Applied Economics

CHAPTER 2
Application of
Demand and Supply
 LESSON 2.1
Basic Principles of
Demand and Supply
Chapter Learning Objectives
• To explain the law of supply and demand and
illustrate how equilibrium price and equilibrium
quantity are determined
• To discuss and explain the factors that affect
demand and supply
• To reason effectively how a change in demand or
supply or in both can affect equilibrium price and
equilibrium quantity
 Chapter Learning Objectives
• To apply the principles of demand and supply to
illustrate how prices of commodities are determined
• To distinguish between elastic and inelastic demand
and supply
• To describe the characteristics and distinguish the
features of the market structures (perfect competition,
monopoly, monopolistic competition, and oligopoly)
 Chapter Learning Objectives
• To relate population growth with the country’s labor
supply and apply the law of demand and supply in
the determination of wages of labor
• To deduce how the excess supply of labor has led
to the phenomenon of the Overseas Filipino Worker
• To analyze how demand and supply forces can
affect the value of the Philippine peso in relation to
foreign currencies
Chapter Learning Objectives
• To apply the law of demand and supply to Philippine
housing shortage and show how this has led to the
real estate boom in the country
• To understand how savings channeled into
investments can affect the economy
• To explain the concept of minimum wage
• To discuss why it is necessary for the government to
impose taxes
 Terms to Remember in
Chapter 2
• Market • Shift of the curve
• Goods market • Supply
• Consumers goods • Supply schedule
• Labor market
• Cost of production
• Stock market
• Technology
• Demand
•
• Market equilibrium
Demand schedule
• Demand function • Equilibrium
• Demand curve • Equilibrium price
• Population • Equilibrium quantity
• Movement • Rent
• Price ceiling
 Terms to Remember in
Chapter 2
• Elasticity
• Elastic demand/supply
• Inelastic demand/supply
• Unitary elastic demand/supply
• Price elasticity of demand
• Arc elasticity
• Income elasticity of demand
• Normal good
• Inferior goods
• Monopoly
• Monopolistic
competition
• Non-price competition
• Economies of scale
• Oligopoly
• Cross Price Elasticity of
Demand
• Market structure
• Perfect competition
• Imperfect competition
• Labor force or labor
supply
 Terms to Remember in
Chapter 2
• Wage • Gross Domestic
• Minimum wage Product
• Labor migration • Gross Domestic
• Foreign exchange rate Production
• Real estate boom • Full-time workers
• Business process • Part-time workers
outsourcing (BPO) • Overseas Filipino
• Savings Worker
• Investment • Productive capacity
• Taxes • Resources
• Economic rent
• Public goods
 The Market

What is a MARKET?

 It is an interaction between buyers and sellers of trading or

exchange.
 It is where the consumer buys and the seller sells.
 It is classified in three:
• Goods Market, where we buy consumer goods
• Labor Market, where workers offer services and
look for jobs, and where employers look for workers
to hire
• Financial Market, which includes the stock market
where securities of corporations are traded
 On Demand
What are DEMAND, DEMAND
SCHEDULE, and DEMAND
FUNCTION?
 Demand is the willingness of a consumer to buy a
commodity at a given price.
 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. It can be expressed by
the equation:
Qd = f (P)
This signifies that the quantity demanded for a good is dependent on the
price of that good.
 On Demand
What is the DEMAND CURVE?

 It is a graphical illustration of the demand schedule, with the price

measured on the vertical axis (Y) and the quantity demanded measured
on the horizontal axis (X). The values are plotted on the graph and are
represented as connected dots to derive the demand curve.
 On Demand

What is the LAW OF DEMAND?

 It states that, using the assumption “ceteris paribus”, there

is an inverse relationship between the price of a good and
the quantity demanded for that good. Thus, as price
increases, the quantity demanded for that product
decreases and vice versa.
 On Demand
There are also NON-PRICE
DETERMINANTS of Demand.

 They include income, taste, expectations, prices of related

goods, and population.
 They 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.
 If non-price determinants come into play, the demand
function will now read:
D = f(P, T, Y, E, PR, NC)
This states that the demand for a good is a function of Price (P), Taste (T), Income
(Y), Expectations (E), Price of Related Goods (PR), and Number of Consumers
(NC).
 On Demand
What happens when shifts of the
demand curve occur?
 If a change in demand is caused by a non-price determinant, this
will involve a change in the entire demand curve. For example, the
demand curve will shift to the right to reflect an increase in demand
due to higher income and to the left to show a decrease in demand
due to less income.
 On Supply
What are SUPPLY, SUPPLY SCHEDULE,
and SUPPLY FUNCTION?

 Supply refers to the 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.
 On Supply
What is the SUPPLY CURVE?

 It is a graphical illustration of the relationship between the price of a

good or service and the quantity supplied for a given period of time.
The price is measured on the vertical axis (Y) and the quantity supplied
measured on the horizontal axis (X). The values are plotted on the
graph and are represented as connected dots to derive the supply
curve.
 On Supply

What is the LAW OF Supply?

 It states that, using the assumption “ceteris paribus”, there

is a direct relationship between the price of a good and
the quantity supplied of that good. Thus, as the price
increases, the quantity supplied of that product also
increases and vice versa.
 On Supply
There are also NON-PRICE
DETERMINANTS of Supply?

 They include cost of production, technology, and

availability of raw materials and resources.
 They can cause an upward or downward change in the
entire supply of the product. This change is referred to as
a shift of the supply curve.
 If non-price determinants come into play, the supply
function will now read:
S = f (P, C, T, AR),
This states that the Supply (S) of a good is a function of the price of that good (P),
the cost of production (C), technology (T), and the availability of raw materials
and resources (AR).
 On Supply
What happens when shifts of the
supply curve occur?
 Just like in the case of demand, there are also shifts of the supply
curve. Once supply increases due to a non-price determinant, the
entire supply curve will shift to the right to reflect an increase, or
to the left to reflect a decrease.