ECONOMICS
Handout
Analysis of Demand and Supply
Demand Curve
-is a schedule that shows the level of consumption
at alternative prices at a given point in time.
-The D.C. of a commodity summarizes the benefits
derive by the customers from the purchase of good
or service.
Supply Curve
-shows the amount of output the producers are
willing to sell at alternative prices at a given point in
time.
-The S.C. incorporates the sacrifices and costs
incurred by the seller in producing a commodity.
To the buyer, price is the payment for the purchase
of a commodity.
Additional satisfaction = market price
When the supplier accepts the price as payment for
the sale of commodity it implies that the price can
compensate for the additional cost incurred in
producing a unit of a commodity.
What is a demand curve?
Demand Curve is a schedule of the willingness and
capacity of a consumer to buy a commodity at
alternative prices at a given point in time other
things held constant.
When we say other thing held constant or ceteris
paribus, the other factors that may affect the
demand for the commodity are not changing.
The greatest factor that influences the level of
demand or consumption is the price of the
commodity itself.
Principle of Diminishing Marginal Utility
explanation on the downward sloping demand
curve is derived from the principle of diminishing
Other Factors Affecting the Demand of a
Commodity
1. Income of consumer
A higher level of income will give him higher
capacity to consume while lower income will give
him limited purchasing power.
2. Price of other commodities
If the other good is a substitute, the increase in
price of the substitute good may increase the
demand of the commodity at hand.
A substitute good is a good that can be used in
place of another. (e.g. beef and chicken)
If the other good is complementary good, a
decrease in its price, will impact positively on the
demand of the good being investigated.
A perfect complement is a good that has to be
consumed with another good. (e.g. cars and
petrol)
3. Expectation (Expectation of future prices)
The expectation or the prospect on what is going
to happen to the price can influence the demand
for the commodity.
4. Taste or preference of consumers
The formation of taste is influenced by several
factors; cultural values, others through peer
pressure or the power of advertising.
5. Market (Number of buyers)
An increasing population can contribute to the
expansion of the existing markets for various
commodities
Why is the demand curve downward sloping?
As the price of the commodity declines the
quantity demand increases and when the price
increases, the quantity demand declines.
The demand curve shows a negative relationship
between the price of the goods and the quantity
demand.
A more interesting but theoretical
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Handout
marginal utility. According to this major principle as
a buyer continues to consume a good his total
satisfaction or utility increases; however, the
additional or marginal satisfaction decreases as a
buyer consumes additional unit of good.
Diminishing marginal utility implies that the
additional satisfaction provided by an additional
commodity consume is lower than the additional
satisfaction given by the previous level of
consumption of the commodity.
• It is proven that the optimal demand for a
commodity is attained when its price is
equal to the marginal utility derived from the
last unit consumed.
• Given this optimal condition, as long as the
marginal utility is higher than the marginal
cost or the price of the commodity, the net
marginal satisfaction is positive and the -
total net satisfaction can still be increased
by increasing the consumption of the
commodity.
Changes in the demand curve
There are two major categories of changes in the
demand curve
1. movement in the demand curve
2. shift in the demand curve
Movement in the demand curve refers to the
change in quantity demand resulting from the
change in price of the commodity. Thus as the
price of the commodity decreases, the movement
along the curve will lead to an increase in the
quantity demand of the commodity. Similarly, an
increase in the price will result in the decrease in
quantity demand as shown in the movement in the
demand curve
Shift in demand curve are change in the demand
curve caused by any of the other factor beside the
price of a commodity. A positive effect will shift the
demand curve to the right. This means that in each
price point there is an increase in the demand of a
commodity. On the other hand, a negative impact
will shift the demand curve to the left.
• The positive and negative impact of these
other factors do not alter the negative
relationship between the price of the
commodity and the quantity demand.
What is a Supply curve?
The Supply Curve is defined as a schedule
showing a direct and positive relationship
between the price of a commodity and level of
output that the seller is willing to supply at a
given point in time other things held constant.
Other factors affecting the supply of a
commodity
1. Price of Production Inputs
The production of commodity will require the
use of two inputs – intermediate inputs/raw
materials and factor inputs
Intermediate inputs refer to materials including
raw materials that are still going to be
processed or transformed into higher level of
outputs.
Factor inputs are the processing or
transforming inputs.
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Handout
2. Taxes, subsidies, and regulations
Taxes can be considered part of the cost of
production. Although, taxes are not factor
inputs nor raw materials they are still
considered part of the costs of operating a
business. Thus, an increase in taxes, can
increase the cost of supplying a commodity.
This in turn may discourage the sellers to
increase their supply of the commodity in the
market.
3. Technology
Improvements in technology used by some firms
can lower their production cost and can make
these firms more competitive.
4. Expectation of future prices
If there is an expectation that the price of the rice
will increase next season, this may encourage the
farmers to plant more rice now in anticipation of
the higher price in the near future.
5. Weather Conditions
6. Prices of alternative goods
7. Number of sellers
Why is the supply curve downward sloping?
The supply curve shows a positive or direct
relationship between the price of a commodity and
the quantity supplied in the market.
The simplest reason for the direct relationship
between price and quantity supplied is due to
variation of the costs of production among
producers.
Movement along the supply curve
This is brought about by changes in the price of a
commodity.
Shift in the supply curve
This is caused by changes in the other factors
affecting supply except the price of a commodity.
DETERMINATION OF PRICES OF COMMODITIES
Equilibrium Price
• When buyers and sellers transact in a
market they agree on the price of a
commodity and the amount to be sold and
bought. The agreed price is called
equilibrium price.
• This is shown by the intersection of the
demand curve with the supply curve.
• Since equilibrium price is an agreed price it
is also a stable price since there no
pressure from the buyers and the sellers to
alter the amount they want to buy or sell.
Disequilibrium Price
• There are cases when there are
disagreements among buyers and sellers
on the price and quantity. In such cases
disequilibrium situation can occur.
Changes in Equilibrium price and output
What happens when the demand curve shifts to
the right? To the left?
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What happens when the supply curve shifts to
the right? To the left?
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• Price Ceiling is a price control measure
imposed by the government that means that
the prices cannot go higher than the mandated
price.
• A price floor is the lowest legal price a
commodity can be sold at.
• Minimum Wage is the lowest wage rate fixed
by law that an employer can pay his workers
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Handout
• Exchange rate is the price of foreign currency.
• The demand of US dollars in the Philippines is
influenced primarily by its demand for imports
since the country needs US dollar to pay for its
imports.
• The higher the price of dollar imports become
expensive. imports: expensive = Qty. demand:
decrease (indirect relationship)
• Rent refers to the price using land, a fixed
input, in the process of production.
• Since supply is not responsive to the change in
price, the price of land/rental rate is
determined by the demand for land alone.
-few sellers producing similar and
differentiated products (e.g. cement and steel
companies)
-imperfect competition
4. Monopolistic Competition
-numerous sellers and buyers in the market
can freely enter and leave the market (e.g.
shampoo, soap, detergent, etc.)
- imperfect competition

Market Power is defined as the ability of any actor

or group of actors in the market to significantly
influence the price in the market and the quantity
to be produced or sold.
4 Major Classification of Market Structures
1. Perfect Competition
-described as a market structure where no
single seller or single buyer has power to
determine the price and level of output in
the market.
-no one has market power because they
have equal influence
-numerous seller and buyers supplying and
buying the product.
-market sell undifferentiated product or
service
- characterized by free entry and free exit
-perfect information -this means that actors
in the market are adequately equipped with
information to make rational decisions.
2. Monopoly
-characterized by the single seller in the
market
-If there is only one buyer in the market, the
market is called a monopsony.
-only one seller or one buyer
-enormous market power
-no competition in the production of a
highly differentiated product
3. Oligopoly