Module 1: Unit 3- Demand, Supply,
and Equilibrium
“Your inferior good might be a normal good to
someone and your normal good might be an inferior
good to someone.”
A normal good- is a product or service for which
demand increases as a consumer's income increases. In
other words, as people become more affluent, they
tend to consume more of these goods or services. For
example, if a person's income increases, they may
decide to switch from generic-brand clothing to
designer clothing, or from regular gasoline to premium
gasoline.
An inferior good- is a product or service for which
demand decreases as a consumer's income increases. In
other words, as people become more affluent, they
tend to consume less of these goods or services. For
example, if a person's income increases, they may
decide to stop buying canned goods and instead buy
fresh produce or switch from using public transportation
to driving their own car.
In simpler terms:
Normal goods are things that people want to buy more
of as they become richer. Inferior goods, on the other
hand, are things that people want to buy less of as they
become richer.
- Example:
Normal goods- Clothing (as income increases,
people may start buying higher-end or designer
clothing)
Inferior goods- Generic/store brand products
(as income increases, people may switch to
more expensive and higher-quality brands)
Market- a means by which the exchange of goods and
services takes place because of buyers and sellers being
in contact with one another, either directly or through
mediating agents or institutions.
If there are buyers and sellers, that is a market. No
matter whether trading happens or not.
- Buyers as a group determine the demand to
purchase this good or service.
- Sellers as a group determine the supply of the
product, to provide this good or service.
Demand and supply analysis
Demand Concept
Demand- refers to the behavior of people regarding
their ability and willingness to buy products at a given
price. Therefore, when we say demand both the ability
and willingness to pay should be present.
Quantity demand- refers to the amount of goods and
services people are willing to buy and consume.
Demand schedule- is the tabular presentation of
quantity demanded at a given price (P).
Demand curve- graphical presentation of the demand
schedule. Graphically, demand is depicted as a
downward sloping line on a graph with Price on the Y
axis and Quantity on the X axis. The downward slope
indicates the inverse relationship between price and
quantity purchased.
Law of demand- is a simple explanation of consumer
behavior.
- States that as the price of a good goes up, the
quantity demanded of that good goes down
when other factors are held constant.
- This means that consumers tend to buy more of
a certain good at a lower price.
- Conversely, as this good becomes more
expensive, consumers will tend to buy less.
- Take note of the word “Tendency.”
Exceptions to the law of demand
Some goods do not show an inverse relationship
between the price and the quantity. Therefore, the
demand curve for these goods is upward sloping. These
goods are classified as:
1. Giffen goods
- These are inferior goods that lack close
substitutes that represent the large portion of
the consumer’s income.
- The existence of such goods was proposed by
Scottish economist Sir Robert Giffen in the 19th
century.
- Giffen goods violate the law of demand because
the prices of these goods increase with the
increase in the quantity demanded.
 - Giffen goods remain mostly a theoretical - The price of complementary goods or services
concept as there is limited empirical evidence of raises the cost of using the product you
their existence. demand, so you'll want less.

Substitute goods- are two alternative goods that could

2. Veblen Goods
be used for the same purpose.
- Are named after American economist, Thorstein
Veblen.
- Generally, they are luxury goods that indicate
the economic and social status of the owner.
- Consumers are willing to consume Veblen goods
even more when the price increases.
- Some examples of Veblen goods include luxury
cars, expensive wines, and designer clothes.
Non-Price Determinant of Demand.
1. Income
- When income rises, so will the quantity
demand. When income falls, so will the
demand.
- Usually as income rises the demand for normal
goods increases and the demand for inferior
goods decreases.
Normal Good- Can be defined as those goods for which
demand increases when the income of the consumer
increases and falls when income of the consumer
decreases, price of the goods remaining constant.
- An increase in the price of good A will lead to an
increase in the demand for good B and vice
versa.
3. Taste and preference
- When the public’s desires, emotions, or
preferences change in favor of a product, so
does the quantity demand. Likewise, when
tastes go against it, that depresses the amount
demanded. Brand advertising tries to increase
the desire for consumer goods.
4. Expectations
- When people expect that the value of
something will rise, they demand more of it.
That helps explain the housing asset bubble of
2005. Housing prices rose, but people kept
buying houses because they expected the price
to continue to increase.

- Example: Demand of smart television, demand

for more expensive cars, branded clothes, 5. Number of buyers in the market
expensive houses, diamonds etc.… increases - The number of consumers affects overall, or
when the income of the consumers increases. “aggregate,” demand. As more buyers enter the
market, demand rises. That's true even if prices
Inferior Goods- the opposite side of normal goods. It is don't change the total number of buyers in the
defined as those goods the demand for which decreases market expands. Example: as population
when the income of the consumer increases. increases demand for housing increases.
- Example: consumption of breads or cereals and
since the income of the consumer increases, he
moved towards consumption of more nutritious
foods and hence demand for low priced
products like bread or cereal decreases.

2. Prices of related goods or services

Complementary Goods or Service- these are goods

service that must (or at least are meant) to be used
together, like car and fuel, printer, and ink.
The Law of Demand in the Real World
- Economic principle that guides the actions of
politicians and policymakers.
- Is quintessential for the fiscal and monetary
policies that are undertaken by governments
around the world.
Supply Concept
Supply- refers to the behavior of the suppliers or the
producers on their ability and willingness to make
products available at a given prices.
Quantity supply- refers to the amount of goods and
services suppliers or producers can make available at a
given price.
Supply schedule- is the tabular presentation of prices
and their corresponding quantities supplied by
suppliers.
Supply curve- Graphically, supply is depicted as an
upward sloping line on the same graph with price and
quantity on the axes, indicating the positive relationship
between price and quantity. The reason for this
relationship is simple: the higher the price of a product,
the more rewarding it is to sell.
Concept of supply and stock
Stock- is the total quantity of the commodity that is held
by the firm at a particular point of time.
Supply- is that portion of the stock of the commodity
that the producer is willing to bring to the market for
sale.
Stock can never be less than supply.
Law of Supply
- Given the ceteris paribus assumption, when
price of commodities tends to increase the
quantity being supplied by suppliers/ producers
also tends to increase. Likewise, if the price of
commodities tends to decrease, the
corresponding quantities being supplied also
tend to decrease.
- The driving force behind the behavior of the
suppliers / producers is simply the “profit
motive”.
- Common sense would tell us that no producer
or supplier would offer his/her products or
services without a corresponding economic
benefit (in this case profit). Because of this
motive, if the producers see that they can make
more money by offering more products they
tend to offer more at higher prices. But if there
is less money to be made, they tend to offer
fewer products to cut their losses and offer
these at a lower price to entice customers to
buy their products. Take note that this law of
supply applies when all other things are held
constant.
Non-Price determinant in Supply
1. Number of sellers in the market (competition)-
more firms producing the same or very similar
product means more supply overall.
2. Technology- as technology improves more
supply being produced at a cheaper price.
3. Cost of inputs- changes in costs of factors of
production (land, labor, capital
entrepreneurship). As there is an increase in the
costs of production you would have to pay more
for the same quantity.
4. Price of related goods- an increase in the price
of related goods can influence the supply of the
original good.
5. Producer’s expectation of future prices- if the
demand for a product is likely to rise, companies
increase their supply (to be ready to supply
more in the future and gain higher profit for
example prior to this upcoming Christmas there
would be an increase in the production of
Christmas decorations.
6. Legal provisions- pertaining to government
intervention for example, provision on indirect
taxes will lead to an increase in the cost of
production which result to less supply and
 increase in price. Rules, regulations, policies are
among them.
7. Natural Phenomenon- affecting mostly the
agricultural sector. For example, what had
recently happened in some parts of Luzon
where rice production is engrained. It is
expected that if there is a decrease in the supply
of rice it is because of the devastation brought
about by typhoon Ulysses.
Equilibrium- The point at which the supply and demand
curves intersect.
Equilibrium price- is the only price where the plans of
consumers and the plans of producers agree.
- Where the amount of the product consumers
wants to buy (quantity demanded) is equal to
the amount producers want to sell (quantity
supplied).
Economists call this common quantity the equilibrium
quantity.
Disequilibrium
- If the market price is above or below the
equilibrium price
- There are two conditions that are a direct result
of disequilibrium: a shortage and a surplus.
A shortage occurs when the quantity demanded is
greater than the quantity supplied.
Shortage = Quantity demanded (Qd) > Quantity
supplied (Qs)
Because of the excess demand, there will be
competition among buyers to have their wants
reserved. They compete for the limited supply, and this
is done through a price increase. As the price of the
commodity increases, the quantity demand will decline,
and the quantity supplied will increase thus eliminating
the excess demand.
A surplus occurs when the quantity supplied is greater
than the quantity demanded.
Surplus = Quantity supplied (Qs) > Quantity demanded
(Qd).
If the quantity demand is lower than the quantity
supplied there is excess supply at the prevailing price.
Suppliers are then motivated to remove excess supply
through price competition. Suppliers will compete to
dispose of their excess supply by lowering their prices
and this will encourage the consumers to increase
quantity demand thus adjustment from both supplier
and buyers will eliminate excess supply.
John Maynard Keynes- an economist was the first to
study market disequilibrium. He theorized that markets
will usually be in a state of disequilibrium because of
various factors that influence market stability.
How to solve demand, supply equation and
equilibrium?
Watch YT
a. Solve for the demand equation.
b. Solve for the supply equation.
c. Solve for the equilibrium price and
equilibrium quantity.
Types of Elasticity
1. Price elasticity- is the responsiveness of
demand to change in price.
2. Income Elasticity- income elasticity means a
change in demand in response to a change in
the consumer’s income.
3. Cross Elasticity- cross elasticity means a change
in the demand for a commodity owing to a
change in the price of another commodity.
Price elasticity of demand and supply
A. Price elasticity of demand- refers to the degree
of responsiveness of the consumers for every
change in price. In other words, it shows how
many products customers are willing to
purchase as the price of these products
increases or decreases.
- The elasticity of demand formula is calculated
by dividing the percentage that quantity
changes by the percentage price changes in
each period.
Elasticity = % change in quantity / % change in price
Q2-Q1 / P2-P1
Q1 P1
- Types of price elasticity of demand.
a. Elastic- The demand is elastic when with a
small change in price there is a great change
in demand.
b. Inelastic- it is inelastic or less elastic when
even a big change in price induces only a
slight change in demand.
c. Unitary elastic- changes in the same
proportion to its price; this means that the
percentage change in demand is exactly
equal to the percentage change in price.
- Types of price elasticity of supply
a. Elastic- when with a small change in price
there is a great change in supply.
b. Inelastic- it is inelastic or less elastic when
even a big change in price induces only a
slight change in supply.
c. Unitary elastic- which changes in the same
proportion to its price; this means that the
percentage change in supply is exactly equal
to the percentage change in price.
Equilibrium= the state where the quantity demanded,
and the quantity supplied are equal at a given price.
The steps to analyzing changes in equilibrium.
Step 1. Draw a demand and supply model representing
the situation before the economic event took place.
Step 2. Decide whether the economic event being
analyzed affects demand or supply.
Step 3. Decide whether the effect on demand or supply
causes the curve to shift to the right or to the left and
sketch the new demand or supply curve on the diagram.
Step 4. Identify the new equilibrium and then compare
the original equilibrium price and quantity to the new
equilibrium price and quantity.
Another application of demand supply analysis.
1. During times of major calamities, we often
observe that the price of basic commodities
increases very fast. This is not caused by the
reduction in supply alone, but it can be
accompanied by an increase in the demand of
the consumers as they expect the price of basic
commodities to increase in the future due to
the effect of the calamity. During the times of
calamities, the rapid increase in the price of
basic commodities force the government to
intervene and impose price control measure
and even rationing.
Price Ceiling- a measure to stabilize prices of basic
commodities. This means that the price cannot go
higher than the mandated price ceiling.
Price Floor- another government measure to arrest the
price adjustment in the market. The government sets
the price of the commodity, and it cannot go lower than
the set price. The imposition of the price floor is to
protect certain actors in the market.
2. Applications in the labor market
- The demand and supply analysis can also be
used in the determination of the wage rate in
the labor market.
The Labor Market- is composed of those that demand
labor services and those that supply labor services. The
demand for labor and the supply of labor in the labor
market are motivated by the changes in the price of
labor which are indicated by the wage rate.
3. Application in the foreign exchange market
- A foreign exchange market is the market in
which the currencies of various countries are
converted into each other or exchanged for
each other. The exchange rate can be
determined by the interaction of the demand,
for example US dollars, and the supply of US
dollars in the market for foreign exchange.
Module 1: Unit 4- Market Structure
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.
Market structure- refers to the nature and degree of
competition in the market for goods and services. The
structures of market both for goods market and service
(factor) market are determined by the nature of
competition prevailing in a particular market. In other
words, it describes the extent to which markets are
competitive.
Market structures are classified on the following
determinants:
1. The number and nature of sellers.
2. The number and nature of buyers. (Bargaining
power of buyers)
Oligopsony- few buyers of a particular product.
Monopsony- single buyer in the market.
3. The nature of the product.
The nature of the product such as homogenous
or standardized, heterogeneous or
differentiated products, products that are close
substitute, unique product that has no close
substitute determines the market structure.
4. The conditions of entry into and exit from the
market or barriers to entry.
There are barriers that may hinder the entry of
new firms.
Different types of Market Structure:
1. Perfect Competition Market:
- Characteristics of Perfect Market Competition
a. Large Number of Buyers and Sellers
 Large number of buyers and sellers that
none of them can individually influence
the price and output of the industry.
b. Freedom of Entry or Exit of Firms
 The firms are free to enter or leave the
industry.
c. Homogeneous Product
 Each firm/ seller produces and sells a
homogeneous product so that no buyer
has any preference for the product of
any individual seller over others. This is
only possible if units of the same
product produced by different sellers
are perfect substitutes.
d. Absence of Artificial Restrictions
 Sellers are free to sell their goods to any
buyers and the buyers are free to buy
from any sellers. In other words, there is
no discrimination on the part of buyers
or sellers.
e. Profit Maximization Goal
 Every firm has only one goal of
maximizing its profits.
f. Perfect Knowledge of Market Conditions
 Buyers and sellers possess complete
knowledge about the prices at which
goods are being bought and sold, and of
the prices at which others are prepared
to buy and sell.
g. Absence of Transport Costs
 Another condition is that there are no
transport costs in carrying products
from one place to another.
h. Absence of Selling Costs
 Under perfect competition, the costs of
advertising, sales-promotion, etc. do
not rise because all firms produce a
homogeneous product.
2. Monopoly Market: A monopoly refers to a
market structure where a single firm controls
the entire market. In this scenario, the firm has
the highest level of market power, as consumers
do not have any alternatives. As a result,
monopolies often reduce output to increase
prices and earn more profit.
- Characteristics of Monopoly Market
a. The number and nature of sellers.
 Monopoly is a market situation in which
there is only one seller of a product
with barriers to entry of others.
 b. The nature of the product. 4. Monopolistic Competition:
 The product has no close substitutes. - Features of monopolistic competition.
This means that no other firm produces
a. The number and nature of sellers.
a similar product.
 Since the number of sellers is large,
c. The number and nature of buyers.
none controls a major portion of the
(Bargaining power of buyers)
total output. Firms in monopolistic
 A monopolist has full control over the
competition sell similar but slightly
supply of a product.
differentiated products. That gives them
d. The conditions of entry into and exit from
a certain degree of market power, which
the market or barriers to entry.
allows them to charge higher prices
 For example, a patent can give the
within a specific range.
patent owner a legal monopoly on the
b. The number and nature of buyers. (Bargaining
production of the patented product.
power of buyers)
Pure monopoly is nonexistent in the real world.  Many buyers. No single buyer can
influence the price and output.
c. The Nature of the Product
3. Oligopoly: describes a market structure that is  Products are close but not perfect
dominated by only a small number of firms. substitutes for each other.
That results in a state of limited competition. d. The conditions of entry into and exit from the
The firms can either compete against each other market or barriers to entry.
or collaborate. By doing so, they can use their  There are barriers to entry of new firms.
collective market power to drive up prices and
earn more profit.
- Characteristics of Oligopoly
a. The number and nature of sellers
 Oligopoly is a market situation in which
only a few firms dominate the market.
Unfortunately, it is not clearly defined
what a “few firms” means precisely. As
a rule of thumb, we say that an
oligopoly typically consists of about 3-5
dominant firms.
b. The number and nature of buyers.
(Bargaining power of buyers)
 Many buyers, buyers are price takers.
c. The nature of the product.
 Few firms sell homogeneous or
differentiated products.
d. The conditions of entry into and exit from
the market or barriers to entry.
 There are some types of barriers to
entry which tend to restrain new firms
from entering the industry. Examples
are huge capital requirements,
economies of scale.
Understanding the different market structures are important because they help us understand how competing firms
make decisions. With that said, let’s look at the four market structures in more detail using the table below.

Market structure
Features Perfect Monopoly Monopolistic Oligopoly Monopsony oligopsony
competition competition
1. No. of Large One Varied and Few few Few to many
firms/ many
sellers in
the
industry
2. Nature of Homogenous/ One type/ Products are Homogenous Usually, Slightly
product standardized unique differentiated or unique differentiated
differentiated
3. Barriers Free Very high Low Very high Very high Very high
to entry No barrier barrier barrier
or exit in
the
industry
4. Relative No influence, Seller is Strong Very strong Buyer is the Buyer usually
influence sellers are the price influence but influence; price maker is the price
over the price takers maker, or usually a price seller usually maker with
price of the seller taker a price maker the others.
the can with the
product influence others
the price
and the
supply of
the
product
5. Number Many Many Many Many One Few
of buyers
in the
industry

Market Structure- refers to the characteristics of the market, either organizational or competitive, that describes the
nature of competition and the pricing policy followed in the market. Thus, the structure of the market affects how firm
price and supply their goods and services, how they handle the exit and entry barriers, and how efficiently a firm carries
out its business operations.

One of the macroeconomic goals of a country is economic growth, which is measured by real GDP. Consumption of
goods and services drives economic growth, so this explains why the government gives assistance or support, subsidies
to businesses regardless of the type of market structure.