Applied Economics

Chapter 2
Application of Demand and Supply

Prepared by: Rebecca Rabe-Galano

Subject Teacher
 Objectives and Terms to Remember

 Read the objectives of this lesson first.

 Encircle the terms that you are not too

familiar with.
 Lesson 2.1 Basic Principles of Demand and Supply

THE MARKET
-Is an interaction between buyers and
sellers of trading or exchange.
Types of Market:
1. Good market – most common
2. Labor Market- offers service and look for job
3. Financial Market-stock market
 Lesson 2.1 Basic Principles of Demand and Supply

Why is the market important?

 It is where a person who has excess goods can

dispose them to those who need them.
 The interaction of the buyers and sellers happen.
 This interaction lead to an implicit agreement
between the buyers and sellers on volume and price.
 In a purely competitive market (similar products) ,
the agreed price between the seller and the buyers is
called the MARKET PRICE or PRICE FOR ALL.
 DEMAND

What is demand?
 Is the willingness of a consumer to buy a
commodity at a given price.
Demand Function- shows how the quantity
demanded of a good depends on its determinants,
the most important of which is price of the good.

Equation: Qd= f (P)

 DEMAND

Equation: Qd= f (P)

Qd=6-P/2
Table 2.1. Hypothetical Demand Schedule of Martha for Vinegar (in bottles)
PRICE PER BOTTLE NUMBER OF BOTTLES
P0 6
2 5
4 4
6 3
8 2
10 1
 DEMAND
Table 2.1. Hypothetical
Demand Schedule of Martha
for Vinegar (in bottles)
Quantity Demanded (in bottles)

. ..
PRICE PER NUMBER
BOTTLE OF
BOTTLES
12
P0 6

..
10
2 5
4 4 8

6 3 6
8 2 4
10 1
2
0
1 2 3 4 5
The downward slope of the curve indicates that as the price of vinegar increases, the demand for
this good decreases. The negative slope of the demand curve is due to income and substitution.
 Factors that affect demand
Income Effect
• Is felt when a change in the price of a good changes consumer’s 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.

Substitution Effect
• Is felt when change in the price of a good changes demand due to
alternative consumption of substitute goods.
Example:
Lower price product is more demand –income effect
Higher product encourages the consumption of lower price product-Income effect
 Non-Price Determinants of Demand
If the ceteris paribus is assumption is
dropped, non-price variables that also
affect demand are now allowed to
influence demand.

Non – Price Factors of Income

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.

Income, Taste, Expectations, Prices of Related Goods, Number

of Consumers, and Population

Demand Function: D=f (P,T,Y,E,PR, NC)

 Non-Price Determinants of Demand

Price of Related Goods

Income
Number of Consumers
Taste
Expectations
Shifts of Demand Curve
 SUPPLY
Demand is looking at the side of the Consumers.
Supply is looking at the side of the Producers.
What is Supply?

Refers to the quantity of goods that a seller is willing to

offer for sale.
 SUPPLY
Qs=100+5P
Table 2.2 Supple Schedule of Pedro for Fish in One Week
Price of Fish (per kilo) Supply (in kilos)
P 20 200
40 300
60 400
80 500
100 600

The higher the price the more Fish Pedro is willing to sell.
 SUPPLY

.
Supply Curve of Fish (in hundred Kilos)

Price for Fish (Per Kilo)

120

100

. . .
.
80

60

40

20
0
1 2 3 4 5
Quantity Supplied in hundred Kilos
 SUPPLY

Using the assumption ceteris paribus “other things constant”

 SUPPLY
Non-Price Determinants of Supply
Dropping the assumption ceteris paribus “other things constant”

Non-Price Factors of Supply:

1. Cost of Production
2. Technology
3. Availability of Raw Materials and Resources

These non-price determinants 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 supply curve.
Supply Function
S=f(P,C,T,AR)
 Lesson 2.2
Demand and Supply in Relation to the Prices of Basic
Commodities
Equilibrium- is a state of balance when demand is equal to supply.

Quantity
Demanded is
equal to
Quantity
Supplied