elements of demand and supply

7/28/2019 Elements of Demand and Supply

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ELEMENTS OFDEMAND AND SUPPLY

Prepared by:GREGAR DONAVEN E. VALDEHUEZA, MBA

Lourdes College Instructor

Chapter 3ECONOMICS: its concepts and principlesBy: BKG Gabay

RM Remotin, Jr.

EAM Uy


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DEMAND

Refers to the number or amount of goods andservices desired by the consumers.

Quantity demandedThe amount of goods and services consumers are

willing and able to buy/purchase at a given price,place, and at a given period of time.


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Determinants of Demand

Price of goods itselfAs the price of certain goods and services increases,

the demand for these goods and services decreases orvice versa.

Consumers incomeA change in income will cause a change in demand.

Consumers tend to buy more goods and acquire moreservices when their income increases and vice versa.The direction in which the demand will shift in

response to a change in income depends on the typeof goods. Normal goods refers to a good for which quantity demand

at every price increases when income rises.

Inferior goods refers to a good for which quantity demandfalls when income rises.


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Consumers expectation of future prices The quantity of a good demanded within any period depends not

only on prices in that period but also on prices expected in future

periods.

Prices of related commodities/goods The quantity demanded of any particular good will be affected by

changes in the prices of related goods.

Substitute goods are goods that can be used in place of othergoods.

Complementary goods are goods that go together.

Consumers tastes and preferencesAn increase in the preference and taste for a certain good will

certainly increase the demand for that particular good.

PopulationAn increase in the population means more demand for goods and

services and vice versa.


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Demand Schedule

The relationship between the quantityof a good demanded and the price ofthat good.

other factors that may affect the quantitydemanded, such as prices of other goods, areheld constant (ceteris paribus) in drawing up

the demand schedule.


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Example of a Demand Schedule

Price (Php 000) Quantity Demanded

1 1000

2 800

3 600

4 400

5 200


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Demand Curve

Shows graphically the relationship between thequantity of a good demanded and its

corresponding price, with other variables heldconstant.

The demand curve is typically downward-sloping


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Example of a Demand Curve


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Law of Demand

States that as price increases, quantitydemanded decreases; and as price decreases,quantity demanded increases, if other factors

remain constant.

The law of demand is only true if theassumption of ceteris paribus is applied or

other determinants remain constant.


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Justification for the Law of Demand

Income effectWhen the price of goods decreases, the consumer

can afford to buy more of it or vice versa.

Substitution effect

It is expected that consumers tend to buy goodswith a lower price.


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Changes Involving Demand

Change in Quantity DemandedMovement along a demand curve which indicates

movement from one point to another point of thesame demand curve.

Due to a change in the price of goods and services.

Change in DemandShifting from one demand curve to another

demand curve.

Brought by the changes in all determinants ofdemand except price.


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SUPPLY

Maximum units/quantity of goods or services

producers can offer.


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Determinants of Supply

Change in technologyState of the art technology that uses high-tech

machines increases the quantity supply of goodswhich causes the reduction of cost of production.

Cost of inputs usedAn increase in the price of an input or the cost of

production decreases the quantity supplied becausethe profitability of certain business decreases.

Expectation of future priceWhen producers expect higher prices in the future

commodities, the tendency is to keep their goods andrelease them when the price rises.


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Change in the price of related goodsChanges in the price of goods have a significant effect

in the supply of such goods.

Government regulation and taxes It is expected that taxes imposed by the government

increases cost of production which in turn discouragesproduction because it reduces producers earnings.

Government subsidiesSubsidies or the financial aids/assistance given by the

government reduces cost of production whichencourages more supply.

Number of firms in the marketAn increase in the number of firms in the market leads

to an increase in supply of goods and services.


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Supply Schedule

The relationship between the quantityof a good supplied and its price.

Other factors that may affect the quantity

supplied, such as the prices of inputs and

available production techniques, are heldconstant (ceteris paribus) in drawing up the

supply schedule.


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Example of a Supply Schedule

Price (Php 000) Quantity Supplied

1 200

2 400

3 600

4 800

5 1000


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Supply Curve

Shows graphically the quantity of a goodsupplied at each price, with other factors that

affect quantity supplied held constant.

The supply curve is typically upward-sloping


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Example of a Supply Curve


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Law of Supply

States that as price increases, quantitysupplied also increases; and as pricedecreases, quantity supplied also decreases if

other factors remain constant.

The law of supply is only true if theassumption of ceteris paribus is applied or

other determinants remain constant.


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Changes Involving Supply

Change in Quantity SuppliedMovement along the supply curve which shows the

movement from one point to another point on the

same supply curve. Due to a change in the price of goods and services.

Change in SupplyShifting from one supply curve to another supply

curve.

Brought by the changes in all determinants of supplyexcept price.


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Determination of Market Equilibrium

Law of demand and supply stipulate that when demand isgreater than supply, price increases; when supply is greaterthan demand, price decreases; and when demand is equalto supply, price remain constant.

It is noted that there is contradiction between the twoparties. The consumer dislikes high price while theproducer likes high price. Law of demand infers thatconsumers are willing and able to buy/purchase goods andservices at a lower price while law of supply infers that

producers are willing and able to offer or sell more goodsand services at higher price.

This force in the market place creates equilibrium price andequilibrium quantity, or the market equilibrium.


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Market Equilibrium

Is a state which implies a balance betweenthe opposing forces, a situation in whichquantity demanded and quantity supplied are

equal.

The market equilibrium is determined by the

intersection of the demand and supply curves. In

other words, the quantity that consumers will buy isequal to the amount or quantity the producers are

able and willing to offer.


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Demand and Supply Schedules

Points Price

(Php 000)

QuantityDemanded

QuantitySupplied

State ofMarket

Pressureon Price

A 1 1000 200 Shortage(-800)

Upward

B 2 800 400 Shortage(-400)

Upward

C 3 600 600 Equilibrium(0)

Neutral/

Equal

D 4 400 800 Surplus(400)

Downward

E 5 200 1000 Surplus(800)

Downward


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