = qx (Px, Ps, Pc, I, T, N, Pe)

Change in Quantity Demanded vs Change in Demand
 Change in quantity demanded – is a movement along the same demand curve, due solely to a change in price, i.e.,
all other factors held constant.
 Change in demand – is a shift in the entire demand curve (either to the left or to the right) as a result of changes in
other factors affecting demand.
Graphical illustrations
Change in quantity demanded
Fig. 1.2. Change in quantity demanded

Price
•A decrease in price from p1
to p2 brings about an
p1 increase in quantity
demanded from q1 to q2
•It is shown as a movement
along the same demand
p2 curve
Quantity
q1 q2
Change in Demand
Fig. 1.3. Change in demand

•An increase in demand
Price means that at the same
price such as p1 more will
be brought, due to other
factors such as increased
p1 incomes, increase in number
of consumers, etc.
•It is shown as a shift in the
entire demand curve
This is a
decrease in
demand D1
D0
D2
Quantity
q1 q2
Other factors affecting demand

 Income: as income changes, demand a commodity usually changes
 Normal goods – are goods whose demand respond positively to changes in income.
• Most goods are normal goods. As income increases, more of shoes, TVs, clothes, are bought.
 Inferior goods – are goods whose demand respond negatively to change in income
Few but existent. Examples are firewood, “tuyo”, “adidas or chicken feet”, bicycles, etc.
 Prices of related commodities in consumption:
 Substitutes – are goods that are substitutable with each other (not necessarily perfect).
• Examples are coffee and tea, Coke and Pepsi, beer and ginebra.
• When the price of a substitute increases, quantity bought of a good increases. --- P y Qx (direct
relationship)
 Complements – are goods that are used or consumed together.
• Examples are coffee and sugar, bread and butter, tennis rackets and tennis balls.
• When the price of a complement increases, quantity bought of a good decreases. --- P y Qx¯ (inverse
relationship)
 Consumer tastes and preferences:
 When consumer tastes shift towards a particular good, greater amounts of a good are demanded at each
price.
• Example: consumers preference for drinking mineral water increases so its demand curve will shift
rightward.
 If consumer preferences change away from a good, its demand will decrease; at every possible price, less
of the good is demanded than before.
• Example: the demand for VCDs and VHS tapes decreases due to preference for DVDs.
 Consumer expectations: Expectations about future prices and income affect our current demand for many goods
and services.
 If we expect prices of dried fish to increase with coming of the rainy season, we might stock up on the
good to avoid the expected price increase. Thus, current demand for dried fish might increase
 those who expect to lose their jobs due to bad economic conditions, will reduce their demand for a variety
of goods in the current period.
 Number of Consumers: affects the total demand for a good.
 Total demand is also known as market demand. It is the summation of the individual demand of all
consumers
 An increase in the number of consumers shifts the market demand curve to the right
 Example: demand for housing and transportation increases with an increase in population.
 On the other hand, less consumers will cause the market demand to decrease, resulting in a shift to the left of the
entire demand curve.
 Supply - refers to the various quantities of a good or service that producers are willing to sell at alternative
prices, ceteris paribus.
 Obviously, firms are motivated to produce and sell more at higher prices.
 Emphasizes the relationship between quantity sold of a commodity and its price. However, there are
other factors that determine how much a producer would like to produce and sell.
Law of supply
 States that the quantity sold of a good or service is positively or directly related to its own price.
 When the price increases, more of the good or service will be sold
 When the price decreases, less of the commodity will be purchased.
3 Ways of presenting the supply relationship

 Supply schedule –in tabular form.
 Supply curve – in graphical form
 Supply function – in equation form
Supply Schedule
TABLE 1.2. Supply Schedule for Denim Pants
Price of Denim Pants Quantity Supplied per month

(in pesos) (No. of pairs)
0 0
50 1
100 2
150 3
200 4
250 5
300 6
350 7
400 8
Fig. 1.5. Supply Curve

P
400 S
Price (in pesos)
300
200
100
0 2 4 6 8 Q
Quantity
Figure 3.2. Supply Curve. The positive slope of the supply

curve depicts the direct relationship between price and
quantity supplied.
Supply function
 Quantity supplied (Qs) is expressed as a mathematical function of price (P). The supply function may thus be
written as:
Qs = c + dP
where
 c is the horizontal intercept of the equation or the quantity demanded when price is zero
 d is the slope of the function.
 Example: Qs = 0 + 0.02P
Change in Quantity Supplied vs.

Change in Supply
 Change in quantity supplied – is a movement along the same supply curve, due solely to a change in price, i.e., all
other factors held constant.
 Change in supply – is a shift in the entire supply curve (either to the left or to the right) as a result of changes in
other factors affecting supply.
Change in quantity supplied

S
Price
•An increase in price from p1
to p2 results in an increase in
quantity supplied from q1 to
p2
q2
•It is shown as a movement
along the same supply curve
p1
Quantity
q1 q2
Change in supply
S2 S0
S1
Price
•An increase in supply

p1 means that at the same
price such as p1 more will
be sold, due to other factors
such as improvement in
technology, increase in
number of producers, etc.
This is a
decrease in •It is shown as a shift in the
supply entire supply curve
Quantity
q1 q2
Other factors affecting supply

 Resource prices:
 When prices of inputs to production increase, the supply of the firm's product decreases.
 Decreases in resource prices, however, translate to an increase in supply. The entire supply curve shifts to
the right.
 Prices of related goods in production:
 Resources can be employed to produce several alternative goods and services.
 Examples from agriculture:
a piece of farmland can be use to grow rice, corn, or sugarcane. An increase in price of sugarcane
may result in decreased supply of rice and corn.
 farmers can use their land and labor to produce ornamental flowers instead of vegetables. If
vegetable prices decrease, the supply of ornamental flowers may increase.
 Technology: A change in production techniques can lower or raise production costs and affect supply.
 Improvements in technology shift the supply curve to the right.
 A cost-saving invention will enable firms to produce and sell more goods than before at any given price.
 New high yielding crop varieties will increase production on the same amount of land.
 Producer expectations:
 When producers expect the price of their product to increase in the future, they may hoard their output for
later sale, thus reducing supply in the present period. Thus the supply curve shifts to the left.
 If firms expect that the price of their product will fall in the near future, supply may increase in the
current period as firms try to increase production as well as to dispose of their inventory.
 Number of sellers: As the number of sellers increases, so will total supply.
 The market supply is the horizontal summation of the supply schedules of individual producers.
 As more firms enter the market, more will offered for sale at each possible price, thus shifting the supply
curve to the right.
 Similarly, the supply curve shifts to the left when firms exit the market.
 Market equilibrium is that state in which the quantity that firms want to supply equals the quantity that consumers
want to buy.
 The price that clears the market is called the equilibrium price and the quantity (sold and bought) is
called the equilibrium quantity.
 The market is said to be "at rest" since the equilibrium price and equilibrium quantity will stay at those
levels until either demand or supply changes.
Market Equilibrium
TABLE 1.3. Market for Denim Pants
Quantity Demanded Quantity Supplied
Price of Denim Pants per month per month
(in pesos) (No. of pairs) (No. of pairs)
0 8 0
Equilibrium 50 7 1
Price=200 100 6 2
150 5 3
200 4 4
250 3 5
300 2 6
350 1 7
400 0 8
Equilibrium Quantity=4
Market Equilibrium
 At prices above the equilibrium price, quantity supplied is greater than quantity demanded, resulting in a
temporary surplus.
 In a surplus situation, producers will try to reduce price to entice consumers to buy more denim pants.
Actions by both producers and the public will wipe out the temporary surplus
 At prices below the equilibrium price, consumers desire to buy more denim pants than are available, creating a
temporary shortage.
 Consumers will try to outbid each other, thus pushing up the price. As price rises, firms increase their
production while some consumers reduce their purchases.
Market Equilibrium
P
400 S
Surplus
Price (in pesos)
300
200
100
Shortage
0 2 4 6 8 Q
Quantity
 Algebraic solution: equate the demand and supply equations (Qd=Qs).
Qd = 8 - 0.02P
Qs = 0 + 0.02 P
 Step by step solution:
• 8 - 0.02P = 0 + 0.02 P
• 0.04P = 8
• P* = 8/0.04 = 200
• Qd = 8 – 0.02(200) = 8 – 4 = 4
P* =200 per unit, Q* = 4 per month
Elasticity Concepts and Measurement

 Meaning of elasticity: If Y=f(X), elasticity measures the responsiveness of Y due to changes in X.
 A given change in X brings about a change in Y. The elasticity measure attempts to compare the relative change
in Y with to the relative change in X.
 Mathematical formulation:
% Y Y / Y
  
% X X / X
Elasticity Values
The elasticity values (in absolute terms) can range from zero to infinity; each with definite interpretations.
  0 Perfectly inelastic
  1distribution,” Inelastic
purposes only and not for commercial
NVSU-FR-ICD-05-00 (081220)
  1 Unit elastic Page 11 of __
Prepared by Gayon P. Sarmiento,
1 Ag Economics UPLB
Elastic
   Perfectly elastic
3 Demand Elasticity Concepts

 We shall study 3 demand elasticity concepts:
 Own price elasticity : responsiveness of quantity demanded of a good to changes in own-price.
 Cross price elasticity – responsiveness of quantity demanded of good A to changes in price of good B
(substitute or complement)
 Income elasticity – responsiveness of quantity demanded of a good due to changes in income.
Own-Price Elasticity
 Own price elasticity of demand (ε) – measure of responsiveness of quantity demanded to changes in price
%  inQ
 d
%  in P
Two ways of measuring elasticity
 Point elasticity Þ elasticity is measured for a single point
 More precise since elasticity changes at every point on demand curve
 Can be obtained if demand function is known
 Arc elasticity Þ computed for two points along a demand curve
 Done if we have limited number of observations
Point Elasticity
Point Elasticity
P
%Qd Qd / Q Qd P
   
%P P / P P Q
  slope  P/Q
Price
P1 A
0 Q1 Q
Quantity
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Arc Elasticity
P
Q2  Q1 P2  P1
  
Q2  Q1 P2  P1
Diff Q Diff P
  
Sum Q Sum P
Price
P1 A
B
P2
0 Q1 Q2 Q
Quantity
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Arc Elasticity: Example
P
200-100 30-20
  
200+100 30+20
100 10 1 5
      5 / 3  1.66
300 50 3 1
Price
30 A
B
20
0 100 200 Q
Quantity
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Elasticity Along a Linear Demand Curve
• Elasticity goes down as

P you move down along a
D linear demand curve.
•The upper half is elastic,
Elastic the lower half is inelastic.
P1 •At the mid-point of the

demand curve, elasticity is
Unit Elastic
unitary.
Price
P
Inelastic
D
0 Q1 Q Q
Quantity
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Geometric derivation of ε
P % Q Q / Q Q P
   
% P P / P P Q
A
DC BD DC
  
BD OD OD
BC

AB
E B
Price
O D C
Q
Quantity
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Geometric derivation of ε
BC

AB
P P
A A
C C
0 Q 0 Q
Elastic at B Inelastic at B
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Table 1.4.Demand function:

Qd = 20 - 2P
Price Quantity Slope Elasticity
10 0 -2 
9 2 -2 -9.00
8 4 -2 -4.00
7 6 -2 -2.33
6 8 -2 -1.50
5 10 -2 -1.00
4 12 -2 -0.67
3 14 -2 -0.43
2 16 -2 -0.25
1 18 -2 -0.11
0 20 -2 0.00
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Special Case:
• Perfectly Inelastic Demand Curve:
P D
• A vertical demand curve
implies that any change in price
will not lead to a change in
quantity demanded.
Price
% Qd 0
   0
%P 
0
Q
6/4/2010 Quantity
Special Case:
• Perfectly Elastic Demand Curve:
• A horizontal demand curve
P implies that a very small change
in price will lead to an infinitely
large change in quantity
demanded.
D
Price
% Qd 
    
% P 0
0
Q
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Elasticity and Total Revenue

 Total revenue (from the point of view of a seller) is equal to the quantity sold multiplied by the price.
 TR = P x Q
 It is of interest to the seller what happens to his TR if he raises or lowers his price, knowing that if he does,
consumers will adjust their purchases.
What happens to TR when price increases?
Answer: it depends on the elasticity of demand
%Q

%P
Elastic TR decreases
P Q
Unitary TR unchanged
P Q
Inelastic TR increases
P Q
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What happens to TR when price decreases?
Answer: it depends on the elasticity of demand
% Q

% P
Elastic TR increases
P Q
Unitary TR unchanged
P Q
Inelastic TR decreases
P Q
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Determinants of price elasticity of demand

(1) the availability of good substitutes for the commodity
 Þ more substitutes, more elastic
(2) the number of uses the good can be put into
 Þ more uses, more elastic
(3) the price of the good relative to the consumer's purchasing power
 Þ if good takes a larger share of budget, likely to be more elastic
(4) the time frame under consideration
 Þ longer period of time, more elastic
(5) location along the demand curve.
 Þ recall ideas on “elasticity and the linear demand curve”
Cross Price Elasticity of Demand

• Definition: responsiveness of quantity
demand of a good to changes in price of other
goods.
% Qdx
• Formula: exy 
% Py
• Sign: + for substitutes,

- for complements
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Income Elasticity of Demand

• Definition: responsiveness of quantity
demanded of a good to changes in income
• Formula: %Qdx
 xI 
%I
• Sign: + for normal goods

- for inferior goods
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Some Applications
 Minimum Price Policy – floor prices to protect producers (price support) or workers (minimum wage)
 Maximum Price Policy – price ceilings to protect consumers (fares, rice price, LPG price, etc.
 Tax Incidence – who bears the burden when tax is imposed on the producer?
Minimum price policies

 prices cannot go below a specified price
 E.g. price support for agricultural commodities, minimum wages
 floor price is usually set above the equilibrium price and it causes a surplus
Floor Price
(minimum price policy)
Examples:
P
Minimum wages,
price support for
S rice farmers
surplus
Pf To be effective, a floor price

(Pf) must be set above the
equilibrium price(P*)
P*
P rice
D
0 Q1 Q* Q
Quantity
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Maximum price policy

(price ceiling)
 price cannot be set above a specified price
 Example: maximum fares allowed public transport operators
 Usually set below the equilibrium price and causes a shortage
Price Ceiling
(maximum price policy)
P
Examples:
S
Price control of
rice, rents, LPG
Pf
To be effective, a price
P* ceiling (Pf) must be set
Price
below the equilibrium

price(P*)
Pc
shortage
D
0 Q1 Q* Q
Quantity
6/4/2010
Appendix to chapter 1
Application of Demand and Supply Model
A. Floor Price – a legislated minimum price that producers must receive for designated products; usually imposed
by government to promote the interest or welfare of producers; it is set above the equilibrium price to be
meaningful and effective.
Graphical Example: minimum wage imposition on a previously perfectly competitive labor market
Let: L - total number of workers
DL - demand curve for labor by firms
SL - supply curve of labor by workers
W* - equilibrium wage rate
L* - equilibrium level of employment of labor
W - fixed minimum wage i.e. firms can’t pay workers an amount below minimum wage
LD - number of workers hired at minimum wage
LS - number of workers willing to be employed at minimum wage
W
SL
W
W**
DL
L
0 LD L* LS
Questions:
1. What is the relationship between WM and w*? ______________________________________
2. What is the number of workers employed at WM? ____________________________________
3. What is the number of workers employed at WM? ____________________________________
4. What is the total number of workers unemployed? ___________________________________
5. What is the number of workers displaced (those who lost their jobs because of minimum wage?)
________________________________
6. What is the income of those employed at WM? ______________________________________
B. Ceiling Price – a legislated maximum price that consumers can pay for designated products; usually imposed by
government to protect consumers from high prices; is set below the equilibrium price to be meaningful and
effective; creates a shortage.
Graphical example: Rent control on housing

Let:
H - number of housing units
DH - demand curve for housing
SH - supply curve for housing
R* - equilibrium rent
H* - equilibrium quantity of housing
Rc - rent ceiling, i.e., house renters must not be charged an amount above the ceiling price.
HD - demand for housing at rent ceiling
HS - supply for housing at rent ceiling
SH
R*
RC
DH
H
HS H* HD
Tax incidence
 Concerned with effects of government tax policies on consumption and production.
 The tax could either be a specific or excise tax or an ad valorem tax.
 specific tax or excise tax Þ tax per unit of the product
 ad valorem tax Þ tax as percentage of the selling price.
Tax incidence
Tax Incidence
P
S1
S0
P0+ t
tax
P1+ t
Price
P0
P1
D
0 Q1 Q2 Q0 Q
Quantity
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Tax Incidence
D
P
S1
S0
P0+ t
tax
Price
P0 If demand is Perfectly
Inelastic : all of the
tax is passed on to
consumers.
0 Q0 Q
Quantity
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Tax Incidence
D
P
S1
S0
P0+ t
tax
Price
P0 If demand is Perfectly
Inelastic : all of the
tax is passed on to
consumers.
0 Q0 Q
Quantity
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Consumer Surplus
P
S1
S2
When market price

Price
P1 decreases, consumer
surplus becomes
bigger
P2
0 Q1 Q2 Q
Quantity
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Producer Surplus
P
S1
Producer surplus:
difference between what a
producer receives (market
Price
price) and the amount that will

P1
motivate him to supply the
product (marginal costs must
be recovered).
0 Q1 Q
Quantity
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VI. LEARNING ACTIVITIES
VII. ASSIGNMENT
Answer the following questions.

a. DEMAND: For each of the following cases, state how the demand for isuzu crosswind behaves i.e. whether
there is an increase or decrease in demand or quantity demanded.
i. The price of gasoline rises because of a shortage in the world petroleum market.
ii. The lower priced “Mitsubishi Adventure” enters the car market.
iii. The country is hit by a recession, causing a fall in real incomes.
iv. The government imposes a 10 percent import levy on all imported car parts.
v. A lower rate of fatalities in accidents involving Isuzu crosswind is observed.
b. SUPPLY: Indicate whether a movement upward or downward along the supply curve, or a shift leftward or
rightward of the supply curve of mangoes occurs for the following cases.
i. The surge in export demand raises prices
ii. The government imposes a price ceiling on mangoes to appease consumers who have not enough
fruits last year.
iii. A new variety is developed which doubles the output per tree
iv. The current crop of mangoes is infested by fruit flies
v. The price of pesticides against fruit flies increases due to the 10 percent import levy.
c. Describe what will happen to equilibrium price and quantity of each of the commodities given the corresponding
hypothetical situations
i. Coffee: the Philippine Medical Association announces that caffeine in coffee causes heart attack.
ii. National Bookstore’s Books: Management engages in a one month cut-price book sale.
iii. Rice: Government imports rice from Thailand
iv. Pork: Foot and mouth disease (FMD) hits thousands of pigs resulting in a very high mortality
rate.
v. Cigarettes: Taxes on cigarettes are increased from P2 to P3 per pack
True or false. Write ”TRUE” if the statement is correct and “FALSE” if otherwise.
1. The demand for a product is the quantity of good that the buyers are willing to buy at a certain
price.
2. The demand function shows how the quantity demanded of a good is dependent on its
determinants.
3. The demand curve is upward-sloping to the right.
4. A coefficient of income elasticity shows us how elastic demand is.
5. A positive cross price elasticity implies that goods are complementary.
6. Inferior goods are purchased more at higher income levels.
7. The more substitutes a good have the more inelastic in demand it becomes.
8. The more important a good is to a consumer the more inelastic in demand it becomes.
9. Normal goods are goods that gain importance as income increases.
10. Complementary goods are used together.
II. Indicate what happens to the demand curve for mangoes (A. shift to the left, B. shift to the right, C. no effect) given
the following situation
____ 1. The price of pineapple, a substitute, good increases.

_
____ 2. The quantity demanded decreases.
_
____ 3. There is an increase in the export for Philippines mangoes
_
____ 4. Typhoon caused damaged to mangoes decreasing the supply for mangoes.
_
____ 5. More people prefer mangoes to pineapples
_
____ 6. The price of mangoes increases
_
____ 7. It is the season for mangoes
_
____ 8. Income increased
_
____ 9. New technology increased mango production
_
____ 10. Cost of production decreased
_
VIII. EVALUATION (Note: Not to be included in the student’s copy of the IM)
IX. REFERENCES
Catelo, Ma. Angeles O (1999). Economics 102 Reference Workbook. Department of economics, UP Los Banos.
Pagoso, C. et. al. (2014). Introductory Microeconomics. Rex Book Store
Sison, T. et.al. (2009). Manual for Economics
Numbering the IM No.: IM-CCCCCC-SSSSSS-NNNN-NNNN
School Year
Semester
Course Number
e.g.:
IM-COURSE NO-SEMESTER-SCHOOL YEAR
IM-MCB180-1STSEM-2020-2021

Chapter 2 Demand and Supply

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Chapter 2 Demand and Supply

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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

College College: __BUSINESS EDUCATION

DEGREE COURSE NO. ECO1

I. UNIT TITLE/CHAPTER TITLE

Demand and Supply

II. LESSON TITLE

Demand and Supply

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOMES

Two reasons for the Inverse Relationship

Three ways of presenting the demand relationship

Table 1.1 Demand Schedule for Denim Pants

Figure 1.1. Demand Curve. The negative slope of the

 (-b) is the slope of the function.

The demand function would be presented this way:

Qdx = qx (Px, Ps, Pc, I, T, N, Pe)

Fig. 1.2. Change in quantity demanded

Fig. 1.3. Change in demand

Other factors affecting demand

 Complements – are goods that are used or consumed together.

 Consumer tastes and preferences:

 Number of Consumers: affects the total demand for a good.

 When the price decreases, less of the commodity will be purchased.

3 Ways of presenting the supply relationship

Price of Denim Pants Quantity Supplied per month

Fig. 1.5. Supply Curve

Figure 3.2. Supply Curve. The positive slope of the supply

 d is the slope of the function.

Change in Quantity Supplied vs.

Change in quantity supplied

•An increase in supply

Other factors affecting supply

 Prices of related goods in production:

 Resources can be employed to produce several alternative goods and services.

 Examples from agriculture:

 Improvements in technology shift the supply curve to the right.

 Number of sellers: As the number of sellers increases, so will total supply.

 Algebraic solution: equate the demand and supply equations (Qd=Qs).

P* =200 per unit, Q* = 4 per month

Elasticity Concepts and Measurement

3 Demand Elasticity Concepts

 Own price elasticity : responsiveness of quantity demanded of a good to changes in own-price.

 Income elasticity – responsiveness of quantity demanded of a good due to changes in income.

Two ways of measuring elasticity

 Point elasticity Þ elasticity is measured for a single point

 More precise since elasticity changes at every point on demand curve

 Can be obtained if demand function is known

 Arc elasticity Þ computed for two points along a demand curve

 Done if we have limited number of observations

Arc Elasticity: Example

Elasticity Along a Linear Demand Curve

• Elasticity goes down as

P1 •At the mid-point of the

Table 1.4.Demand function:

Elasticity and Total Revenue

What happens to TR when price increases?

Answer: it depends on the elasticity of demand

What happens to TR when price decreases?

Answer: it depends on the elasticity of demand

Determinants of price elasticity of demand

Cross Price Elasticity of Demand

• Sign: + for substitutes,

Income Elasticity of Demand