Applied Economics

AGNES R. RAMO
SHS Teacher II
Market Demand, Supply
and
Equilibrium
What do we mean by the word
market?
In the subject Principles of Marketing the
word “Market” is usually used as another term
for customer like the target market or what we
are referring as target customer.
What do we mean by the word
market?
It can also describe the place where financial
instruments are offered, the financial market.
What do we mean by the word
market?
In applied economics, it refers to the place
where the sellers can sell their products to
their buyers/customers usually in exchange for
money.
Types of Market
“Markets are commonly known as factor
markets or goods markets. ”
“Factor markets”
refer to the purchasing and selling of factors of
production.
In free market or market economy, households
are the owners and therefore could be the
providers of the factors of production (like land,
labor, capital). ”
Goods market
- where we buy consumer goods. - Markets for
the output of production.
“Labor market”
- the venue for potential employees looking for
a job and ready to provide
services.
In the same way, it is a venue for employers who
are hiring workers for particular jobs.”
o Financial market- where securities of
 In the same way, it is a venue for employers
who are hiring workers for particular jobs.”

Financial market
- where securities of corporations are traded
Make a wish list of something you want
to own.
Let us check the products/services that is
previously and currently in your wish list.
Categorize the products/services into different
levels.
Below is how you can categorize the
product/service:
Level 1: I already have it.
(for those products/services that you
already have but is in your wish list before)
Level 2: Ready to buy it.
(for those products/services in your wish
list that you are planning to buy within this
year.)
Level 3: I want it, but I can’t afford it now.
(for those products/services in your wish list
that you are planning to buy but not within this
year)
Level 4: I want it, but how?
(for those products/services in your wish list
that you don’t know where to buy it or of it is
available in the market)
 BASIC PRINCIPLES OF
DEMAND
“DEMAND
it is the willingness and ability of consumers to
buy a certain quantity of good or service at a
certain price.”
“MARKET DEMAND is the aggregate demand of
all consumers, who buy the goods in the market.”
THE LAW OF DEMAND
- “As price increases, the quantity demand for that
product decreases, other things held constant
THE LAW OF DEMAND
- “As price increases, the quantity demand for
that product decreases, other things held
constant
(ceteris paribus)”
THE LAW OF DEMAND
There is an opposite relationship between the
price of a product and the quantity demanded. ”
- “It states that quantity demanded varies
inversely with price, other things held constant.
Thus, the higher the price (P) , the smaller the
quantity demanded; the lower the price (P), the
greater the quantity demanded” (Dinio, et.al., 2017).
Conditions and assumptions of Law of Demand”
1. “There is no variation or change in the consumers’
income. If there is an increase or decrease on this
factor, the law might not be applicable. ”
2. “The consumers’ taste and preference do not change”
3. “The price of substitute goods or complement goods
do not increase nor decrease”
 CETERIS PARIBUS
- “all other factors are held constant except the
one that is under study (example: price only)”
- “the variables that might influence the
demand for the product do not vary or change
and the only thing
that affects the quantity demand is only the
price
“The law of demand can be expressed
through demand schedule and demand
curve. ”
DEMAND SCHEDULE
- “It indicates the different amount or quantity that
the consumer is willing to buy at different given
prices.”
“The Law of Demand states that when the price of
a commodity falls, its demand increases and when
the price of a commodity rises, its demand
decreases; other things remaining constant.
DEMAND SCHEDULE
Thus, there exists an inverse relationship between
price and quantity demanded of a commodity.
The functional relationship between price and
quantity demanded can be represented as: ).” (Dinio,
et al, 2017)

Dx = f(Px
“ “Classifications of Demand Schedules”:
a. “Individual Demand Schedule”
b. Market Demand Schedule
“Classifications of Demand Schedules”:
a. “Individual Demand Schedule”
b. Market Demand Schedule
DEMAND CURVE”
- “It illustrates the demand schedule
graphically, with the price of a good on Y axis
and the quantity demanded on X axis”
DEMAND FUNCTION
- “It illustrates how the determinants affect the
quantity demanded for a product, most
importantly, how the price determines the
demand for the commodity.”

Example: Qd= 6-P/2

Demand schedule for bottles of soy sauce
given the following prices:
Computation based on demand function:
Qd= 6-P/2

Qd= 6- (0/2)= 6 Qd= 6-(6/2)= 3

Qd= 6-(2/2)= 5 Qd= 6-(8/2)= 2
Qd= 6-(4/2)= 4 Qd= 6-(10/2)= 1
- “There is inverse relationship between the price of
a commodity and the quantity demanded for that
good”
- At a lower price, consumer buys more and at a
higher price, consumption tends to go down
- “The downward slope shows that the higher the
price, the lower the demand for the product ”
- “The negative slope happens because of income
and substitution effect ”
o Income effect
- when the price of a good increases or
decreases, the consumer’s real income or
purchasing power also changes
- “It shows that when a commodity’s price
increases, real income decreases and the
buyers tend to
decrease the amount of goods they buy”
o Substitution effect
- it is felt when a change in the price of a
good changes demand due to alternative
consumption of
substitute goods;
consumers substitute expensive goods
with cheaper goods
“Change in Quantity Demanded vs. Change
in Demand”
“There is a difference between the change in
demand and the change in quantity demanded.
This is shown by a shift in the demand curve
or a movement along demand curve. ”
Change in Quantity Demand: movement
along demand curve”

“Change in Demand:
shifting in demand curve”
Change in the quantity demanded:
- “Changes in the quantity demanded refers to the
movements along a “fixed” demand curve as a
response to a change in the good's own price,
ceteris paribus.”
- “An increase in quantity demanded is caused by
a decrease in price while a decrease in quantity
demanded is caused by an increase in price.”
(Birchall, 2016)
Change in demand:
“When determinants affect change in
demand, and the other things remain constant
even the price, then the demand will change,
and the demand curve will move or shift to the
right or to the left.
The shifting in demand indicates that there
is a change in the quantity demanded at every
given price.
 In this case, even though the price of the good
remains constant the quantity will either increase
or decrease as shown in the graph. When the
other variables affect the demand to shift to the
right, the move from D1 to D2, then this signifies
an increase in demand.
The reason is that, at the same price of P1 the
quantity that consumers plan to buy increases
from Q1 to Q2.
 On the other hand, when the other variables
affect the demand curve to shift to the left, the
move from D1 to D3, then this is referred to as
a decrease in demand.
It happens when at the same price of P1, the
quantity that consumers would like to purchase
fall from Q1 to Q3.”
NON-PRICE DETERMINANTS OF
DEMAND
- “If ceteris paribus is disregarded or dropped,
the variables other than price which also
influence demand can now affect demand
(income, taste, expectations, prices of related
goods and population)”
- “Demand function will be:
D= f( P, T, Y, E, PR, NC )
which means that demand for a commodity
is a function of price (P), taste (T), income (Y),
expectations (E), price of related goods (PR),
and
the number of consumers (NC)
- “Demand function will be:
D= f( P, T, Y, E, PR, NC )
which means that demand for a
commodity is a function of price (P), taste
(T), income (Y), expectations (E), price of
related goods (PR), and
the number of consumers (NC)
- “The demand curve will move or shift
rightward to reflect rise in demand and it
will move or shift leftward to show a
decline in demand due to non-price
determinants or variables”
1. Income
– the income of the consumer influences the
capacity to purchase Income ↑QD↑ “Shift to
the right” Income ↓QD↓ “Shift to the left

- “The effect of consumers' income on demand

relies on the type of good (normal or inferior
good)”
- “It is a normal good if a higher income of
consumers raise the demand for the
commodity;
in this case the demand curve will shift to
the right
(examples include cloths, cars, vacations)”
 - “It is an inferior good if a higher income
causes demand for the good to decline;
in this case, the demand curve will shift to
the left.
(Example: used cars or used furniture)
2. Prices of related goods
PSUBSTITUTTE ↑QD of Chosen Good
↑ Shift to the right
PSUBSTITUTTE ↓QD of Chosen Good
↓Shift to the left

- “Commodities can be related or unrelated

goods” -
- “If the two commodities are unrelated,
then the change in the price of one item
will have no effect on the demand for the
other good.
For example, the change in the price of
tomatoes will have no influence on the
demand for cars.”
- “As for related goods, their market price and
availability may have an effect to the level of
demand for another good.
This depends on whether the goods are
complement or substitute goods. ”
a. Substitute goods
- “These are goods that are consumed as a
replacement for the other good.
For example, beef and chicken, broccoli and cauli
flower, etc.)”
- “For these goods, an increase in the price of one
good will increase demand (shifts demand curve
rightward) for the other good and the opposite is
true for the decrease in the price of the first good. ”
b. Complementary goods
PCOMPLEMENTARY ↑ QD of Other Complement ↓
Shift to the left
PCOMPLEMENTARY ↓ QD of Other Complement ↑
Shift to the right
- “These goods are usually consumed
together. For example, cars and gasoline,
DVDs and DVD players, sugar and tea, etc.”.
- For these goods, an
increase in the price of one
of the goods will decrease
the demand for the other
good and the opposite is
true.
 For example, the
demand for coffee creamer
would increase and the
demand curve will shift to
the right if the price of
coffee decreases.
If X and Y are related goods, then
3. Expectation
– prospect of what is going to happen to the
price can influence the demand of a
commodity

PFUTURE ↑QD↑ Shift to the right

PFUTURE ↓QD↓ Shift to the left
 - “When there is an expectation that the price of
the commodity will increase, then the present
demand will rise and the demand curve will shift to
the right
- “When there is an expectation that the
income of consumer will increase, then the
present demand will rise and the demand curve
will shift to the right
4. Taste
– preference that may influence the demand
for a commodity Factors affecting taste:
a. Cultural values
b. Peer pressure
c. Power of advertising
Taste ↑QD↑ Shift to the right
Taste ↓QD↓ Shift to the
- “Consumers with similar income may still
differ in their demands depending on their
preference to the goods and services.”
- “If consumers prefer a certain commodity
due to a certain reason, then the demand for
that good will rise.
- If they do not like a certain good, then the
demand for it will fall. ”
5. Number of consumers (market)
– size and characteristic of the population
Population ↑QD↑ Shift to the right
Population ↓QD↓ Shift to the left

“The greater the number of the consumers of

the good, the higher will be the demand for the
commodity. ”