BASIC PRINCIPLES OF DEMAND AND SUPPLY

THE MARKET

Market
- Is an interaction between buyers and sellers of trading or exchange.
- It is where consumer buys and the seller sells.
- The market is important because it is where a person who has excess goods can
dispose them to those who need them.
- This can lead to an implicit agreement between buyers and sellers on volume and price.
- In purely competitive market (similar products) the agreed price between a biyer and
seller is also the market price or price of all.

Goods Market
- Is the most common type of market because it is where we buy consumer goods

Labor Market
- Is where workers offer services and looks for jobs, and where employers look for
workers to hire.

Financial Market
- Which includes the stockmarket where securities of corporations are traded

DEMAND
- Is the willingness of a consumer to buy a commodity at a given price
- The various seasons of the year, demand for certain types of goods will increase.

Demand Schedule
- Shows the various quantities the consumer is willing to buy at various prices

Demand Function
- Shows how the quantity demanded of a good depends on its determinants, the most
important of which is the price of the good itself, thus, the equation.

Qd = 6 - P / 2

- This signifies that the quantity demanded for a good is dependent on the price of that
good.

Income effect
- Is felt when a change in thee price of a good changes consumerls real income or
purchasing power, which is the capacity to buy with a given income.
Purchasing Power
- Is the volume of goods and services one can buy with his/her income.

If a good becomes more expensive real income decreases and the consumer can only buy less
goods and services with the same amount of money income. The opposite holds with a
decrease in the price of a good abd increase in real income.

Substitution Effect
- Is felt when a change in the price of a good changes demand due to alternative
consumption of substitute goods.

DEMAND AND SUPPLY IN RELATION TO THE PRICES OF BASIC COMMODITIES

If the forces of demand and supply operate together, we can show how price is determined in
the market economy. Alfred Marshall, a british economist defined the law of demand and
supply.

Equilibrium
- Is the state of balance when demand is equal to supply.

The equality means that the quantity that sellers are willing to sell is also the quantity that
buyers are willing to buy for a price.

The law of supply

- Using the same assumption of “ ceteris paribus “ (other things constant) there is direct
relationship between the price of a good and the quantity supplied of that good.
- As the price increases, the quantity supplied of that product also increases.
- The high price of the good serves as motivation for the seller to offer more for sale.
- When the price increases, the quantity supplied of the good increases since the seller
will take this as an opportunity to increase his/her income.

Non- price Determinants of Supply

- Supply is influenced by the factors other than price.
- These factors are assumed constant for the purpose of simplifying the study of the
relationship between price and quantity supplied.
-
If the assumptions of ceteris paribus is dropped, non-price variable are now allowed to influence
supply.
These non - factors are
● Cost of production
● Technology
● Availability of raw materials
● sources
 - These non-price materials can cause an upward or downward change in the entire
supply of the product, and this change is referred to as a shift of the supple curve.

Shifts of supply curve

The supply function will now read : S = (P, C, T, AR)

S = Supply
P = Price of that good
C = Cost of that production
T = Technology
AR = Availability of raw materials

COST OF PRODUCTION
- Refers to the expenses incurred to produce the good

An increase in cost will normally result in a lower supply of the goods even when price will not
change since the producer has to sell out more money to come up with the same amount of
output.

Which the same budget and higher cost, the producer will only produce a smaller amount of the
good, therefore the supply of the goods in the market will decrease.

TECHNOLOGY
- Is another significant non-price determinant of demand
- The use of improved technology in the production of a good will result in the increased
supply of that good.

SUPPLY
- Refers tothe quantity of goods that a seller is willing to offer for sale.

SUPPLY SCHEDULE
- Shows the different quantities the seller is willing to sell at various prices

SUPPLY FUNCTION
- Shows the dependence of supply on the various determinants that affect it.
The law of Demand
- As price increases, the quantity demanded for that product increases.
- The low price of the good motivates the consumer to buy more.
- When the price increases, the quantity demanded for the goods decreases.
Non-price Determinants of Demand

- If the ceteris paribus assumption is dropped, non-price variable that also affect demand
are now allowed to influence demand.

Non price factors include:

● Income
● Taste
● Expectations
● Prices of related goods
● Population

These non price determinants can cause an upward or downward change in the entire demand
for the product and this change is referred to as a shift of the demand curve.

The demand function will now read : D = f ( P, T, Y, E, PR, NC)

D = Deman for a good

F = function
P = price
T = taste
Y = Income
E = expectations
PR = Price of related goods
NC = Number of Consumers

If the consumer income decreases, the capacity to buy decreases and the demand will also
decrease even when price does remain the same. The opposite will happen when income
increases.

Improved taste for a product will cause a consumer to buy more of that good even if its price
does not change.

Another non-price determinant is the consumers expectations of future price and income.

Consumers tend to anticipate changes in the price of a good.

Prices of related goods as substitutes or complements also determines demand

SUBSTITUTE GOODS
- Are those that are sued in place of each other.

In the case of substitute goods, an increase in the demand for one good leads to a decrease in
the demand for the other goods.
So if the price of goods increases the demand for that good will decrease while the demand of
its substitute decreases.

Complements
- Are goods that are used together.

For complementary goods an increase in the demand for a good will lead to an increase in the
demand for the complement since they are used together.

Thus if the price of goods increases the demand for it will decrease and the demand for
its complement will likewise decrease.

Number of consumers is also a important determinant that will affect market demand for a good.

Population
- Makes up the group of consumers who will buy the product.
- The higher the population, the more consumers and the highers will be the demand dot
the good.