Subject: APPLIED ECONOMICS Quarter 3 - LAS 3

At the end of this module, you should be able to:

Differentiate the law of supply from the law of demand

Analyze the market demand and market supply by interpreting the demand and supply schedule
and curve
Appreciate how the demand and supply are influenced by price and other several factors.
Determine the market equilibrium and the effect of disequilibrium

Lesson 1 Market Demand

What do we mean by the word market?
As an Accountancy, Business and Management (ABM) student, you will always encounter the word
“market” in your different major subjects such as in Principles of Marketing, Business Finance and
Applied Economics.
In the subject Principles of Marketing the word “Market” is usually used as another term for
customer like the target market or what we are referring as target customer. It can also describe
the place where financial instruments are offered, the financial market.
In this module, it refers to the place where the sellers can sell their products to their
buyers/customers usually in exchange for money.

Demand and Supply

If our needs and wants can be backed by our buying power, it becomes demand. It means that we
have the ability and the willingness to buy the product at a given price within a given time period.
On other hand, the supply refers to the quantity of goods and services that firms are ready and
willing to sell at a given price within a period (Viray and Avila-Bato 2018).

The Law of Demand and Supply

The law of demand states that: all other things remain constant (Ceteris Paribus), the higher the
price of a good the lesser the demand for that good and the lesser the price the higher the demand.
The relationship between the price and demand is inversely related. It is because of the substitution
effect and income effect. Substitution effect means that if the price of Product A increases the
consumer will look for its substitute and will cause decrease in quantity demanded for Product A.
On the other hand, having the same income, an increase in price of a product will cause a decrease
in quantity demanded because the consumer may not afford to buy all the things just like before.
The law of supply states that the quantity of products offered to be sold is directly related with the
price. It means that when the price increases the quantity supplied increases too and if the price
decreases the quantity supplied decreases too.
Analyzing Demand
The demand can be analyzed using:
Demand Schedule –a table that shows the price of a good and the quantity demanded for that good
at a given price within a given period.
Demand Curve – a graphical representation that shows the relationship between the price of a good
and the quantity demanded for that good at a given price. It usually uses the information in the
demand schedule.

Changes in Quantity Demanded compared to Changes in Demand

Changes in quantity demanded happened when there is a change in the demand for a product
because of the change in price. For example, the quantity demanded for chicken at ₱120.00 was 10
kilos per month but when the price of the chicken increased by ₱10.00 the quantity demanded
decreased to 8 kilos. Another increase in price of the chicken happened making it ₱140.00 per kilo
because of that the quantity demanded decreased again to 7 kilos.
Table 1: Hypothetical Demand Schedule of Chicken per Month
Without ASF
Quantity
Price/Kilogram
Demanded (kg)
₱120.00 10
₱130.00 8
₱140.00 7
 Figure 1: Demand Curve
145

140

135
Price

130

125

120

115
0 2 4 6 8 10 12
Quantity Demanded

Figure 1 shows the graphical representation of the demand schedule in Table 1. It is negative slope
showing that the price and quantity demanded are inversely related. Table 1 and Figure 1 shows
the change in quantity demanded because of the change in price.
There is a change in demand when there is a change in quantity demanded because of some factors
other than price. For example, the quantity demanded for chicken at ₱120.00 is 10 kilos per month
but because of the issues related to ASF (African swine flu) the quantity demanded increases to 12
kilos at the same price.
When the price the chicken increases to ₱130.00 the quantity demanded changed to
10 kilos and 8 kilos at ₱140.00
Table 2: Hypothetical Change in Demand Schedule of Chicken
Quantity Demanded (kg)
Price/Kilogram
Without ASF With ASF
₱120.00 10 12
₱130.00 8 10
₱140.00 7 8

Figure 2: Change in Demand

145
140
135
130 without ASF
with ASF
125
120
115
110
7 8 9 10 11 12 13 14
Quantity Demanded
Figure 2 shows the graphical representation of the demand schedule in Table 2. It shows the
change in demand for chicken because of the African swine flu which made the consumer to choose
chicken meat compared to pork.
The change in demand is not always positive sometimes it falls. The change in demand may be
affected by several factors such as:
Taste and preferences
Income
Seasonal products
Population change
Prices of related good (substitute/complementary goods)
Expected future prices, income and credit

Analyzing Supply
The supply can be analyzed using:
Supply Schedule - table that shows the prices of a good and the quantity supplied at each price at a
given point of time
Supply Curve - a graphical representation that shows the relationship between the price of a good
and the quantity supplied at a given point of time.
Change in Quantity Supplied compared to Changes in Supply
Changes in quantity supplied happened when there is change in the quantity of goods produced
to be sold because of the change in price. It happens because businessman or entrepreneurs
prepared to sell their goods at a higher price to yield more profit.
For instance, an online seller of chicken dishes has following supply schedule that shows how many
packs of chicken dishes he prepares at a different price.
Table 3: Hypothetical Supply Schedule
Selling Price/Pack Quantity supplied
₱100.00 20
₱115.00 25
₱140.00 35
₱150.00 40

Figure 3: Supply Curve

160
140
120
100
Price

80
60
40
20
0
0 5 10 15 20 25 30 35 40 45
Quantity Supplied

Figure 1 shows the graphical representation of the supply schedule in Table 3. It is positively slope
showing that the price and quantity supplied are inversely related. Table 3 and Figure 3 shows the
change in quantity supplied because of the change in price.
Changes in supply is a shift of supply curve because of some factors other than price. For example,
the quantity supplied in Table 3 changes not because of the change in price but because of the
increase in the number of online sellers offering the same product. The table below shows the new
supply schedule.
Table 4: New Supply Schedule
Selling Price/Pack Quantity supplied
₱100.00 15
₱115.00 20
₱140.00 25
₱150.00 30

Figure 4: Change in Supply

160
140
120
100
Price

80
60
40
20
0
15 20 25 30 35 40 45
Quantity Supplied
S S'
Figure 4 shows the blue line which is the same as supply curve shown in Figure 3 and the orange
line which shows the changes in supply curve.
The entire supply curve shifts to the left. It means that at the same price the quantity of goods
supplied by the producer decreases not because of the decrease in price but because of the increase
in the number of sellers.

Factors that can Cause Changes in Supply

Technology
Cost of production
Number of sellers
Government policies (Taxes and subsidies)
State of nature (weather)
Prices of related goods produced
Future expectations (possible increase in price)

Market Equilibrium
QUANTITY DEMANDED = QUANTITY SUPPLIED
As stated in the law and supply and demand, market equilibrium happens when there is an equal
demand and supply causing the price to remain the same. When the supply is greater than the
demand it causes the price to decrease but when the demand is greater than the supply the price
increases.

Equilibrium market price – price agreed by the buyer and seller.

45
40 Figure 5: Market Equilibrium
35
30
Price

25
20
Equilibrium point
15
10
5
0
100 120 130 140 150 160 170
Quantity
Supply Curve Demand Curve

Figure 5 shows the equilibrium between the quantity demanded and quantity supplied. It is the
point of intersection between the supply and the demand curves. It shows that the Equilibrium
price (Pe) is 25 and the equilibrium quantity (Qe) is 140. It means that if the price and quantity
change there will be market disequilibrium (shortage/surplus).
When the quantity supplied is greater than quantity demanded there will be surplus. On the other
hand, shortage is when the quantity demanded is greater than quantity supplied.
Change in demand or supply may result to the changes in market equilibrium.
To protect the seller or the buyer when there is market disequilibrium the government sets the
minimum price (floor price) or maximum price (ceiling price) for some goods, this is what we called
price control.

Checked by:

RONALD A. DERANO
Asst. School Principal II
 Applied Economics
Parallel Test 1 – M3

Name: ________________________________________ Grade & Section: ___________ Score:___________

 Applied Economics
Parallel Test 2 – M3

Name: ________________________________________ Grade & Section: ___________ Score:___________

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