DEMAND AND SUPPLY

Demand and Its Determinants

• Demand is the amount of goods and services desired by the consumers

• Quantity Demanded refers to the amount of goods and services that buyers are
willing and able to buy at a certain price at a given period of time.

Determinants of Demand:

1. Prices of the goods

The Law of Demand states that,

“As price of the good increases, the quantity demanded of that good
decreases; and as price decreases, quantity demanded increases, ceteris
paribus”.
 Demand and Its Determinants

2. Income of the consumers 3. Prices of related goods

a. Normal good a. Substitute goods

b. Inferior good b. Complementary goods

4. Consumer’s tastes and

preferences
5. Consumer’s expectation of
future prices
 Demand schedule

• Demand schedule is a tabular presentation showing the relationship between

the price of the good and its quantity demanded

Price of Bread (in Peso) Quantity Demanded

5 10
10 8
15 6
20 4
25 2
Demand Curve

• Demand curve a graphical

presentation showing the
relationship between the price of
the good and its quantity demanded
 Changes in Demand

a. Change in quantity demanded

• a movement along the demand
curve
• due to a change in the price of the
good
 Changes in Demand

A decrease in
income of the
b. Change in demand consumer
• a shift from one demand curve to
another
• due to the changes in all the
determinants of demand except
the price of the goods
 Supply

• Supply is the maximum amount of goods or services producers can offer

• Quantity Supplied is the amount or quantity of goods and services producers
are willing and able to supply at a certain price, at a given period of time.

Law of Supply
“As price of the good increases, the quantity supplied of that good increases; and as price
decreases, its quantity supplied also decreases, ceteris paribus”.
 Determinants of Supply

5. Government regulations
1. Prices of the goods
a. Taxes

2. Costs of inputs used b. Subsidies

3. Technology 6. Number of firms in the market

4. Expectation of future prices

Supply Schedule

Supply schedule shows the relationship between the quantity of a good

supplied and its price

Price of Bread (in Peso) Quantity Supplied

0 0
5 2
10 4
15 6
20 8
 Supply Curve

• The supply curve graphically shows the

quantity of a good supplied at each
price, with other factors that affect
quantity supplied held constant.
• The supply curve is upward sloping which
means that producers tend to supply more at
a higher price because it could give them
more profit.
 Changes in Supply

a. Change in quantity supplied

 a movement along the supply
curve
 due to a change in the price of
the good or service
 Changes in Supply

b. Change in supply
 a change in all the determinants of
supply except the price of the good
 a shift of the entire supply curve
 Market Equilibrium: Demand and Supply Together

• Equilibrium is a situation in which various forces are in balance - and this also describes
a market’s equilibrium

• The actions of buyers and sellers naturally move markets toward the equilibrium of
supply and demand

• The equilibrium is found where the supply and demand curves intersect
 Demand and Supply Equilibrium

• At equilibrium price, the quantity of

the good that buyers are willing and
able to buy exactly balances the
quantity that sellers are willing and
able to sell (e.g. equilibrium
quantity).
• Also called the market-clearing price
because, at this price, everyone in the
market has been satisfied: Buyers have
bought all they want to buy, and sellers
have sold all they want to sell.
Demand and Supply Equilibrium

Suppose that, qD = 1000 - 100p • A more general model is

qS = -125 + 125p qD = a + bp

Equilibrium qD = qS qS = c + dp
Equilibrium qD = qS
1000 - 100p = -125 + 125p
225p = 1125 a + bp = c + dp
p* = 5
q* = 500
 Demand and Supply Equilibrium

A shift (increase) in demand will lead to A shift (decrease) in supply will lead to a
a new equilibrium: new equilibrium:

Let q’D = 1450 - 100P Let q’S = -1025 + 125p

q’D = qS qD = q’S
1450 - 100P = -125 + 125P 1000 - 100P = -1025 + 125P
225P = 1575 225P = 2025
P* = 7 P* = 9
q* = 750 q* = 100
• An increase in demand rises both the • A decrease in supply increases the
equilibrium price and quantity equilibrium price but decreases the
equilibrium quantity
 Excess Supply

• Surplus a situation in which

quantity supplied is greater than
quantity demanded
• Excess supply
• Suppliers are unable to sell all they
want at the going price
• They respond to the surplus by
cutting their prices.
 Excess Demand

• Shortage a situation in which

quantity demanded is greater than
quantity supplied.
• Excess demand
• Demanders are unable to buy all they
want at the going price.
• With too many buyers chasing too
few goods, sellers can respond to the
shortage by raising their prices
without losing sales.
 Demand and Supply Equilibrium

• The activities of the many buyers and sellers automatically push the
market price toward the equilibrium price.
• Once the market reaches its equilibrium, all buyers and sellers are
satisfied, and there is no upward or downward pressure on the price.
• In most free markets, however, surpluses and shortages are only
temporary because prices eventually move toward their equilibrium
levels.
• This phenomenon is so pervasive that it is sometimes called the law of supply and
demand: The price of any good adjusts to bring the supply and demand for that good
into balance.
 Changes in Demand in Equilibrium

How an increase in demand affects the

equilibrium?
• An event that raises quantity demanded
at any given price shifts the demand
curve to the right.
• The equilibrium price and the
equilibrium quantity both rise.
• An abnormally hot summer, for example,
causes buyers to demand more ice cream.
The demand curve shifts from D1 to D2,
which causes the equilibrium price to rise
from 20.00 to 30.00 and the equilibrium
quantity to rise from 100 to 150.
Changes in Demand in Equilibrium

Price An increase in demand...

S
…leads to a rise in the
equilibrium price and
30 quantity.
20

D’
D

100 150 Quantity per period

 Changes in Supply in Equilibrium

How a decrease in supply affects the

equilibrium?
• An event that reduces quantity supplied at
any given price shifts the supply curve to
the left.
• The equilibrium price rises, and the
equilibrium quantity falls.
• The supply curve shifts from S1 to S2,
which causes the equilibrium price to rise
from 20.00 to 30.00 and the equilibrium
quantity to fall from 100 to 50.
Changes in Supply in Equilibrium

A decrease in supply…

…leads to a rise in equilibrium

price and a decrease in equilibrium
quantity