Demand and Supply

MAS 202 / MW / 11:00 – 12:30

MR. CADUCOY
 Terms to Remember

• Market – a place where buyers and sellers interact and

engage in exchange
• Demand – it reflects the consumer’s desire for a
commodity
• Supply – the amount of a commodity available for sale
 Terms to Remember

• Nonprice Factors – also known as parameters, are

factors other than price that also affect demand or
supply
• Demand Function – shows how quantity demanded is
dependent on its determinants
 Terms to Remember

• Supply Function – shows how quantity supplied is

dependent on its determinants
• Equilibrium – condition of balance or equality
• Price ceiling – is the maximum limit at which the price
of a commodity is set
 Terms to Remember

• Price floor – a minimum limit beyond which the price

of a commodity is not allowed to fall
• Surplus – an excess of supply over the demand for a
good
 Introduction

• In a market economy, the forces of demand and supply

play a very significant role in the determination of what
goods to produce and at what prices they should be
sold.
 The Market Mechanism

• A market is a mechanism through which buyers and

sellers interact in order to determine the price and
quantity of a good or a service while price is the value
of a good in terms of money.
• In the market system, prices serve as signals to both
the producers and the consumers.
 The Market Mechanism

• A competitive market is a market that has many

buyers and many sellers so no single buyer or seller can
influence the price.
• The money price of a good is the amount of money
needed to buy it.
 The Market Mechanism

• The relative price of a good is the ratio of its money

price to the money price of the next best alternative
good and its opportunity cost.
 Demand

• If you demand something, then you

1. Want it,
2. Can afford to buy it, and
3. Have made a definite plan to buy it
 Demand

• Demand means the desire for a particular good backed

up by sufficient purchasing power.
• In economics demand does not mean mere need or
desire, which is not backed up by the ability to pay or
no purchasing power. This kind of demand is called
Potential Demand.
 Demand

• The demand, which is backed up by the ability to pay is

called Effective Demand.
 Demand

• The quantity demanded of a good or service is the

amount that consumers plan to buy during a particular
time period, and at a particular price.
• It is briefly stated, it may be suitably described as
signifying a quantity of a particular good that an
individual is willing and ready to buy at a given price.
 Demand
• A demand schedule reflects the quantities of goods and
services demanded at different prices and can be understood
through graphical illustration known as the demand curve.
• In many instances, it is more convenient to express the
relation between prices and quantity demanded by means of
a demand curve.
 Demand in Output Markets
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS • A demand schedule is a
QUANTITY table showing how much of
PRICE DEMANDED a given product a household
(PER (CALLS PER
would be willing to buy at
CALL) MONTH)
$ 0 30 different prices.
0.50 25
3.50 7
• Demand curves are usually
7.00 3 derived from demand
10.00 1 schedules.
15.00 0
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS

PRICE
QUANTITY
DEMANDED
• The demand curve is a
(PER (CALLS PER graph illustrating how much
CALL) MONTH)
$ 0 30
of a given product a
0.50 25 household would be willing
3.50 7
7.00 3
to buy at different prices.
10.00 1
15.00 0
The Law of Demand
• The law of demand states
that there is a negative, or
inverse, relationship
between price and the
quantity of a good
demanded and its price.
• This means that
demand curves slope
downward.
 The Law of Demand

• It states “other things remaining the same, the higher

the price of a good, the smaller is the quantity
demand; and the lower the price of a good, the larger
is quantity demanded.
• The law of demand results from: (a) substitution effect
(b) Income effect
 Substitution Effect

• When the relative price (opportunity cost) of a good or

service rises, people seek substitutes for it, so the
quantity demanded of the good or service decreases.
• It means that consumers tend to buy goods with lower
prices. In case the price of the good increases they look
for substitutes whose prices are lower.
 Income Effect

• When the price of a good or service rises relative to

income, people cannot afford all the things they
previously bought, so the quantity demanded of the
good or service decreases.
 Determinants of Demand

• Income - changes in income of consumers will change

their demand for goods and services.
• Population – more people means more demand for
goods and services.
• Taste and Preference – basis for religion, culture,
tradition, age and gender.
 Determinants of Demand

• Price expectation – changes of prices of goods in

certain period of time.
• Price of related goods – changes of prices of goods in a
certain period of time will result for substitution effect
and complimentary effect.
 Ceteris Paribus Assumption

• It assumes that “all other things equal or constant”.

• It means that the determinants of demand are
constant and are not considered as factors that will
affect demand in the market.
 Ceteris Paribus Assumption

• As restated “assuming that the determinants of

demand are constant, price and quantity demanded
are inversely proportional to each other”.
• However, if the determinants of demand affects the
demand in the market, then the ceteris paribus
assumption is dropped or changed.
 Changes in Demand

• It refers to the shift of demand curve which is brought

about by the changes in the determinants of demand.
• If the ceteris paribus assumption is dropped, then
changes in the price factor shall take place.
• This will result in change in the position or slope of the
demand curve and demand schedule.
 Changes in Demand

• Increase in income – shift to the right

• Decrease in income – shift to the left
• Greater taste / preference – shift to the right
• Less taste / preference – shift to the left
 Changes in Demand

• Increase in population – shift to the right

• Decrease in population – shift to the left
• Greater speculation – shift to the right
• Less speculation – shift to the left
 Changes in Quantity Demanded

• It indicate the movement from one point to another

point brought by changes in prices.
• This means, the demand curve does not change its
position like that of the demand curve in the changes
in demand.
 Supply

• If a firm supplies a good or service, then the firm

1. Has the resources and technology to produce it,
2. Can profit from producing it, and
3. Has made a definite plan to produce and sell it.
 Supply

• Resources and technology determine what it is

possible to produce. Supply reflects a decision about
which technologically feasible items to produce.
• The quantity supplied of a good or service is the
amount that producers plan to sell during a given time
period at a particular price.
 Supply

• Supply is the schedule of various quantities of

commodities which producers are willing and able to
produce and offer at various prices in a given time and
place.
• In other words, it is the amount of goods and services
available for sale at given prices in a given period of time.
 Supply in Output Markets
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS • A supply schedule is a table
QUANTITY
SUPPLIED
showing how much of a product
PRICE (THOUSANDS firms will supply at different
(PER OF BUSHELS
BUSHEL) PER YEAR)
prices.
$ 2 0
1.75 10
2.25 20
3.00 30
4.00 45
5.00 45
 The Supply Curve and
the Supply Schedule
CLARENCE BROWN'S 6

Price of soybeans per bushel ($)

SUPPLY SCHEDULE • A supply curve is a
FOR SOYBEANS 5
QUANTITY
4
graph illustrating how
PRICE
SUPPLIED
(THOUSANDS
3
much of a product a firm
will supply at different
(PER OF BUSHELS
BUSHEL) PER YEAR) 2
$ 2 0
1.75 10 1 prices.
2.25 20
3.00 30 0
4.00 45
5.00 45 0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
 The Law of Supply
6 • The law of supply states
Price of soybeans per bushel ($)

5 that there is a positive

4 relationship between price
3 and quantity of a good
2 supplied.
1 • This means that supply
0 curves typically have a
0 10 20 30 40 50 positive slope.
Thousands of bushels of soybeans
produced per year
 The Law of Supply
• It also states:
• Other things remaining the same, the higher the price of a good,
the greater is the quantity supplied; and
• The lower the price of a good, the smaller is the quantity supplied.
• Producers are willing to supply a good only if they can at least
cover their marginal cost of production.
 Marginal Cost

• It is the change in the opportunity cost that arises

when the quantity produced is incremented by one
unit.
• It is also the cost of producing one more unit of a good.
 Determinants of Supply

• Productivity (workers, machines, and / or assembly)

• Inputs (change in the price of materials needed to make
the good)
• Government Actions (subsidies, taxes and regulations)
• Technology (improvements in machines and production)
 Determinants of Supply

• Outputs (price changes in other products)

• Expectations (outlook of the future)
• Sizes of Industry (number of companies in the industry)
The Ceteris Paribus Assumption of Supply

• The law of supply is only correct if we apply the

assumption of ceteris paribus.
• This means the law of supply is valid if the
determinants of supply are constant.
 Changes in Supply

• The law of supply is only correct if we apply the

assumption of ceteris paribus.
• This means the law of supply is valid if the
determinants of supply are constant.
• It pertains to a shift of supply curve brought by changes
in the determinants of supply.
Changes in Supply
Changes in Supply
 Changes in Quantity Supplied

• It shows the movements from one point to another

point in a constant supply curve.
• Change in quantity supplied is brought about by a
change in price.
 A Change in Supply Versus
a Change in Quantity Supplied
• When supply shifts
to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.
 Changes in Quantity Supplied

• Increase in the number of sellers – shift to the right

• Decrease in the number of sellers – shift to the left
• Better – shift to the right
• Decrease in the cost of production – shift to the right
 A Change in Supply Versus
a Change in Quantity Supplied
To summarize:

Change in price of a good or service

leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
 Market Equilibrium
• The operation of the market depends on the interaction
between buyers and sellers.
• An equilibrium is the condition that exists when
quantity supplied and quantity demanded are equal.
• At equilibrium, there is no tendency for the market
price to change.
Market Equilibrium

• Only in equilibrium is
quantity supplied equal
to quantity demanded.
 The Law of Demand and Supply

• It states that when supply is greater than demand,

price decreases. When demand is greater than supply,
prices increases.
• When supply is equal to demand, price remains
constant.
Market Disequilibria
• Excess demand, or shortage,
is the condition that exists
when quantity demanded
exceeds quantity supplied at
the current price.
• When quantity demanded
exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
Market Disequilibria
• Excess supply, or surplus, is
the condition that exists
when quantity supplied
exceeds quantity demanded
at the current price.
• When quantity supplied
exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.
 Increases in Demand and Supply

• Higher demand leads to higher • Higher supply leads to lower

equilibrium price and higher equilibrium price and higher
equilibrium quantity. equilibrium quantity.
Decreases in Demand and Supply

• Lower demand leads to • Lower supply leads to

lower price and lower higher price and lower
quantity exchanged. quantity exchanged.
Relative Magnitudes of Change

• When supply and demand both increase, quantity

will increase, but price may go up or down.