▪ Complementary Goods – two goods for which an increase in the price of one leads to a decrease

in the demand for the other.

▪ Demand – pertains to the quantity of a good or service that people are ready to buy at a given
price within a given period.
▪ Demand Curve – a graph of the relationship between the price of a good and the quantity
demanded.
▪ Demand Schedule – a table that shows the relationship between the price of a good and the
quantity demanded.
▪ Equilibrium – a situation in which supply and demand have been brought into balance.
▪ Equilibrium Price – the price that balances supply and demand.
▪ Equilibrium Quantity – the quantity supplied and the quantity demanded when the price has
adjusted to balance supply and demand.
▪ Law of Supply and Demand – the claim that the price of any good adjusts to bring the supply
and demand for that goods into balance.
▪ Market – refers to a place where a group of buyers and sellers of a particular good or service
interacts.
▪ Quantity Demanded – the amount of a good that buyers are willing and able to purchase.
▪ Quantity Supplied – the amount of a goods or services that sellers are willing and able to sell.
▪ Shortage – a situation in which quantity demanded is greater than quantity supplied.
▪ Substitute Goods – two goods for which an increase in the price of one leads to an increase in the
demand for the other,
▪ Supply – refers to how much of a product a business owner can supply to buyers and at what
price.
▪ Supply Curve – a graphical representation shows the relationship between the price of the product
sold or the factor of production and the quantity supplied per period.
▪ Surplus – a situation in which quantity supplied is greater than quantity demanded.

Market Demand:
What Determines the Quantity an Individual Demands? When you buy goods or rendered services, what factors
affect in your decision? Here are some of the answers you might give:

1. Price
When you buy a product or render a service, your concern is whether it is expensive or inexpensive. If the price
of a particular product or service rise, you buy less, and if the price fall, you buy more. Hence, you might
conclude that the quantity demanded is negatively related to the price. As the quantity demanded of a product
or service increases, the price falls and decreases as the price rises.
2. Income
What would happen to your family's demand for grocery, if your father gets promoted, and his salary increases?
Most likely, it would rise. It is because an increase in an individual's income, generally, increases his/her
purchasing power to demand more goods or services that one is not able to purchase in a low income. On the
other hand, an individual with low income reduces the purchasing power that makes the demand for goods and
services to decline.
3. Prices of Related Goods
When a particular price of product increases, you tend to look closely related commodities or substitute goods.
Substitute goods generally offered at a lower price, thus, makes it more attractive to you as a buyer to buy such
products, sample butter to margarine. The complementary goods also affect the quantity demanded of an
individual. These are goods which cannot exist without the other product. For instance, the jeep cannot run
without gasoline, and your cellphone cannot function if you do not have a sim card or load.
4. Tastes and Preferences
Your buying decision-making affects your likes and dislikes about the product. Your tastes and
preferences as a consumer, frequently, decide whether you will buy or not, or how many quantities
you will buy for a product.
5. Expectation of Future Prices
Your forecast about the probability to happen in the future may affect your demand for a product
or service today. For example, you are planning to give your best friend a perfume on his birthday
next month. However, the SM Department Store announced a 50% markdown on the price of
perfume next week. If you have enough money, you may be more willing to buy the perfume
next week rather than next month.
6. Occasional or Seasonal Products
There are products which sellable for a short time during the event only are called occasional or
seasonal products. For example, during Christmas season, demand items are Christmas decors,
hams, and quezo de bola, while on Valentine’s Day, demand rises for red roses and chocolates.
However, after such events, the demand for these products go to its original level.
7. Population Change
Another way to determine for the quantity demanded on some type of goods and services is
through the size of a population in a certain area. This means that the quantity demanded of a good
and service is measure by the number of demands of people residing in the area. When a
population increases, the more goods and services are demanded, because of the rising population.
Inversely, a decrease in population results to decline the demand. For example, if you have four
(4) members in your family, then one (1) sack of rice is enough as your consumption for a month.
However, if you have twelve (12) members in the family, one (1) sack of rice is not enough to
sustain your need. Your family demand for one-month consumption of rice is at least three (3)
sacks

Shift in the Demand Curve

Whenever any determinant of demand changes, other than the good’s price, the demand curve shifts. Any
change that increases the quantity demanded at every price, shifts the demand curve to the right. Similarly, any
change that reduces the quantity demanded at every price, shifts the demand curve to the left.

Market Supply:
What Determines the Quantity an Individual Supplies? What determines the quantity of a product the sellers are
willing to produce and offer for sale?

Here are some of your possible answers:

1. Price
The sellers sell more products at a higher price than at a lower price. These are because higher sales result in
higher profits. If your family has farmland and a mini grocery store and you are selling rice, you are more willing
to sell rice at a high price because selling it is profitable. By contrast, when the price of rice is low, you sell less
rice because your family business is less profitable.
2. Input Prices
The cost of production of rice, like the cost of seeds, equipment, and fertilizer, affects the price of rice. Hence,
when the price of one or more of these inputs rises, your store becomes less profitable; consequently, your
store supplies less rice. If input prices rise substantially, your family might stop or sell no rice at all. Hence, the
quantity supplied and the input prices of production have a negative relationship.
3. Technology
New technology makes increases the production of a product. Using harvest automation and autonomous
tractors technology makes farms more efficient and productive. By reducing production costs, the advance in
technology raised the supply of rice in the market.
4. Future Expectation
This factor impacts sellers as much as buyers. If you foresee an increase in the price of rice, you may decide to
discontinue the current supply to take advantage of the future rise in price, thus decreasing market supply. If
you, however, expect a decline in the rate of rice, you will increase the current quantity supplied of rice.
5. Number of Sellers
The number of sellers is another determinant to determine the quantity supplied in the market. If you are more
sellers there are in the market, the more the supply of goods and services will be
available. If more farmers plant rice instead of other crops, then the quantity supplied of rice in
the market will increase due to an increase in production, assuming that no destructive calamities
strike the country.
6. Weather Conditions
Natural disasters – typhoons, drought, and others – reduce the supply of agricultural commodities while good
weather has an opposite impact. If your farm or riceland destroys by a calamity, the quantity supplied of rice in
the market will decline.
7. Government Policy
The government also influences the market supply through policies like trade agreements, farm subsidies,
tariffs, property taxes, and conservation programs. For instance, through government programs like the
Conservation Reserve Program (CRP), your family can be paid not to plant crops for a certain number of years.
The more number of acres enrolled in CRP will reduce the supply of the commodities commonly grown in your
land.

Shift in the Supply Curve

Whenever there is a change in any determinant of supply, other than the good’s price, the supply curve shifts.
Any change that raises the quantity supplied at every price shifts the supply curve to the right. Similarly, any
change that reduces the quantity supplied at every price shifts the supply curve to the left.

Market Equilibrium
You learned the different factors affecting demand and supply now you try to combine the demand and supply
curve to see how to determine the quantity of a good sold in a market and its price. You will notice that the two
lines have intersected across the point, and this is called the market equilibrium. The price at which the demand
and supply curve meet is called the equilibrium price and the quantity is called the equilibrium quantity. At the
equilibrium price, the quantity of the good that buyers are willing and able to buy is the same as the quantity
that sellers are willing and able to sell. The equilibrium price sometimes called the market-clearing price
because, at this price, everyone in the market has been satisfied. Buyers have bought all they want to buy, and
the sellers have sold all they want to sell. (N. Gregory Mankiw) The behavior of buyers and sellers naturally
drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus
of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is
a shortage, which causes the market price to rise. (N. Gregory Mankiw)

Three Steps to Analyze Changes in Equilibrium

To analyze how any event influences or how the determinants of demand and supply affect the market,
you have first to draw the demand curve and the supply curve at the same graph. Then, examine how
the event affects the equilibrium price and the quantity by performing the following three (3) steps:
1. Decide whether the event shifts the supply curve or the demand curve (or both).
2. Decide which direction the curve shifts – to the right or to the left.
3. Compare the new equilibrium with the old equilibrium

What Happens to Price and Quantity When Supply or Demand Shifts?

If you are confused with your answer, whether the demand and supply will increase, or decrease, or
no change at all, herein the table that you can use to check your answer. But, before you proceed to
use this table, you have to draw the demand and supply curve first, then apply and follow the three (3)
steps to analyze the changes in equilibrium.

The table shows the predicted outcome for any combination of shifts in the demand curve and supply
curve. In order to answer the above question for any certain situation, pick an entry in this table and
make sure you can explain to yourself why the table contains the prediction it does.

MARKET EQUILIBRIUM: A MATHEMATICAL APPROACH

There are three (3) ways to determine the market equilibrium: using the table/schedule, graphical
representation, and the mathematical approach. You have already learned two of these three (3)
methods from the previous discussion of this module.
You can also determine the market equilibrium by using your basic knowledge in algebra or using the
mathematical approach. To do this, you need the three (3) sets of equations as follows:

1. Demand Equation: 𝑸𝒅 = 𝒂 − 𝒃(𝑷)

2. Supply Equation: 𝑸𝒔 = 𝒄 + 𝒅(𝑷)
3. Equilibrium Equation: 𝑸𝒅 = 𝑸𝑺

𝑸𝒅 = 𝒂 − 𝒃(𝑷) 𝑸𝒅 = quantity demanded at a particular price

𝒂 = intercept of the demand curve
𝒃 = slope of the demand curve
𝑷 = price of the good at a particular time period

𝑸𝒔 = 𝒄 + 𝒅(𝑷) 𝑸𝒔 = quantity supplied at a particular price

𝒂 = intercept of the supply curve
𝒃 = slope of the supply curve
𝑷 = rice of the good sold
▪ Elasticity – use to determine how changes in product demand and supply related to changes in

consumer income or the producer price.

▪ Elastic Demand – A slight change in the price will lead to a drastic change in the demand for the
product.
▪ Complement Good – two goods for which an increase in the price of one leads to a decrease in the
demand for the other.
▪ Cross-Price Elasticity of Demand – a measure of how much the quantity demanded of one good
response to a change in the price of another good, computed as the percentage change in quantity
demanded of the first good divided by the percentage change in the price of the second good.
▪ Inferior Good – a good for which, other things equal, an increase in income leads to a decrease in
demand.
▪ Income Elasticity of Demand – a measure of how much the quantity demanded of a good response
to a change in consumers' income, computed as the percentage change in quantity demanded
divided by the percentage change in income.
▪ Inelastic Demand – An elastic product is one that consumers continue to purchase even after a
change in price.
▪ Normal Good – a good for which, other things equal, an increase in income leads to an increase in
demand.
▪ Price Elasticity of Demand – a measure of how much the quantity demanded of a good response
to a change in the price of that good, computed as the percentage change in quantity demanded
divided by the percentage change in price.
▪ Price Elasticity of Supply – a measure of how much the quantity supplied of a good response to a change in the
price of that good, computed as the percentage change in quantity supplied divided by the percentage change in
price. ▪ Substitute Good – two goods for which an increase in the price of one leads to an increase in the
demand for the other. ▪ Superior Good – are luxury goods that are always expensive and often are relatively
scarce or harder to come by. These are goods that are something very pleasant but not really needed in life.

Elasticity of Demand
As a consumer, you are usually demanding more of goods when its price is lower, when your incomes are
higher, when the value of substitute goods is higher, or when the rate of the complement goods is cheaper. It is
your natural reaction as a consumer but, it is not happening all the time. The level of the consumers’
responsiveness varies greatly, and it can measure by the price of elasticity of demand. You can classify the
demand elasticity according to the factors that cause the change: the price elasticity, the income elasticity, and
the cross-price elasticity.

Price Elasticity of Demand

The price elasticity of demand is dealing with the sensitivity of quantities bought by a consumer to a
change in the product price. You can compute the price elasticity of demand, by using the following
formula:

𝑬𝒅 =𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

Where: 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅 = 𝑸𝟐−𝑸𝟏

𝑸𝟏
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 = 𝑷𝟐−𝑷𝟏
𝑷𝟏
Therefore:
𝑬𝒅 = 𝑸𝟐 − 𝑸𝟏
𝑸𝟏
𝑷𝟐 − 𝑷𝟏
𝑷𝟏
Where: 𝑬𝒅 = Price elasticity of demand
𝑸𝟏 = Original quantity demanded
𝑸𝟐 = New quantity demanded
𝑷𝟏 = Original Price
𝑷𝟐 = New Price
Interpretation of the Elasticity Coefficient
You may interpret your computed elasticity as follows:

• Elastic – The result is greater than 1 (𝑬𝒅 > 𝟏), which means that spending is relatively priced
sensitive.
• Inelastic – The result is less than 1 (𝑬𝒅 < 𝟏), which means the slight or no change in quantity
demanded when the price of the commodity gets changed.
• Unitary Elasticity – The result is equal to 1 (𝑬𝒅 = 𝟏), which means that the spending changes are
proportionate with price changes.
• Perfectly Elastic – The result is infinite (𝑬𝒅 = ∞), which means that a change in price leads to an
unlimited change in the quantity demanded.
• Perfectly Inelastic – The result is equal to zero (𝑬𝒅 = 𝟎), which means that quantity
demanded/supplied remains the same when price increases or decreases.

Elastic vs. Inelastic

In general, necessity commodities or essential items such as foods, medicines, water, and electricity are price
inelastic while luxury products such as appliances, fashionable jewelry, and car are price elastic. Demand for
necessity commodities is inelastic because of the repeated purchase of these commodities for basic needs by
the consumer. These products usually do not have substitutes and always a part of the financial budget of the
consumers. Thus, the consumers' habit does not change even the price goes up or goes down. Conversely,
demand happens to be elastic for luxurious commodities due to seldom purchase of these commodities. When
the prices of the commodity increase, the quantity demanded decreases because people are not willing to
spend more money on this product. At the same time, when the price of the commodity decreases, the quantity
demanded increases. Hence, the price change leads to the substitute product available in the market to either
increase or decrease.

Income Elasticity of Demand

You can use the income elasticity of demand if you want to measure how the quantity demanded
changes as consumer income changes. You can compute the income elasticity by dividing the
percentage change in the number of goods demanded by the percentage change in income. That is,

𝒆𝒚 = 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆

𝒆𝒚 = 𝑸𝟐 − 𝑸𝟏
𝑸𝟏
𝒀𝟐 − 𝒀𝟏
𝒀𝟏

Let: Q2 = 170 Y2 = 9,000

Q1 = 140 Y1 = 7,000
Solution:
𝒆𝒚 = 𝑸𝟐 − 𝑸𝟏
𝑸𝟏
𝒀𝟐 − 𝒀𝟏
𝒀𝟏

= 𝟏𝟕𝟎 − 𝟏𝟒𝟎
𝟏𝟒𝟎
𝟗, 𝟎𝟎𝟎 − 𝟕, 𝟎𝟎𝟎
𝟕, 𝟎𝟎𝟎
= 𝟑𝟎
𝟏𝟒𝟎
𝟐, 𝟎𝟎𝟎
𝟕, 𝟎𝟎𝟎

= . 𝟐𝟏
. 𝟐𝟗

= . 𝟕𝟓

What is 𝒆𝒚 =. 𝟕𝟓? The income elasticity of .75 means that for every one percent (1%) increase in
income, the quantity demanded will increase by .75 or 75%. Since income elasticity of .75 is less than
1, therefore, income is inelastic, and the good is inferior.

If the income elasticity is more than one (1), income is elastic, and the good is superior. If the income
elasticity is lesser than one (1), it is inelastic, and the product is inferior, and if it is equal to one (1), it
is unitary, and the good is normal.

Elasticity of Supply:

The producers or sellers of a good tend to sell more goods and services when prices are higher. However, their
reactions also vary depending on their ability to produce at a given time. The varying responses of producers or
sellers can measure by the price elasticity of supply.

Price Elasticity of Supply:

The price elasticity of supply measures how much the quantity

supplied responds to changes in the price. In other words, the
price elasticity of supply is equal to:

𝑬𝒔 = 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒔𝒖𝒑𝒑𝒍𝒊𝒆𝒅

𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

Where: 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒔𝒖𝒑𝒑𝒍𝒊𝒆𝒅 = 𝑸𝟐−𝑸𝟏

𝑸𝟏
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 = 𝑷𝟐−𝑷𝟏
𝑷𝟏
Therefore:
𝑬𝒔 = 𝑸𝟐 − 𝑸𝟏
𝑸𝟏
𝑷𝟐 − 𝑷𝟏
𝑷𝟏