Chapter 2:

DEMAND
AND
SUPPLY
 Learning Objectives:

• Familiarize with the concepts of demand and supply;

• State the Law of Demand and Supply;
• Identify the determinants of demand and supply;
• Explain how the forces demand and supply interact to attain
equilibrium in the market; and
• Apply the Law of Demand and Law of Supply to different
economic situations
 Demand. Changes in Demand
 
Demand Curve: Graphical depiction of the
relationship between the price of a good and the
amount of the good that consumers are both willing
and able to buy at that price, holding other factors
constant (ceteris paribus).
 

Demand can also be perceived as a schedule of

the maximum prices buyers are willing and able to
pay for each unit of a good.
 The Law of Demand:
A demand curve shows the negative relationship between the price and
quantity of a good demanded during a given interval, holding all other
influences constant.
 
(Quantity demanded rises as price falls, other things
constant).
(Quantity demanded falls as prices rise, other things
constant.)
 
Changes in the quantity of a good demanded are movements along a
demand curve and are caused by only one thing—a change in its price.
But what happens if influences on the demand for a good other than its own
price change?
 
If a determinant of demand other than a good's own price changes, there is

a change in demand, and a shift in the demand curve. The most

important determinants of the demand are:

• The consumer’s
income
• Number of
consumers
• The price of
substitute goods
• The price of
complementary
goods
• The consumer’s
preferences or tastes
and advertising that
may influence
 The Supply
To understand the market we also need to understand supply.
Supply Curve: Graphical depiction of the relationship
between the price of a good and the amount of the good that
producers are both willing and able to sell at that price,
holding other factors constant (ceteris paribus).
And as on the demand side of the equation, the basic law
of supply is common sense: as prices rise, supply
increases, as prices fall, supply decreases. In other words,
when the price for a good goes up, suppliers of that good
will produce more. When the price of a good goes down,
suppliers produce less.
 
 Supply curves are a lot like demand curves. Economists gather
information about the amount of a specific good or service that a
provider will supply at various prices and then they plot this information
on a graph like this.
 

Supply is influenced by
several factors:

 Production Costs,
 Technology,
 The number of Competitors,
 The expectations of producers
Factors decreasing supply and
shifting the supply curve to the
right:

 Decreased Production Costs

 Decreased Government
Regulation
 Optimistic Market
Expectations
 Entrance of new market
competitors
 New Technology
Factors increasing supply and
shifting the supply curve to the
left:

 Increased Production Costs

 Increased Government
Regulation
 Pessimistic Market
Expectations
 The withdrawal of Market
Competitirs
Market Equilibrium Price
 Equilibrium means a state of equality or a state of balance
between market demand and supply. Without a shift in demand
and/or supply there will be no change in market price. In the diagram
above, the quantity demanded and supplied at price P1 are equal. At
any price above P1, supply exceeds demand and at a price below P1,
demand exceeds supply. In other words, prices where demand and
supply are out of balance are termed points of disequilibrium

Changes in the conditions of demand or supply will shift the demand

or supply curves. This will cause changes in the equilibrium price and
quantity in the market.
Changes in Market Demand and Equilibrium Price
 
 The demand curve may shift to the right (increase) for
several reasons:
 
1. A rise in the price of a substitute or a fall in the price of a
complement
2. An increase in consumers’ income or their wealth
3. Changing consumer tastes and preferences in favour of the
product
4. A fall in interest rates (i.e. borrowing rates on bank loans or
mortgage interest rates)
5. A general rise in consumer confidence and optimism
 The outward shift in the demand curve causes a movement
(expansion) along the supply curve and a rise in the equilibrium
price and quantity. Firms in the market will sell more at a higher
price and therefore receive more in total revenue.

The reverse effects will occur when there is an inward shift of

demand. A shift in the demand curve does not cause a shift in the
supply curve! Demand and supply factors are assumed to be
independent of each other although some economists claim this
assumption is no longer valid.
Changes in Market Supply and Equilibrium Price
 The supply curve may shift outwards if there is
 
1. A fall in the costs of production (e.g. a fall in labour or raw material
costs)
2. A government subsidy to producers that reduces their costs for
each unit supplied
3. Favourable climatic conditions causing higher than expected
yields for agricultural commodities
4. A fall in the price of a substitute in production
5. An improvement in production technology leading to higher
productivity and efficiency in the production process and lower costs
for businesses
6. The entry of new suppliers (firms) into the market which leads to
an increase in total market supply available to consumers
 
 The outward shift of the supply curve increases the supply
available in the market at each price and with a given
demand curve, there is a fall in the market equilibrium price
from P1 to P3 and a rise in the quantity of output bought and
sold from Q1 to Q3. The shift in supply causes an expansion
along the demand curve.

A shift in the supply curve does not cause a shift in the

demand curve. Instead we move along (up or down) the
demand curve to the new equilibrium position.
 
A fall in supply might also be caused by the exit of firms
from an industry perhaps because they are not making a
sufficiently high rate of return by operating in a particular
market.
 References: Books
1. Hyman, David (2009). Microeconomics: 6th Edition. McGraw Hill
 
2. Pagoso, Cristobal et al (2016). Introductory Microeconomics: Fourth Edition. Rex
Publishing

Electronic Resources
1. Majaski, Christina (2020). Positive Economics
https://www.investopedia.com/terms/p/positiveeconomics.asp Date Retrieved:
April 1, 2021
 
2. Fernando, Jason (2021). Demand and Supply
https://www.investopedia.com/terms/l/law-ofsupply- demand.asp Date Retrieved:
April 1, 2021
~ END OF PRESENTATION ~
Group 2:
Leader: Mampuste, Jellie G.
Members:
- Rodriguez, Charise Mae
- Tono, Ronalyn P.
- Rosal, Nerwin R.
- Orozco, Allenaire N.