CHAPTER 2

APPLICATION OF DEMAND AND SUPPLY

LESSON 2.1 BASIC PRINCIPLES OF DEMAND AND
SUPPLY
THE MARKET
• A market is an interaction between buyers and sellers of trading
or exchange.
• it is where the consumer buys and the seller sells.

 GOODS MARKET
- is the most common type of market because it is where we buy
consumers goods.
 LABOR MARKET
- it is where workers offer services and look for jobs, and where
employers look for workers to hire.
 FINANCIAL MARKET
- includes the stock market where securities of corporations are
traded.
 Is the willingness of a consumer to buy a commodity at a
DEMAND- given price.

DEMAND SCHEDULE DEMAND FUNCTION

- shows how the quantity demanded
- shows the various quantities
of a good depends on its determinants,
the most important of which is the price
the consumer PRICE Qd to buy at of the good itself, thus, the equation:
is willing
various
A prices.
200 0 Qd= a-b(P)
B 150 100 a= is the Quantity demand if the
C 125 150 price is zero
D 100 200
E 75 250 b= ∆Qd = Q2-Q1
F 50 300 ∆P P2-P1
G 25 350
H 0 400
Qd= 400 – 2P
 Is a graphical representation or illustration of the
DEMAND CURVE demand schedule on the vertical axis (Y) and the
quantity demand on the horizontal axis (X).
P
250

PRICE Qd

A 200 0 200

B 150 100

C 125 150 150

D 100 200
100
E 75 250

F 50 300
50
G 25 350

H 0 400
0
0 100 150 200 250 300 350 400 Qd
The negative slope of the demand curve is
due to income effect and substitution effect
• Income effect is felt • Substitution effect is felt
when a change in price when a change in price
of a good changes of a good changes
consumer’s income or demand due to
purchasing power, alternative consumption
which is the capacity of substitute goods.
to buy with a given
income.
LAW OF DEMAND –As the prices increases, the quantity demand for that product decreases. The low price of t he good
motivates the consumer to buy more.

• “ceteris-paribus” is a Latin phrase that generally

means "all other things being equal." In
economics, it acts as a shorthand indication of
the effect one economic variable has on
another, provided all other variables remain the
same.
Non-Price Determinants of Demand

If ceteris paribus assumption is dropped, non-price variables

that also affect demand are now allowed to influenced
demand.

Non-price factors:
 Income
 Taste
 Expectations
 Prices of related goods (Substitute & Complementary
Goods)
 Population
 -refers to the quantity of goods that a
SUPPLY seller is willing to offer for sale.
• Supply Schedule – shows the
different quantities the seller is wiling to sell
at a various prices.
PRICE Qs • Supply Function – shows the
dependence of supply on the various
A 200 110 determinants that affect it.
B 150 80
C 125 65 Qs= c + bP
D 100 50 Where:
E 75 35 C = quantity of supply when the
F 50 20 price is 0.
G 25 5 b= ∆Qs = Qs2-Qs1
H 0 -10 ∆P P2-P1
 SUPPLY CURVE
120

100

80

60

40

20

0
0 25 50 75 100 125 150 200
-20
 THE LAW OF SUPPLY
• Using the assumption “ceteris paribus” (other things
remains constant) there is a direct relationship
between the price of a good and the quantity supply
of that good.
• As the price increases, the quantity supply of that
product also increases. The high price of the good
serves as a motivation for the seller to offer more for
sale. Thus, when price increases, the quantity
supplies of the good increases since the seller will
take this as an opportunity to increase his/her income
Non-Price Determinants of Supply
Non-price Factors that influenced Supply:
 Cost of production
 Technology
 Availability of raw materials