Market Forces – Demand and Supply (DS)

Review what was learned

Differentiate the following terminologies. For the factors affecting demand, enumerate the determinants
then provide an example in relation to the law of demand or supply. For equilibrium of DS, explain when
DS is in equilibrium then provide an example using a graph that shows equilibrium.

Demand Supply
- Demand refers to the consumer’s desire to - Supply pertains to the specific amount of
purchase or willingness to pay for a good goods or services that is available for the
or service. consumers.

Demand Schedule Supply Schedule

- The demand schedule is a table that shows - The supply schedule is a table that shows the
the different price levels in every quantity quantity supplied of a good or service in
demanded of a good or service. different market price levels.

Demand Curve Supply Curve

- Demand Curve shows the visual - Supply Curve is the illustration of the
representation of the law of demand or a relationship between quantity supplied and
graph that shows the changes in demand the cost of goods or service for a given period
due to price changes. The relationship which correlates to one another.
between price and quantity demanded is
shown in this graph.

Law of Demand Law of Supply

- The law of demand states the inverse - The law of supply refers to the direct
relationship of price and demand. When relationship of price and supply. When the
the price is low, the demand is high. The price is high, the supply is high. The lower the
higher the price, the lower the demand. price, the lower the supply.

Factors Affecting Demand (Determinants) Factors Affecting Supply (Determinants)

1. Price of the Product 1. Cost of Production

Example: The price of the product will affect the Example: The cost of production will affect the supply.
demand. In accordance to the law of demand, if the If a business encounters a low production cost, the
price is high, the demand is low. If the price is low, more they will supply goods to earn more profits at any
the demand is high. That’s why the price of a good given selling price for its products. A high production
or services is one of the factors that affects the cost will cause a business to decrease their supply since
demand. expensive materials will affect their profit and market
price.

2. Consumer Expectations 2. Government Policy

Example: The consumer expectations will affect the Example: The government policy will affect the supply.
demand. For example, when a consumer expects Policies such as taxes, import duties, subsidies etc. can
that the value of a certain product or service will affect the cost of production. It might affect in a way
increase in the future, the demand will rise for them wherein the cost of production will increase due to the
to get the product in lower price. Similarly, if the policies that will lower the level of supply, or the cost
expectation of the consumer is reduced price of of production will decrease and the amount of supply
goods in the future, there will be a decrease in will increase.
demand.
3. Price of Related Goods 3. Technology
Example: The price of related goods will affect the Example: The technology will affect the supply. The
demand. For example, the price of a certain product continuous innovation of technologies will benefit the
increases, and there’s a related good that has a production process of a firm and tend to produce
lower price. This related good will become a quality goods or services. Since technology also makes
substitute product and its demand will increase it easier and faster to produce, there will be also an
because of the lower price that is offer. (ex. Rise in increase of supply. The automatic machines that can be
price of coffee will increase the demand for teas seen in a factory is an example of a technology that is
and decrease the demand for coffee). involve in production process.

4. Income of the Consumers 4. Price of Good or Service

Example: The income of the consumers will affect Example: The price of good or a service will affect the
the demand. Let us just say that there is an increase supply. As stated in the law of supply, when the price is
to the consumer’s income. This will result to the high, the supply will increase. If the price is low, the
increase of goods that the consumer’s demands supply will decrease. This is due to the fact that if the
since he/she is capable of purchasing a specific good or service has a high market price, a business will
number of goods. On the other hand, if the produce more supply so they can earn more profit.
consumer’s income decrease, the consumption
levels will also reduce.

5. Number of Buyers in the Market 5. Availability of Raw Materials

Example: The number of buyers in market will Example: The availability of raw materials will affect
affect the demand. The more the number of buyers the supply. If there is enough or high quantity of raw
increase, the more that the demand will rise. If the materials, there will be a smooth flow of production
number of buyers decreases, then the demand will process that will allow a business to increase more
also decrease. supply. But if there’s a shortage of raw materials,
possibly, the supply will decrease.

Equilibrium of Supply and Demand

The curves will cross when the supply and demand graphs are combined. The equilibrium price is established
using this intersection. The price at which a product's supply and demand are balanced is known as the
equilibrium price. The price point where product supply and the price customers are willing to pay are equal,
maintaining supply and demand steady, as shown in the example supply and demand equilibrium graph
above. For example, the supply and demand curves' lines show that the price for a certain product is $500 at
equilibrium. Prices that are too expensive, over $500, can reduce demand and cause an oversupply of the
product. Prices that are excessively low can spurge demand and cause a shortage of the commodity, so the
equilibrium price of a certain product must be $500 to achieve the balance of supply and demand.
 Elasticity of Demand Elasticity of Supply
Elastic - A demand that is elastic experiences a Elastic - When the price elasticity of supply exceeds
massive shift in quantity demanded as a result of a one, there is an elastic supply. The amount supplied
price adjustment. changes more significantly than the price does.
Inelastic - Once the amount sought changes little Inelastic - When the price elasticity of supply is less
as a result of a price adjustment, the demand is than one, the inelastic supply curve develops. The
said to be inelastic. supply is altered in a smaller percentage than the
price.
Unit Elastic - Elasticity that is unitary changes in Unit Elastic - When the price elasticity of supply is
the same way as its price. In other words, the equal to 1, there is a unit elastic supply. When there is
percentage change in price and the percentage a unit elastic supply, output and prices move
change in demand are exactly equal. proportionally.

Reflection:
What is the importance of demand and supply integration to business? Give three reasons in bullet
form. (hint: significance of DS to business and managers)

1. The supply and demand are important to a business because it serves as their basis for the next
step that they will do in their business. These market forces allow the business to analyze what
decision they will do next to become more a profitable entity, to avoid shortage and surplus, and
to have an indirect communication with their consumers since market forces also provides the
demands of the consumers. The business will know what to produce next or what market price
they will implement. In short, market forces will help the business to make better economic
decisions.

2. Being informed with the supply and demand, a business can achieve a balanced flow and maintain
a stable operation with the help of these market forces. The supply and demand provide
information regarding the quantities of consumers who demands certain product, as well as other
needs in business such as supplies. Achieving a balanced business flow will help the business to
sustain their operation and will help them to operate longer in the future.

3. The market forces provide understanding about the current events of the economy. A business
that is economically aware because of these market forces can become ready for the possible
threats of the market. They can execute a plan in advance for them to be able to produce a quality
service or goods for their consumers. They will also use this market forces as their guide for them
to be able to move efficiently in the market economy. The knowledge that they have about the
supply and demand will benefit them since market forces is something that serves as a map that
directs the businesses to the right route.

Romero, Trisha Mae, V. – BFAC02

References:

LRC references: Indicate the title, author’s name and publisher also the website link. You may use your old
notes.

Printed Books E-books Journals/ articles

Others: outside LRC references

Boo E-books Journals/ articles

ks
Hofstrand, D. (2020). Elasticity of An Overview of Supply and Demand Graphs.
Demand. Iowa State University Extension and (2022). Lucidchart.
Outreach. https://www.lucidchart.com/blog/overview-of-
https://www.extension.iastate.edu/agdm/w supply-and-demand%20graphs
holefarm/pdf/c5-207.pdf
Fernando, J. (2021). Law of Supply and
Demand in Economics: How It
Works. Investopedia.
https://www.investopedia.com/terms/l/law-of-
supply-demand.asp

Frankenfield, J. (2020). Demand Schedule

Definition. Investopedia.
https://www.investopedia.com/terms/d/demand
-schedule.asp

Kenton, W. (2022). Supply Curve Definition

- Economics. Investopedia.
https://www.investopedia.com/terms/s/supply-
curve.asp

Meaning And Determinants Of Demand:

Definition, Examples, Questions. (2020). Toppr.
https://www.toppr.com/guides/business-
economics/theory-of-demand/meaning-and-
determinants-of-demand/

Potters, C. (2022) Demand: How It Works

Plus Economic Determinants and the Demand
Curve. Investopedia.
https://www.investopedia.com/terms/d/demand.
asp

Price Elasticity of Supply: Meaning, Types

& Examples. (n.d.). StudySmarter.
https://www.studysmarter.us/explanations/micro
economics/supply-and-demand/price-elasticity-
of-supply/

Supply: Meaning of Supply And

Determinants Of Supply. (2020). Toppr.
https://www.toppr.com/guides/business-
economics/theory-of-supply/meaning-and-
determinants-of-supply/