BASIC PRINCIPLES OF

SUPPLY AND
DEMAND
What is Ceteris Paribus?

• Ceteris Paribus which means “holding other things

constant”, or all else being equal”, acts as a shorthand
indication of the effect of one economic variable on
another, provided all other variables remain the same.
What is Ceteris Paribus?

• For example, “higher income will raise demand, ceteris

paribus”.
It means that you cannot argue other things like
• “What if people did not choose to buy and save
instead?”,
What is Ceteris Paribus?

• “What about if there is inflation?”

• What if people pay their loans?” because these
are considered constant or unchanging.
The Law of Supply and Demand

• It was developed by British economist Alfred

Marshall.

• The most basic economic law and the foundation of

other economic theories which may be applied to
markets final goods and services or to markets for labor,
capital, etc.
The Law of Supply and Demand

• The most basic economic law and the foundation of

other economic theories which may be applied to
markets final goods and services or to markets for
labor, capital, etc.
 Control what suppliers are
willing to produce

SUPPLY AND DEMAND

Play an important role in the

Control what consumers are dynamics of the world market and
willing and able to purchase even in the economic stability of
many nations
• What Is the Law of Supply and Demand?

The law of supply and demand combines two

fundamental economic principles describing how
changes in the price of a resource, commodity, or
product affect its supply and demand.
As the price increases, supply rises while demand
declines. Conversely, as the price drops supply
constricts while demand grows.
• The law of supply and demand describes the
economic relationship between the price of a
product, its availability and the buyers' demand
for it.
• It combines the law of supply and the law of demand.
For every product, there's an equilibrium where the
price, consumer demand and manufacturer supply
meet.
• Manufacturers might increase production to capitalize
on interest when a product has a high demand.
Increased production may cause prices to go up
• Consumer demand might lessen as buyers find less
expensive alternatives. Consumer research helps
companies identify how much money shoppers are
willing to spend on a product.
Supply Schedule and Demand Curve

• Supply Schedule
- A chart that shows the different
quantities of goods/service that a
producer is willing to
provide/produce to meet demand
at various prices
Supply Schedule and Demand Curve

• Demand Curve
- A graphical
representation of the
relationship between the
price of good or service
and the quantity
demanded for a given
period of time
 SUPPLY

The decision or choice of the suppliers as regards the quantity of a

certain product, item , commodity, service they are willing to
make available at a particular price
What is supply?

✓Supply describes the number of a particular

good or service available within an economy.

✓ There's a positive relationship between price and

supply. If the prices go up and stay high,
manufacturers might supply the product in
larger quantities to make a profit.
What is supply?

✓Supply depends on demand and price changes

and quickly adjusts to these.

✓The changes in demand and price may be

seasonal, temporary or permanent, and sellers
adjust their supply accordingly.
Factors that affect supply
Production capacity

• Production capacity is the product output compared to

resource input.
• Some products require relatively few resources, while
others require more capacity.
Production capacity

• If there's a rise in market demand, the manufacturer

might increase the output to provide more supplies.
• Increasing production capacity might require capital
for new manufacturing facilities or an expanded
workforce.
Production costs

• Production costs include manufacturing expenses like

materials, employee wages and utilities like
electricity and water.
• High production costs might cause higher prices on
the market.
Production costs

• If the market can sustain high prices, the supply

can increase as consumers pay more for each
product.
• For some products, high production costs can
reduce demand, especially if consumers can get
the same type of product at a lower cost from
another company.
Competitors

• Competitors are any companies that produce the same

product or service in a similar price range.
• These competitors can make it difficult for a company
to continue producing a supply of products at a certain
price if consumers choose alternatives.
Competitors

• In response to competition, a company may

reduce production or diversify to other goods
for better market outcomes.
Competitors

• For example, a company might produce fitness-

tracking watches.
• If a new company begins to create the same
type of product for a lower cost, the existing
watch company might diversify its product line
to include pedometers or exercise headphones.
Availability of materials

• The availability of inexpensive raw materials can help

increase production and the supply of products.
• If the raw materials aren't easily available or are too
expensive, the production might decrease and result in
a lower supply to the market.
Availability of materials

• Limited materials can also increase prices.

• For example, a lumber shortage might cause prices of
wooden furniture items to increase, while plastic and
metal furniture pieces remain at the same price as
before.
Supply chains

• The supply chain is the process by which

manufacturers get raw materials and
transport finished products to vendors.
Supply chains

• Successful manufacturers have an affordable

and reliable supply chain at every stage of the
production process, from procuring raw
materials and producing the product to
moving them into the market-bound phase.
Supply chains

• An effective supply chain ensures that

producers can transport their supplies to
consumers.
 The amount of some goods or service
consumers are willing and able to purchase at
each price

DEMAND

Based on needs and wants Based on ability to

pay
What is demand?

✓ measures how many goods consumers are

willing and able to purchase at a specific
price point

✓ Up to a certain price point, the demand for

commodities remains fairly consistent
What is demand?

✓Beyond that point, buyers often find the

products too expensive and the demand for
them may decrease.
 Factors that
affect demand
Product price

✓ As the price of a commodity increases, the

consumer demand for it decreases. People might
buy fewer items of the pricier commodity and
seek other, less expensive options.
✓ To increase demand, companies might lower
prices on goods or offer other types of
incentives.
Buyer income

✓ The average income of consumers within an economy determines

their purchasing capacity and often influences demand.

✓ An increase in the average income can cause demand to go up,

while income losses can decrease demand. Higher incomes often
increase demand for higher-quality commodities. For example,
during strong economic times, consumers in a country might buy
more luxury cars, while during recessions, they might choose
budget vehicles and used cars.
Buyer preference

• Changes in trends affect buyers' preferences

for a product, as do changes in societal
customs and habits.
• Popular products might experience rising
demand, which can change swiftly when
trends change.
Buyer preference

• Along with trends, cultural standards affect buyer

demand, which means that international
companies might offer different product types,
depending on the country.
• For example, an international restaurant chain
might have different national menus, which offer
fast-food versions of cultural cuisines.
Buyer expectation

• The demand for a product can rise if buyers

predict scarcity in the future.
• They might purchase certain commodities in
bulk to guard against future events.
Buyer expectation

• For example, when a city's meteorologists

predict an incoming hurricane or other major
storm, consumers in that city might increase
their demand for bottled water and
nonperishable foods, to ensure that they can
feed themselves if the storm causes power
outages.
Available substitutes

• If a particular commodity becomes pricier, the

demand for substitute commodities can increase.
• For instance, if you have always bought a specific
type of cereal and its price increases to the point
it becomes unaffordable, you may begin buying a
similar, less expensive type of cereal.
Available substitutes

• If most consumers can no longer afford the

original cereal, the company might find its
demand decreasing as more customers
choose alternatives.
Complementary products

• With complementary products, the increase in

the price of one can cause a fall in demand for
the other, since consumers often use the
products together.
Complementary products

• For instance, if the prices of printing ink

cartridges go up exponentially, the demand
for both cartridges and printers might
decrease, since using a printer means buying
cartridges.
Market size

• Made up of the total number of potential

buyers of a product or service with a given
market