THE BASIC ANALYSIS OF DEMAND AND SUPPLY function of the its price and other factors such as the

d other factors such as the prices of

the substitutes and complementary goods, income, etc.
MARKET
DEMAND EQUATION :
• It is where buyers and sellers meet.
Qd = a – bP
• It is a place where they both trade or exchange
goods or services. Where:

• It is where transaction takes place. Qd = quantity demanded at a particular price

TYPES OF MARKET a = intercept of the demand curve

• Wet Market – is where people usually buy b = slope of the demand curve
vegetables, meat, etc.
P = price of the good at a particular time period
• Dry Market – is where people buy shoes, clothes, or
other dry goods. DEMAND FUNTION

DEMAND Example : We can illustrate the demand function by using a

hypothetical example. Let us assume that the current price of
• It pertains to the quantity of good or service that good A is P5.00. The intercept of the demand curve is 3 while
people are ready to buy at given prices within a the slope is 0.25.
given time period.
We can simply substitute the given values to our equation,
• Quantity of a good or service that buyers are willing thus:
to buy given its price at a particular time.
Q D = a – bP
Methods of Demand Analysis Q D = 3 – 0.25 (5)
DEMAND SCHEDULE = 3 – 1.25
Q D = 1.75 units of good A
• It is a table that shows the relationship of prices and
the specific quantities demanded at each of these CHANGE IN QUANTITY DEMANDED VS CHANGE IN DEMAND
prices.
• A change in demand refers to a shift in the entire
• The information provided by a demand schedule can demand curve, which is caused by a variety of
be used to construct a demand curve showing the factors (preferences, income, prices of substitutes
price-quantity demanded relationship in graphical and complements, expectations, population, etc.).
form.
• A change in quantity demanded refers to a
DEMAND CURVE movement along the demand curve, which is caused
only by a chance in price.
• The demand curve is a graphical representation of
the relationship between the price of a good or
service and the quantity demanded for a given
period of time.

• This bring us to the law of demand which states that

'if a price goes UP, the quantity demanded of a good
will go DOWN

• Conversely, if a price goes DOWN, the quantity

demanded of a good will go UP ceteris paribus'. The
reason for this is because consumers always tend to
maximize satisfaction

DEMAND FUNTION

• A demand function is a mathematical equation

which expresses the demand of a product or service as a
 SUPPLY

Supply is the quantity of goods and services that firms are

ready and willing to sell at a given price within a particular
time, other factors being held constant.

It is the quantity of goods and services which a firm is willing

to sell at the given price, at a given point in time.

Thus, supply is a product made available for sale by firms. It

should be remembered that sellers normally sell more at a
higher price than at a lower price. This is because higher price
results to a higher profits.
FORCES THAT CAUSE THE DEMAND CURVE TO CHANGE
METHODS IN SUPPLY ANALYSIS
1. Taste Or Preferences
Supply Schedule
- It pertain to personal likes or dislikes of consumers for
certain goods and services. A supply schedule is a table listing the various prices of a
product and the specific quantities supplied at each of these
2. Changing incomes Increasing incomes of households raise prices at a given point in time
the demand for certain goods or services or vice versa
Generally, the information provided by a supply schedule can
3. Occasional or Seasonal Products The various or seasons in be used to construct a supply curve showing the price
a given year also result to a movement of that demand curve quantity supply relationship in graphical form.
with reference to particular goods
Supply Curve
4. Population change - An increasing population leads to an
increase in the demand for some types of goods or services, A supply curve is a graphical representation showing the
and vice-versa. Increase in population means increase in relationship between the price of the product sold or factor
demand and vice versa. of production (e.g., labor) and the quantity supplied per time
period.
5. Substitute and Complementary Goods Substitute goods
are goods that are interchanged with another good. In a The typical market supply curve for a product slopes upward
situation where the price of a particular good increases, a from left to right indicating that as price rises (falls) more
consumer will tend to look for closely related commodities. (less) is supplied.

Substitute goods are generally offered at cheaper price, The upward slope indicates the positive relationship between
consequently making it more attractive for buyers to price and quantity supplied.
purchase.

Complementary goods are goods that compliment with each SUPPLY FUNCTION
other. One good cannot exist without the other good
A supply function is a form of mathematical notation that
Normal goods - It can be defined as those goods for which links the dependent variable, quantity (Q), with various
demand increases when the income of the consumer independent variables which determine quantity supplied.
increases, and those goods that decline when income of the
consumer decreases, price of the goods remaining constant. Among the factors that influence the quantity supplied are
price of the product, number of sellers in the market, price of
Inferior goods - Goods for which the demand decreases when factor inputs, technology, business goals, importations,
the income of the consumer increases. weather conditions, and government policies.

6. Expectations of Future Prices - If buyers expect the price of • Thus, we can transform our statement in a
a good or service to rise (or fall) in the future, it may cause mathematical function as follows:
the current demand to increase (or decrease).
• Q 5 = f (product’s own price, number of sellers, price
of factor inputs, technology, etc.)

• Given our supply function , we can now derive our

supply equation:
Q s = c + dP Number of sellers

• Q s =¿ Quantity supplied at a particular price • Has a direct impact on quantity supplied

• The more sellers there are in the market the greater

• C = intercept of the supply curve
supply of goods and services will be available
• d = slope of the supply curve
Weather conditions
• P = price of the good sold
• Bad weather reduces supply of agricultural
commodities while good weather has the opposite
Change in Quantity Supplied vs. Change in Supply impact.

A change in quantity supplied is a change in the specific Government policy

quantity of a good that sellers are willing and able to sell. This
• Removing quotas and tariffs on imported products
change in quantity supplied is caused by a change in the
also affect supply.
supply price.
• lower trade restrictions and lower quotas or tariffs
A change in supply is an economic term that describes when
boost imports, thereby adding more supply of goods
the suppliers of a given good or service alters production or
in the market.
output. A change in supply can occur as a result of new
technologies, such as more efficient or less expensive Market equilibrium
production processes, or a change in the number of
competitors in the market. • It is the result of meeting of supply and demand.

• The market referred to here is a situation 'where

buyers and sellers meet', while equilibrium is
FORCES THAT CAUSE THE SUPPLY CURVE TO CHANGE generally understood as a 'state of balance'.

Equilibrium
Optimization in the use of factors of production
• Market equilibrium generally pertains to a balance
• An optimization in the utilization of resources will that exists when quantity demanded equals quantity
increase supply, while a failure to achieve such will supplied. Market equilibrium is the general
result to a decrease supply. agreement of the buyer and the seller in the
exchange of goods and services at a particular price
• It can mean maximum production of output at
and at a particular quantity. At equilibrium point,
minimum cost
there are always two sides of the story, the side of
Technological Change buyer and that of the seller.

• The introduction of cost-reducing innovations in the Equilibrium market price

production technology increase supply on one hand.
• is the price agreed by the seller to offer its good or
• On the other hand, this can also decrease supply by service for sale and for the buyer to pay for it.
means of freezing the production through the Specifically, it is the price at which quantity
problems that the new technology might encounter, demanded of a good is exactly equal to quantity
such as technical trouble supplied of the same good.

WHAT HAPPENS WHEN THERE IS MARKET DISEQUILIBRIUM?

Future Expectations SURPLUS

• His Factor impacts sellers as much as buyers. If • It is a condition in the market where the quantity
sellers anticipate a rise in prices, they may choose to supplied is more than the quantity demanded.
hold on back the current supply to take advantage of
the future increase in price, thus decreasing market • The tendency is for the sellers to lower market prices
supply. in order for the goods and services to be easily
dispose from the market.
• If sellers however expect a decline in the price for
their products, they will increase present supply. • There is a downward pressure.
SHORTAGE
Market Equilibrium: A Mathematical Approach
• It is a condition in the market where the quantity
demanded is more than the quantity supplied.
Demand Equation: Q D=a−b ( P )
• If there is a shortage in the market, upward pressure
is applied. Supply Equation: Q S =C+d (P ) ¿
¿

Equilibrium Condition: Q D=¿ Q S

CHANGES IN DEMAND
Look for P E∧Q E given the following information:
• An increase in demand with supply remaining Q D = 68 – 6P
constant raises both equilibrium price and quantity.
Conversely, a decrease in demand with supply Q S =33+10 P
remaining unchanged lowers both equilibrium price
and quantity.

CHANGES IN SUPPLY

• An increase in supply generally results to a decrease

in price but an increase in the quantity of goods sold
in the market. In contrast, if supply decreases while
demand remains constant, the equilibrium price
increase but the equilibrium quantity declines.

PRICE CONTROL

• It is a specification by the government of minimum

or maximum prices for certain goods and services
when the government considers it disadvantageous
to the producer or consumer.

• It happens if there is a surplus or shortage of goods

and services in the market.

FLOOR PRICE

• A price is the legal minimum price imposed by the

government on certain goods and services.

• A price at or above price floor is legal; a price it is

not.

• The setting of a floor price is undertaken by

government if a surplus in the economy persist.

PRICE CEILING

• A ceiling price is the legal maximum price imposed

by the government.

• A price ceiling is usually below the equilibrium price.

• In most cases a price ceiling is utilized by the

government if there is a persistent shortage of goods
in the economy