DEMAND

 Demand for good and services are not just a psychological occurrence that
implies simply a pure “want or desire”.

 The term demand refers to the number or amount of goods and services
desired by consumers at various prices in a particular period of time.

 The quantity demanded is the number of goods and services consumers are
willing and able to buy/ purchase at a given price, place, and period of time.
Law of Demand
 The law of demand states that as the price increases, quantity demanded
decreases; and as the price decreases quantity demanded increases if other
factors remain in contrast (ceteris paribus).

 It can be noted that the law demand deals with the functional relationship
between price and the quantity demanded. The word “law” refers to an
observed regularity in all markets.
Justification for the Law of Demand
1. Income Effect- when the price of goods decreases, the consumer can afford
to buy more of them or vice versa. This simply implies that the consumers
have a greater purchasing power at the lower price.

2. Substitution Effect – It is expected that consumers tend to buy goods at a

lower price. Hence, in case the price of goods that consumers buy increases,
they look for substitutes with a lower price.
Determinant of Demand
 Determinants of demand are those that actually influence the quantity of demand.
Aside from the price that influences the quantity demanded as stated in the law of
demand, there are also other factors that should be given consideration. These are
referred to as non-price determinants enumerated below:

1. Consumers Income - A change in income will cause a change in demand. The

direction in which the demand will change in response to a change in income depends
on the following types of goods:

A. Normal Good- Refers to a good for which demand at every price increases when
income rises or vice versa.
Examples:
 rice
 utilities
 medical
 dental services
B. Inferior Good - Refers to a good for which demand falls when income rises and vise versa.
Example:
 Public transportation

2. Consumers Expectation of Future Prices – The quantity of a good demanded within any
period depends not only on prices in that period but also in the prices expected in future
periods. When someone expects higher prices in the future especially for the price of gasoline ,
the tendency for the owner is to buy more gasoline immediately ( panic buying) to maximize the
purchasing power of their money. In the same manner, demand gasoline decreases if car
owner expect prices to decline in the future.

3.Price of Related Products- The demand for any particular good will be affected by changes in
the prices of related goods. The direction in which the demand will change in response to a change
in prices of related products depends on the following relationships of products:
a. Substitute Products – are goods that can be used in place of other goods. They are related
in such a way that an increase in the price of one good causes in increase in the demand for the
other good or vice versa.
b. Complementary Products – are goods that together or cannot be used within the other. They
are related in such a way that are increase in the price of one good will cause a decrease in the
demand for other good .
4. Consumer’s Tastes and Preferences – Consumers tastes and preferences are major
factors in determining the demand for any product. Religion, culture, tradition, and age,
are some of the factors that can affect them. As preference and taste become inclined for a
certain product, demand will certainly increase for the product or vice versa.

5.Population – An increase in the population means more demand for goods and services.
Inversely, less population means less demand for goods and services. China is fast becoming
an economic superpower as investments are continuously flowing to their economy. The
main reason for this is its huge market at 1.8 billion that has attracted investors from the U.
S. and Europe.
Demand Function
 It is a representation of the relationship between demand and all of its determinants
expressed in a mathematical language using the functional form given below:

Qd= f( P, Y, e, Pr, T, Pop)

where:
Qd= quantity demand
P= price of good and services
Y= income of consumers
e= consumers expectation of prices
Pr= price of related products
T= consumers taste and preferences
Pop= Population size
The demand function above can be re written as follows if all determinants expect price are
kept constant ( ceteris paribus):
Qd = f(P) Eq.3
The expression above signifies that the quantity demanded of a good x is dependent on its
price for a specific period of time bolding everything else constant.

A linear equation can be constructed using the simplified functional expression. This equation
is a representation of quantity demanded good x in a given period of time given as:
Qd= a-Bp Eq.3.2
Where a is the intercept and b is the slope of the function. Notice however that the sign of the
slope of the demand equation is negative suggesting an inverse relationship between the two
variables
For example, consider the following linear demand function for a sports utility vehicle (SUV):
Qd= 4,000- 500P Eq.3.3
From this function, we can construct a demanding schedule for SUVs in the following
section.
Ex.
Let us assume that the current price of good A is P5.00. The intercept of
the demand curve is 3 while the slope is 0.25.
Qd = a - bP
Qd = 3 - 0.25 (5)
= 3 – 1.25
Qd = 1.75 units of good A
But, what if the price of good A will increase to P6.00? What will now be the new
quantity demanded by consumer X?
Demand Schedule
 The demand schedule shows the tabular representation of the relationship between the quantity of a good
demanded and the price of that good. Others factors that may affect the quantity demanded, such as the price
of other goods, are held constant in drawing up the demand schedule.
 Utilizing the prizes given in table 3, a demanding schedule can be derived by simply plugging in the price at each
point to the demand function in getting the values of quantity demanded (Qd). To illustrate we used P4 as the
value of price, hence,
Qd= 4,000-500P
4,000-500(4)
4,000-2,000
= 2,000 units
 Table 3.
Demand Schedule for Sports Utility Vehicle(SUV)

Points Price( in Millions) Quantity Demanded Quantity Demanded (2)for SUV

(1)for SUV

6,000
A 0 4,000
5,500
B 1 3,500
5,000
C 2 3,000
4,500
D 3 2,500

E 4 2,000 4,000

F 5 1,500 3,500

G 6 1,000 3,000

H 7 500 2,500
Demand Curve

 After deriving the demand schedule, we can now draw the demand curve.

 It shows the graphically the relationship between the quantity of a good demanded and its
corresponding price, with other variables held constant.

 The demand curve is typically downward sloping. It describes the negative relation
between the price of the good and the quantity that consumers want to buy at a given
price.
 Change in Quantity Demanded( Qd) versus Changed in
Demand( D)
 Change in Quantity Demand – It is due only to a change in the price of goods and
services. Graphically, it is represented by a movement from one point to another
point of the same demand curve.

 Change in Demand- It is brought by the changes in the non-price determinants of

demand.
Change in Quantity Demanded vs. Change in Demand

Change in Quantity Demanded Change in Demand

There is a change in quantity
demanded if the movement is along
the same demand curve. (Change in
product’s price)
There is a change in demand if the entire
demand curve shifts to the right side
resulting to an increase in demand. (More
amounts of a good or service are demanded
by consumers)
 Supply

- Is defined as the maximum units/quantity of goods and services

producers can offer.

Quantity Supplied
– refers to the amount or quantity of goods and services producers are
willing and able to supply at a given period of time.
 Law of supply

states that as price increases , quantity supplied also

increases; and as price decreases, quantity supplied also
decreases.
 Determinants of Supply
1. Change in Technology
2. Cost of inputs used
3. Expectation of future prices
4. Price of related products
5. Government regulation and taxes
6. Government subsidies
7. Number of firms in the market
From the following hypothetical data, plot the demand and the supply curves
and determine the equilibrium price and equilibrium quantity.

PRICE (AS PER PENCIL ) QUANTITY DEMANDED QUANTITY SUPPLIED

5 60 20

10 50 30

15 40 40

20 30 50

25 20 60
 Supply Function
Qs = f( Px,T,C,Exp,Grt,G,M)
Where:
Qs = Quantity supplied
Px = Price of good x
T = technology
C = cost of inputs used
Exp = expectation of future price
Grt = government regulations and taxes
Gs = government subsidies
M = number of firms in the market
 A linear equation
Qs = c+dPx
c= intercept
d= slope of the function

Qs = -2,000+1,000P
 Qs = c+dPx

Qs = -2,000 + 1,000P
Qs = -2,000 + 1,000(4)
Qs = 2,000 units
 Supply Schedule
Points Price (in millions) Quantity Supplied for Suv

A 0 -2,000
B 1 -1,000
C 2 0
D 3 1,000
E 4 2,000
F 5 3,000
G 6 4,000
 Supply curve

- shows graphically the relationship between the

quantity of a good supplied and its corresponding price,
with other variables held constant.
The supply curve is typically upward sloping.
 Change in Quantity Supplied
- shows the movement from one point to another point on the same supply curve.

-
Change in Supply – shifting from one supply to another.
 Determination of Market Equilibrium
- demand is equal to supply, price remains constant.

Market equilibrium
- it is a state which implies a balance between the opposing forces, a
situation in which quantity demanded and quantity supplied are equal.
 Demand and Supply Schedule for Sport
Utility Vehicle
Points Price (in millions) Quantity Demanded Quantity Supplied State of Market Pressure on Price

A 0 4,000 -2,000 Shortage Upward

(-6,000)
B 1 3,500 - 1,000 Shortage Upward
(- 4,500)
C 2 3,000 0 Shortage Upward
(-3,000)
D 3 2,500 1,000 Shortage Upward
(1,500)
E 4 2,000 2,000 Equilibrium Neutral
0
F 5 1,500 3,000 Surplus Downward
1,500
G 6 1,000 4,000 Surplus Downward
3,000

H 7 500 5,000 Surplus Downward

4,500
Equilibrium Using Demand and Supply
Curves
 Surplus

- is when a person, group, or economy has more of a good or

service than it actively consumes, allowing it to stockpile or export the
remainder.
- situation creates forces among suppliers which cause a
downward pressure on price.
A surplus is when you have more of something than you need or plan to
use. For example, when you cook a meal, if you have food remaining
after everyone has eaten, you have a surplus of food.
 Shortage
- occurs when the price is set below the equilibrium price.
- it is a condition where quantity demanded is greater than the quantity
supplied.
- are people are willing and able to buy the good at the current market
price than what is currently available. When a shortage exists, the market is not
in equilibrium. At equilibrium, the quantity demanded equals the quantity
supplied at the market price.
 Market Equilibrium
Qd = Qs
4,000 – 500P = -2,000 + 1,000P
Transposing similar terms,
4,000+ 2,000 = 500P + 1,000P
6,000 = 1,500P
6,000 = P
1,500
4 = P (equilibrium price)
By substituting the equilibrium price into the demand and supply function,
equilibrium quantity can be derived:
Qd = 4,000 – 500P Qs = -
2,000 + 1,000P
= 4,000 – 500(4) = -2,000 + 1,000(4)
= 4,000 – 2,000 =-
2,000 + 4,000
= 2,000
= 2,000

Equilibrium quantity equals 2,000 units of SUV

 Price Ceilings and Price Floors
Price ceiling

- is defined as the maximum price a good or service is bought or sold .

Ex.
In the Philippines, the rent control law is an example of price ceiling
where the new law, epublic Act 9653, will not allow increases in housing rental
for a year, and after that, it puts a cap on any increase to only seven percent
until 2013.
 Price Floor

Price floor
- minimum price emanates from the desire of the government to assist
producers of goods and services.
Ex. the minimum wage law requires employers to pay their workers P426 as of
May 2011 for non – agriculture employees in the National Capital Region (NCR)
 Shortages and Surplus as Results of
price Controls

Shortages are likely to occur if government tries to restrict firms in

charging higher prices through price ceilings.
If the government will impose price floors, surplus will be created in the
market.
 Activity:
Points Price Quantity Quantity State of Market Pressure on
( in millions) Demanded Supplied Price

A 0 5,000 -3,000
B 1 4,500 -2,000
C 2 4,000 0
D 3 3,500 2,000
E 4 3,000 3,000
F 5 2,500 3,500
G 6 2,000 4,000
H 7 1,500 5,000