DEMAND AND

SUPPLY
DEMAND
• refers to the number of amount of goods and
services desired by the consumers at various prices in
a particular period of time.

LAW OF DEMAND
• states that as price increases, quantity demanded
decreases; and as the price decreases, quantity
demanded increases, if other factors remain constant
(ceteris paribus)
 Determinants of Demand:
1. Consumer’s income
a. normal good- refers to a good for which demand at every price increases when
income rises or vice-versa
example: basic necessities such as rice, utilities (electricity and water), medical,
and dental services
b. Inferior good- refers to a good for which demand falls when income rises and
vice versa.
Example: public transportation

2. Consumer’s Expectation of Future Prices

3. Consumer’s Tastes and Preferences

a. Substitute products- goods that can be used in place of other goods.
Example: increase in the price of gasoline pushed some car owners to convert
their vehicle in using liquefied petroleum gas (lpg).
b. Complementary products- goods that go together or cannot be used without
the other
Example: the rise in the price of aviation fuel resulted to less travel by tourist in the
country causing a decline in hotel occupancy.

4. Population
Demand Function
It is a representation of the relationship between demand and
all of its determinants.
Qdx= f (Px, Y, e, Prel, T, Pop)
Where:
Qdx = quantity demanded
Px = price of goods and services
Y = income of consumers
e = consumers’ expectations of future prices
Prel = price of related products
T = consumers’ taste and preferences
Pop = population size

The demand function above can be rewritten if all determinants

except price are kept constant (ceteris paribus)
Qdx= f (Px )
The expression above signifies that the quantity demanded for good x
is dependent on its price on a specific period of time holding
everything else constant.
A linear equation can be constructed using the simplified
functional expression. This equation is a representation of
quantity demanded for good x in a period of time given as:
Qdx= a – bPx

Where a is the intercept and b is the slope of the function

Notice, however that the sign of the slope of demand equation
is negative suggesting an inverse relation between two
variables.

For Example:
Qd= 4,000-500P
= 4,000-500(4)
= 4,000-2,000
= 2,000
Demand Schedule
• It shows the tabular representation of the relationship
between the quantity of a good demanded and the price of
that good.

Demand Curve
• It shows graphically the relationship between the
quantity of the good demanded and its corresponding price,
with other variables held constant.
• The negative relation between the price of a good and
the quantity that consumers want to buy at a given price.

The Law of Downward Sloping Demand

• The greater quantity will be demanded when the price is
lower, and when the price of goods increases, buyers tens to
buy less of them.
Change in Quantity Demanded
• It is due only to a change in the price of goods and services.

Change in Demand
• It is brought by the changes in the non-price determinants of
demand.

Increase in Demand
• Shown by a rightward shift in the demand curve caused by
changes in non-price determinants.

Decrease in Demand
• Reveals a decline in demand represented by a leftward shift in
the demand curve.
 SUPPLY
Supply
• defined as the maximum units/quantity of goods and
services producers can offer.

Quantity Supplied
• refers to the amount or quantity of goods and services
producers are willing and able to supply at a given price, aat a
period of time.

Law of Supply
• States that as price increases, quantity supplied also increases,
and as price decreases, quantity supplied also decreases.
 Determinants of Supply

1. Change in Technology
2. Cost of Inputs Used
3. Expectation of Future Price
4. Price of Related Products
5. Government Regulation and Taxes
6. Government Subsidies
7. Number of Firms in the Market
Supply Function
• Is a mathematical expression of the law of supply or the relationship
between price (P) and quantity supplied (Qs).
Qsx= f (Px, T, C, Exp, Grt, Gs, M)
Where:
Qsx = quantity supplied
Px = price of good x
T = technology
C = Cost
Exp = expectation of future price
Grt = government regulations and taxes
Gs = government subsidies
M = number of firms in the market

The above supply function can be rewritten as follows if all determinants

except price are kept constant (ceteris paribus):
Qsx = f (Px )
The expression signifies that the quantity supply for good x is dependent
on its price on a particular period of time holding everything else
constant.
Supply Schedule
• Shows the tabular representation of the relationship between the
quantity of a good supplied and its price.

Supply Curve
• Shows graphically the relationship between the quantity of a good
supplied and its corresponding price, with other variables held
constant.

Change in Quantity Supplied

• Shows the movement from one point to another point on the same
supply curve, this is due to a change in the price of goods and
services.

Change in Supply
• Shifting from one supply to another. A shifting of the supply curve
to the right indicates that there is an increase in supply, and shifting
to the left indicates decrease in supply.
 MARKET EQUILIBRIUM
Market equilibrium is a state which implies a balance between
the opposing forces, a situation in which quantity demanded
and quantity supplied are equal.

• Qd=Qs quantity demanded equals quantity supplied

Surplus
• a condition where quantity supplied is greater than a quantity
demanded

Shortage
• A condition where quantity demanded is greater than the
quantity supplied.
Price ceiling
• Defined as the maximum price of good or services is bought or
sold.

Price floor
• Government control through imposition of minimum price.
 ELASTICITY
Elasticity measures the percentage change in one variable in relation
to the percentage change in another variable.
Formula:
Elasticity= percentage change in variable y
percentage change in variable x

In mathematical symbol:
ꜫ= %Δy
%Δx

Where:
ꜫ = Greek letter epsilon used as a symbol for elasticity
Δ = Greek letter delta which means “change”
% = percentage
x = independent variable
y = dependent variable
 Price Elasticity of Demand
Measures the responsiveness of the quantity demanded with
respect to the changes in its price.

Price Elasticity of Demand= percentage change in Quantity Demanded

percentage change in price

Mathematically,
ꜫD= %ΔQ
%ΔP
Degree of Price Elasticity of Demand:
1. Elastic Demand
• demand is price elastic when the elasticity is greater than 1
(˃1).
2. Inelastic Demand
• Demand is price inelastic when the elasticity coefficient is less
than 1. (˂1).
3. Unitary Elastic Demand
• Demand is unitary elastic when the elasticity coefficient is
equal to 1.
Extreme Cases of Price Elasticity of Demand
1. Perfectly Elastic Demand
2. Perfectly Inelastic Demand
 Determinants of Price Elasticity of Demand

1. The importance or degree of necessity of the goods.

2. Number of available substitutes
3. The proportion of income in price changes
4. The time period

Effect on Total Revenue

1. The price effect- this refers to an increase in price that will
result to a positive effect on revenue, and vice versa.

2. The quantity effect- this pertains to an increase in price that

will lead to less quantity sold, and vice versa.
Income Elasticity of Demand
• the responsiveness of quantity demanded in response to
a change in income.

Cross Elasticity of Demand

• measures the responsiveness of quantity demanded of a
good to a change in the price of another good.
 Supply Elasticity
Price Elasticity of Supply
measures the responsiveness of quantity supplied in response
to a percentage change in price of the products.

Degree of Price Elasticity of Supply

1. Elastic Supply
2. Inelastic Supply
3. Unitary Elastic Supply

Extreme Cases of Price Elasticity of Supply

1. Perfectly Elastic Supply
2. Perfectly Inelastic Supply

Determinants of Price Elasticity of Supply

1. Monetary or Intermediate
2. Short-run
3. Long-run