Unit 3: Law of Demand and Supply

The Law of Demand and Supply

Introduction
The global pandemic has changed the direction of global supply chains. We can see the
impact of the pandemic through changes in the prices of different goods and services. It
has also led businesses to shift their production to address the current needs of the people.
With what is happening around us we are led to ask questions such as: why are prices
changing? Why are businesses shifting their focus to producing or selling other things? How
does a pandemic affect people’s purchasing behavior? All of these questions can be
answered through understanding the economic concepts of demand and supply.

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply

This lesson will tackle the concepts of the market system and the difference between the
law of supply and the law of demand. It will also briefly introduce the concept of market
equilibrium. Additionally, quantity supplied and quantity demanded, as well as its
difference from supply and demand, will also be discussed. Alongside these are
applications of basic mathematical concepts that can help further understand supply and
demand.

DepEd Learning Competency

Learning Objectives
At the end of this lesson, you should
In this lesson, you should be able to do the be able to explain the law of supply
following: and demand and how equilibrium
price and quantity are determined
● Explain the law of demand and (ABM_AE12-Ie-h-4).
the law of supply concerning prices and
quantity.

● Differentiate between quantity

demanded and demand, and
quantity supplied and supply.
● Create a demand and supply schedule.
● Construct a demand and supply curve.
● Explain how market equilibrium
is achieved.
 Discover

In studying economics, understanding fundamental concepts such as the law of supply and
the law of demand is important, as the following topics and lessons are grounded on these
concepts. It is essential that students understand these concepts well.

Why is there a need to learn the fundamental

concepts of economics?

Market
Market is where buyers and sellers meet to exchange goods and services. It is in the market
where demand and supply are determined. In economics, a market may be classified based
on the number of buyers and sellers. Different types of markets include perfect competition,
monopoly, oligopoly, and monopolistic competition.

Market Systems
The economy can be classified into two market systems, the free market economy and the
command economy. It is important to remember that economies are not characterized in
absolute terms. This means that every government has the freedom to have degrees of
economic control and leniency, depending on its laws and policies.

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply

Law of Demand
The law of demand states that as the price of goods increases, quantity demanded
decreases. Conversely, when the price of goods decreases, quantity demanded increases.
Keeping all other factors constant (ceteris paribus), buyers will purchase more with lower
prices and less with higher prices. Hence, there is an inverse relationship between price and
quantity demanded.

The law of demand can be expressed as the demand function Qd = a - b(P), where Qd is
quantity demanded, a represents other factors affecting demand aside from price, b is the
slope of the demand curve, and P is price.

Quantity Demanded and Demand

Quantity demanded is the number of units that a buyer is willing and able to purchase at a
given price at a given time period. Meanwhile, demand is the set of all quantities the buyer
is willing to purchase at different price levels at a given time period.

To illustrate the difference between quantity demanded and demand, we will use an
example and apply mathematical concepts to demonstrate.

Let us imagine a child who wants to buy ice cream. The child’s demand function for ice
cream is represented by Qd = 7 - P. Let us fill out the demand schedule for ice cream in
Table 1 using the demand function for different price levels. A demand schedule is a table
that summarizes the quantity demanded for every price level. Using the different prices
found in Table 1, substitute each price level to the demand function to determine the
corresponding quantity demanded.

To illustrate using P = ₱1, we substitute this in the demand function Qd = 7 - 1 or Qd = 6.

When the price is equal to ₱1, quantity demanded is equal to 6.

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply
Table 1. Demand schedule for ice cream
Price (P) Quantity demanded (Qd)

₱1 6

₱2

₱3

₱4

₱5

Substituting each price level to the demand function, we can complete the demand
schedule for ice cream as shown in Table 2.

Table 2. Demand schedule for ice cream

Price (P) Quantity demanded (Qd)

₱1 6

₱2 5

₱3 4

₱4 3

₱5 2

Once the demand schedule is completed, we can now plot the demand curve with the price
on the y-axis and quantity on the x-axis. A demand curve is the graphical representation of
the demand schedule. The graph should look like the figure below:

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply

Figure 1 shows the different data points which represent the quantity demanded for ice
cream at every price level. Demand is the line that connects these data points. The demand
curve is expected to have a downward slope since price and quantity demanded are
inversely related. As shown in the figure above, as we move from zero to a higher price in
the price axis (y-axis), the number of ice cream the child is willing to purchase goes down.

Quantity demanded changes based on price changes and moves along the demand curve,
while changes in demand shift the curve to the left or to the right.

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply
Let’s Calculate

Example 1
Juan is a school principal who plans to purchase notepads. His willingness and capacity to
buy can be described by the demand function Qd = 150 - 3P. Create a demand schedule and
plot the demand curve showing the different prices of a notepad which are ₱20, ₱30, and
₱40.

Solution
Step 1: Applying the rule of substitution, solve for Qd using the demand function Qd =
150 - 3P, when the price is ₱20.
Substitute 20 to P.
Qd = 150 - 3P
Qd = 150 - [3(20)]
Qd = 150 - 60
Qd = 90

Step 2: Repeat Step 1 for price levels ₱30 and ₱40.

When the price is ₱30, substitute 30 to P.
Qd = 150 - 3P
Qd = 150 - [3(30)]
Qd = 150 - 90
Qd = 60

When the price is ₱40, substitute 40 to P.

Qd = 150 - 3P
Qd = 150 - [3(40)]
Qd = 150 - 120
Qd = 30
 Step 3: Create the demand schedule.

Price (P) Quantity demanded (Qd)

₱20 90

₱30 60

₱40 30

Step 4: Plot the points in a graph. Note that different price levels are points on the y-axis
while quantity demanded are points on the x-axis.

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply
Law of Supply
The law of supply states that as the price of goods increases, quantity supplied also
increases. Meanwhile, when the price of goods decreases, quantity supplied decreases. The
law of supply can be expressed as the supply function Qs = a + b(P), where Qs is quantity
supplied, a represents other factors affecting the supply aside from price, b is the slope of
the supply curve, and P is the price. Variable a is also the value of quantity supplied when
the price is equal to zero.

Quantity Supplied and Supply

The quantity supplied is the number of units a seller is willing and able to sell at a given
price at a given time period, while supply is the set of all quantities supplied at different
price levels at a given time period.

Consider an ice cream stand with supply function Qs = 15 + 2P. Create a supply schedule
using the supply function of the ice cream stand for different price levels.

Let us fill out the supply schedule of the ice cream stand in Table 3 using the supply function
for different price levels. A supply schedule is a table that summarizes the quantity
supplied for every price level. Using the different prices found in Table 3, substitute each
price level to the supply function to determine the corresponding quantity supplied.

To illustrate using P = ₱1, we substitute this in the supply function Qs = 15 + 2(1) or Qs = 17.
When the price is equal to ₱1, quantity supplied is equal to 17.

Table 3. Supply schedule of ice cream

Price (P) Quantity supplied (Qs)

₱1 17

₱2

₱3

₱4

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply
₱5

Substituting each price level to the supply function, we can complete the supply schedule for
ice cream as shown in Table 4.

Table 4. Supply schedule of ice cream

Price (P) Quantity supplied (Qs)

₱1 12

₱2 14

₱3 16

₱4 18

₱5 20

Once the supply schedule is completed, we can now plot the supply curve with the price on
the y-axis and quantity on the x-axis. A supply curve is the graphical representation of the
supply schedule. The graph should look like the figure below:

Fig. 3. The supply curve for ice cream

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply
Figure 3 shows the different data points which represent the quantity supplied for ice cream
at every price level. Supply is the line that connects these data points. The supply curve is
expected to have an upward slope since price and quantity supplied are positively related. As
shown in the figure above, as we move from zero to a higher price in the price axis (y-axis),
the number of ice cream the stand is willing to sell goes up. In this example, the owner
would like to sell more units of ice cream at a higher price to increase profit.

Quantity supplied changes based on price changes and moves upward or downward the
supply curve, while changes in supply shift the curve to the left or to the right.

Let’s Calculate

Example 2
Rey sells notepads. His willingness and capacity to sell notepads can be described by the
supply function Qs = 150 + 2P. Create a supply schedule and plot the supply curve showing
the different price levels of notepads at ₱20, ₱30, and ₱40.

Solution
Step 1: Applying the rule of substitution, solve for Qs using the supply function Qs= 150+
2P, when the price is ₱20.
Substitute 20 to P.
Qs = 150 + 2P
Qs = 150 + [2(20)]
Qs = 150 + 40
Qs = 190

Step 2: Repeat Step 1 for price levels ₱30 and ₱40.

When the price is ₱30, substitute 30 to P.
Qs = 150 + 2P
Qs = 150 + [2(30)]
Qs = 150 + 60
Qs = 210

When the price is ₱40, substitute 40 to P.

Qs = 150 + 2P
Qs = 150 + [2(40)]
 Qs = 150 + 80
Qs = 230

Step 3: Create a supply schedule.

Price (P) Quantity supplied (Qs)

₱20 190

₱30 210

₱40 230

Step 4: Plot the points in a graph. Note that different price levels are points on the y-axis
while the quantity supplied are points on the x-axis.

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply

Market Equilibrium
A market, as defined earlier, is where buyers and sellers meet to exchange goods and
services. In the market, buyers determine the demand, while sellers determine the supply.
The interaction of buyers and sellers in the market determines the market price, quantity
demanded, and quantity supplied.

Imagine going out and buying pandesal. Buying pandesal can cost around ₱10 for ten pieces.
At this price, you are able and willing to buy ten pieces of pandesal. The bakery is also able
and willing to sell all the pandesal without compromising profits. At this price level, sellers
are able and willing to sell the quantity demanded by the buyer.

Market equilibrium is the point where quantity demanded is equal to quantity supplied.
The price where quantity demanded is equal to quantity supplied is called the equilibrium
price or the market clearing price. At ₱10, the number of pieces of pandesal that the buyer
is able and willing to purchase is equal to the number of pieces of pandesal that the seller is
able and willing to sell.

​Wrap-Up
_____________________________________________________________________________________________
● The law of supply states that as price increases, quantity supplied increases; as price decreases,
quantity supplied also decreases. The law of demand states that as price increases, quantity demanded
decreases; as price decreases, quantity demanded increases.
● Quantity demanded and quantity supplied reflect buyers' willingness and ability to purchase, and
sellers' willingness and ability to produce goods and services. Demand and supply is the set of all units of
goods and services that are used and produced.
● Market equilibrium is the point where quantity supplied is equal to quantity demanded. The price at
which they are equal is called equilibrium price or market clearing price.
_____________________________________________________________________________________________

3.1. ​The Law of Demand and Supply

 Unit 3: Law of Demand and Supply
Try This!

A. True or False. Write true if the statement is correct. Otherwise, write false.
________________ 1. The market is a place where buyers and sellers meet to exchange
goods and services.

________________ 2. The law of supply states that as the price of goods increases,
quantity supplied also increases.

________________ 3. The law of demand states that as the price of goods increases,
quantity demanded also increases.

________________ 4. Supply and demand should go together.

________________ 5. The law of supply describes the positive relationship between

price and quantity supplied.

________________ 6. The law of demand describes the inverse relationship between

price and quantity demanded.

________________ 7. In the demand equation, Qd = a - b(P), a stands for the slope of

the demand curve.

________________ 8. In the demand equation, Qd = a - b(P), P stands for price.

________________ 9. Quantity supplied is the ability and willingness of buyers to

purchase goods and services.

________________ 10. Market equilibrium is the point at which quantity supplied is

equal to quantity demanded.

B. Fill in the blanks. Choose the correct word from the given options and fill in the blanks.

1. ____________ (Demand, Quantity demanded) is the set of all quantities the buyer
purchases at different price levels.

Unit 3: Law of Demand and Supply

 2. The supply curve slopes ____________ (downward, upward).
3. Keeping all other factors constant (ceteris paribus), buyers will purchase ____________
(less, more) with lower prices.
4. ____________ (Supply, Quantity supplied) is the number of units a seller is willing and
able to sell at a given price.
5. Suppliers, driven by profit, will sell ____________ (less, more), at a higher price.

C. Write your answers legibly in the space provided.

1. Using Venn Diagram, compare and contrast quantity demanded and quantity
supplied.