CHAPTER 2

LESSON 2.1 THE CONCEPT OF DEMAND AND SUPPLY

Objectives:
1. To define the concepts of demand, demand schedule, demand curve, and the law of
demand
2. To identify the different factors affecting demand
3. To differentiate change in demand from change in quantity demanded

DEMAND

The theory of supply and demand is a basic and important tool in explaining changes in

a predominantly market system. This theory shows how consumer preferences determine

consumer demand for goods and services and how business costs determine supply in the

product market.

MARKET (public (dry and wet market), supermarket, e-market, stock market)

Defined as an institution or mechanism, that brings together buyers (demanders) and

sellers (suppliers) of particular goods, services and resources.

Pure Competition – it is a market structure of homogeneous or similar products

consisting of many independently interacting buyers and sellers who determine the price
DEMAND OF A PRODUCT

It is the amount of good or service that buyers in a specific market are willing and able to

buy per unit of time, cetertis paribus or other things held constant. Demand is the desire of

household for goods and services in the particular product market and this desire must be

supported by their capacity and willingness to pay such goods and services.

DEMAND SCHEDULE

It shows the various quantities of the product that will be bought at various prices at a

specific time and place. It may reflect an individual schedule for one buyer or a market

schedule for a group of buyers

Quantity
GARLIC Price Demanded (kilos
per week)
WEEK 1 35 1

WEEK 2 30 2

WEEK 3 25 3

WEEK 4 20 4

WEEK 5 15 5

Table 2.1.1 Individual Demand Schedule for Garlic

Price per KG
Quantity Demanded
DEMAND CURVE

Y= price per kg
X= quantity demand

It is the graphical representation of the demand schedule

40
35
Price per KG 30
25
20
15
10
5
0
1 2 3 4 5

Quantity Demanded

Graph 2.1.1 Individual Demand for Garlic

LAW OF DEMAND

When the price of a product is increased, other things kept constant, the quantity

demanded decreased. On the other hand, when price of product decreased, other things kept

constant, and the quantity demanded increased.

Factors of price fall

 1. Income effect – as price falls and high income, the purchasing power of the

consumers is enhanced because then can buy more products.

2. Substitution effect – the product becomes less expensive compared to similar

products so that the consumers trend to buy more of a product and less of a similar

product.

Determinants of Demand (price- most determinants)

1. Taste and preferences – a favorable change in consumer taste and preferences – a

change that makes good or service more desirable would increase demand.

2. Number of buyers – an increase in number of buyers in a specific market results in

greater demand, and vice versa.

3. Income – a rise in income causes increased demand. As consume earn more, they tend to

but more goods. Products whose demand varies directly with income are called normal or

superior goods. Products whose demand decline as money income rise are called inferior

goods.

4. Prices of related goods – changes in prices and availability of related goods may

increase or decrease the demand for a product or service depend on whether the good is a

substitute or a complement.

Substitute – good is something that can be used in place of another good

Complementary – good is something which is used together with the good.

5. Expectations – the expectation of consumers on future market situations such as future

availability of a product, affect demand.

 LESSON 2.2 THE CONCEPT OF SUPPLY AND SUPPLY ANALYSIS

Objectives:
1. To define the concepts of supply, supply schedule, supply curve and law of supply
2. To draw the supply curves given hypothetical cases
3. To identify supply curves affecting supply
4. To differentiate change in supply from change in quantity supplied

SUPPLY

It is the amount of goods and services that producers or service providers are able and

willing to offer in a specific market per unit of time, other things held constant.

SUPPLY SCHEDULE

Shows the various quantities of the good or service that is offered to the market at various

possible prices. A supply schedule may reflect an individual schedule for one seller or producer

of a good.

Quantity supplied
GARLIC Price
(kilos per week)

WEEK 1 35 15

WEEK 2 30 12

WEEK 3 25 8

WEEK 4 20 4

WEEK 5 15 2

Table 2.2.1 Individual Supple Schedule for Garlic

SUPPLY CURVE
It is the graphical representation of the supply schedule.

40
35
Price per KG30
25
20
15
10
5
0
2 4 8 12 15

Quantity Demanded

Graph 2.1.1 Individual Demand for Garlic

LAW OF SUPPLY

When the price of a product is increased, other things kept constant, the quantity supplied

increased. On the other hand, when price of product decreased, other things kept constant, and

the quantity supplied decreased.

Determinants of Supply

1. Resource prices – the price of resources used in producing goods or providing services

help determine the costs of production incurred by firms.

2. Technology – technological advances which consist of changes that lower the amount of

resources needed to produce the same quantity and quality of products or service,

increase supply
 3. Taxes and subsidies – taxes are considered as costs by businesses, thus an increase in

taxes cost of production and reduces supply. A decrease in taxes decrease cost of

production which increase supply.

4. Price of other goods or services - the prices of alternative goods or services which a

firm can produce or provide given its production process may affect supply. An increase

in the price of alternative good or service becomes more attractive to the firm because

this would mean higher profits.

5. Price expectation – changes in the expectation of the seller about the future price of the

product will affect the willingness of sellers to supply the product.

LESSON 2.3 MARKET EQUILIBRIUM

Objectives:
1. To define the concepts market equilibrium, equilibrium price, and equilibrium quantity
2. To analyze the effects of changes in demand and supply on market equilibrium
3. To determine market equilibrium by the interaction of the demand and supply curves give
hypothetical cases

MARKET EQUILIBRIUM

The demand side and the supply side of the market are brought together to see how the

buying decisions of demanders and the selling decisions of suppliers determine the price of the

commodity and the quantity actually sold and brought. Demand and supply interact to determine

market equilibrium, that is, the price and quantity where forces of supply and demand are in

balance.
 Equilibrium Price (EP)

It is the amount that buyers want to buy is just equal to the amount that sellers want to

sell.

Equilibrium Quantity (EQ)

There is no shortage or surplus in the quantity demanded and supplied.

60

50

Surplus
40
Price per KG

30 Equilibrium Price Equilibrium Quantity

Price per KG 20

Shortage
10

0
15 20 25 30 35

Demand Supply
ACTIVITY
A. Given the hypothetical data on the demand and supply of 150g toothpaste:

QUANTITY
QUANTITY SUPPLIED
TOOTHPASTE PRICE DEMANDED
(million tubes)
(million tube)
A 12 45 22
B 10 50 18
C 8 55 17
D 6 60 15
E 4 65 12

Draw the demand and the supply curve in one graph and determine equilibrium price (EP), and
equilibrium quantity (EQ).

B. If quantity demanded increases by four million at each of the various prices in the data
above
1. Compute the new demand schedule (make a new schedule)
2. Graph new demand curve by superimposing it on the graph A.
3. Indicate the new equilibrium price and equilibrium quantity.

C. After considering the event in situation B. if the quantity supplied at each of the various
prices decrease by three million due to increase in cost of production.
1. Compute the new supply schedule (make a new schedule)
2. Graph new supply curve by superimposing it on the graph A.
3. Indicate the new equilibrium price and equilibrium quantity.