THE MARKET

Market, a means by which

the exchange of goods and
services takes place as a result of
buyers and sellers being in
contact with one another, either
directly or through mediating
agents or institutions.
 DEMAND
Demand is an economic principle
referring to a consumer's desire to
purchase goods and services and
willingness to pay a price for a specific
good or service. Holding all other
factors constant, an increase in the
price of a good or service will decrease
the quantity demanded, and vice versa.
Market demand is the total quantity
demanded across all consumers in
a market for a given good.
Aggregate demand is the total
demand for all goods and services
in an economy.
Multiple stocking strategies are
often required to handle demand.
A demand function shows how the
quantity demanded of a good
depends on its determinants, the
most important of which is the
price of the good itself, thus, the
equation:

Qd=f(P)
EXAMPLE:
At a price of P10 per bottle, Martha is
willing to buy two bottles one bottle of
vinegar for a given month. As price goes
down to P8, the quantity she is willing to
buy goes up two bottles. At a price of
P2, she will buy five bottles. There is a
negative relationship between the price
of a good and the quantity demanded
for that. A lower price allows the
consumer to buy more,
but as price increases, the amount the
consumer can afford to buy tends to go
down.
Qd = 6 – P/2
=6 – P2/2
=6 - 1
Qd =5 if P2 per bottle,5 bottles
Qd =6 – P/2
=6 – 4/2
=6 – 2
Qd =4 if P4 per bottle, 4 bottles
TABLE 2.1. HYPOTHETICAL
DEMAND SCHEDULE OF MARTHA
FOR VINEGAR (in bottle)
PRICE PER BOTTLE NUMBER OF
BOTTLES
P0 6
2 5
4 4
6 3
8 2
10 1
12

10

0
1 2 3 4 5

Quantity Demanded (in Bottles)

 The Law of Demand
After observing the behavior of
price and quantity demanded in
the above schedule, we can now
state the Law of Demand. Using
the assumption “ceteris
paribus,” which means all other
related variables expect those
that are being studied at the
moment and
are held constant, there is an
inverse relationship between
the price of a good and the
quantity demanded for that
good product decreases. The low
price of the good motivates the
consumer to buy more. When
price increases, the quantity
demanded for the good
decreases.
 Non-Price Determinants of
Demand
• If consumer income decreases , the
capacity to buy decreases and the
demand will also decrease even
when price does remain the same.
• Improved taste for a product will
cause a consumer to buy more of
that good even if its price does not
change.
• Another non-price determinant
is consumer’s expectations of
future price and income.
Consumers tend to anticipate
changes in the price of a good.
• Prices of related goods as
substitutes or complements also
determine demand. Substitute
goods are those that are used
in place of each other, like butter and
margarine and sugar and artificial
sweeteners.
• The number of consumers is also
an important determinant that will
affect market demand for a good .
The population makes up the group
of consumers who will buy the
product.
Shift of the Demand Curve
 When a change in the price of a good
causes the quantity demanded for that
good to change, this is illustrated on
the same demand curve and is simply a
movement from one point to another
on that curve. For example, if price
goes down from P5 P4, quantity
demanded will increase from 10 to 15
pieces, this is illustrated on the same
demand curve.
But if the change in demand is
caused by non-price determinant,
this will involve a change in the
entire demand curve. For example,
the demand curve will shift to the
right to reflect an increase in
demand due to higher income and
to the left to show a decrease in
demand due to less income.
Price per Kilo

1 2 3 4 5 6
Quantity (in kgs.) Quantity (in kgs.)2
 SUPPLY
Demand showed us the side of
the consumers and their
reactions to changes in price
and other determinants. We
now look at the side of the
supplier.
Supply refers to the quantity of goods
that a seller is willing to offer for sale.
The supply schedule shows the
different quantities the seller is willing
to sell at various that affect it.
Assuming that the supply function is
given as Qs=100+ 5P and is used to
determine the quantities supplied at
the given prices.
Table 2.2 Supply Schedule of
Pedro for Fish One Week
Price of Fish (per Kilo) Supply (in Kilo)

P20 200

P40 300

P60 400

P80 500

P100 600
 120

100
Price of Fish (in per

80
Kilo)

60

40

20

0
1 2 3 4 5

Quantity Supplied (in hundred kilos)

The law of Supply
After the behavior of price and quantity
supplied in the above schedule, we
can state the Law of Supply. Using the
assumption of “ ceteris parabus,”
(other things constant) there is a
direct relationship between the price
of a good and the quantity supplied of
that good. As the price increases.
The high price of the good serves as
motivation for the seller to offer
more for sale. Thus, when a price
increases, the quantity supplied of
the good increases since the seller
will take this as an opportunity to
increase his/her income.
Non-price Determinants of Supply
In the above analysis (Figure 2.3), the
only factors that vary are price and
quantity demanded. However, in real-
life, supply is influenced by factors
other than price. These are assumed
constant for the purpose of simplifying
the study of the relationship between
price and quantity supplied.
If the assumption of ceteris
parabus is dropped, non-price
variables are now allowed to
influence supply. These non-price
factors are cost of production,
technology, and availability of raw
materials and resources. This non-
price determinants can cause
referred to a shift of the supply
curve.
Shifts of the Supply curve
Just like in the case of demand, there are also
movements along and shifts of the supply curve. In the
curve in Figure 2.3, what we see are changes in the
quantities supplied due to the different prices of fish.
This changes are referred to us a movement along the
supply curve.
The reason for a movement along
the supply curve is the change in
the price of the good. Once supply
increases due to a non-price
determinant, the entire supply
curve will shift to the right to
reflect an increases, or to the left to
reflect a decreases as shown in
figure 2.4
 The supply function will now read
S=f(P,C,T,A,R),where the Supply (S) of
a good is a function of the price of that
good (P), the cost of production (C),
technology (T), and the availability of
raw materials and resources (AR).
 As a non-price determinant, the cost of
production refers to the expenses
incurred to produce the good.
 An increases in cost will normally result
in a lower supply of the good even when
price will not change since the producer
has to shell out more money to come up
with the same amount of output. With
the same budget and a higher cost, the
producer will only produce a smaller
amount of the good, and therefore, the
supply of the good in the market will
decreases. This reflected in a rightward
shift of the supply curve from S1 to S2 in
figure 2.4.
 Technology is another significant
non-price determinant of demand.
The use of improved technology in
the production of a good will result in
the increased supply of that good. On
the other hand, use of obsolete or
improper technology in production
will result in a downward shift of the
supply curve from S1 to S2.