The Basic Analysis

of Demand and
Supply
Keys to economic
success
 The Basic Analysis of
Demand and Supply
Demand is generally affected by the behavior of
consumers, while supply is usually affected by the conduct of
producers.
The interplay betwen these two factors is the foundation of economic
activity. Thus, the customer identifies his
needs, wants and demands, while producers address these by
accordingly producing goods and services.

In the end, the consumer gains satisfaction while producer gains

profit.
 DEMAN
D
Demand pertains to the quantity of goods and
services that people are ready to buy at given
prices within a given period of
time period, when other factors besides price
are held constant.

Simply put, the demand of the product is the

quantity of a good or service that
buyers are willing to buy its price at a
particular time.
 DEMAN
D
Demand therefore implies three
things:

1.desire to possess a thing

(good or service
2.the ability to pay for it or
means of purchasing it and
3.willingness in utilizing it.
 Market
Take note that when
there is demand for a
good or service, there is a
market. A market is
where buyers and sellers
meet. It is the place where
they both trade or exchange
goods and services in
other words, it is where their
transaction takes place.
Kinds of Market

Wet market- is where

people usually buy
vegetables, meat, fish and
etc.

Dry market - is where

people buy shoes, clothes
and other dry goods.
 Kinds of Market
It can represent an intangible
domain where goods and
services are traded, such as as
stock market, real estate
market or labor market where
workers offer their services,
and employers look for
workers to hire.
 Methods of
Demand
Analysis
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 1.DEMAND SCHEDULE

A demand schedule is a table that shows the

relationship of prices and specific quantities
demanded at each of these prices. Generally, the
information provided by a demand schedule can
be used to construct a demand curve showing the
price-quantity demanded relationship in a
graphical form.
Hypothetical Demand Schedule
for Rice per Month
 Demand Schedule

Take note that as the price goes up

(down) the quantity of rice being
purchased by the consumer goes down
(up). This implies that quantity
demanded is inversely related with price.
In other words, consumers are not willing
to purchase more rice at higher prices
but will consume more if prices are low.
 Demand Curve
Graphical representation
showing the relationship
between price and quantities
demanded per time period.A
demand curve has negative
slope thus it slopes downward
from left to right. The
downward slope indicates the
inverse relationship between
price and quantity demanded.
Demand Curve
Law of demand which states
that if the price goes UP, the
quantity demanded of a good
and will go DOWN.
Conversely, if the price goes
D O W N the quantity
demanded of a good will go
UP. The reason for this is
because consumers always
tend to MAXIMIZE
SATISFACTION.
 DEMAND
FUNCTION
Demand Function can be analyzed
mathematically through a demand
function. A demand function shows the
relationship between demand for a
commodity and the factors that
determine or influence this demand.
These factors are the price of the
commodity itself, prices of related
commodities, level of incomes, taste and
preferences, distribution of income etc.
 DEMAND FUNCTION
Thus, we can show our mathematical function for demand as:

Qd= f (product’s own price, income of consumers, price of related goods,

etc.)

We can therefore come up with the demand function as”

Qd= a -b P
where:
Qd= quantity demanded at a particular price
a= intercept of the demand curve
b= slope of the demand curve
P= price of the good at a particular time period
Let us assume that the
current price of good A is 5
pesos. The intercept of the
demand curve is 3 while the
slope is .25.
If we want to determine how
much of good A will be
demanded by consumer X, we
can simply substitute the
given
values to our equation,
Thus:

QD = 3 - 0.25 (5)

= 3 - 1.25

= 1.75 units of good

A
 Change in Quantity
Demanded vs. Change
If the change
purchases in consumer
is caused by a change
in price of the good, it is a
in Demand
change in quantity demanded -
a movement along the demand
curve.

If the change in consumer

purchases is due to a change in
anything other than the price of
the good ( a change in
consumer income for example),
it is a change in demand- a shift
in the demand curve.
 Change in Quantity
Demanded

We can say that there is a change in

quantity demanded (symbolized as

if there is a movement from one point to another

point or from price quantity combination to
another along the demand curve.A change in
quantity demanded is mainly brought about by an
increase ( a decrease) in the product’s own price.
The direction of the movement however is inverse
considering the L A W of Demand
Change in Quantity Demanded
Change in Demand
 Forces that cause the demand curve to change

Taste or Preferences Changing Incomes

Increasing incomes of households raise the demand for
Pertains to the personal likes or dislikes of consumers for
certain goods or services or vice versa. This is because
certain goods and services. If tastes or preferences change
an increase in one’s income generally raises his capacity
so that people want to buy more of a commodity at a
or power to demand for goods and services which he is
given price, then an increase in demand will result or vice
versa. not able to purchase at lower income.

Substitute and Complementary goods

Population Change Substitute goods are goods that are interchanged
The various events or seasons in a given year with another good. In a situation where the price of
also result to a movement of the demand a particular good increases a consumer will tend to
curve with reference to particular goods. look for closely related commodities. They are
usually cheaper which makes it more attractive to
buyers
 Forces that cause the demand curve to change

Expectations of Future Prices

Optimism or pessimism about the future direction of the
economy, including expected natural disasters and inflation
can affect the spending patterns of consumers.
Practical Application of the concept change in quantity
demanded and change in demand
Because of the price changes,
We already know that the price of private car owners tend to lessen
the gasoline in the domestic market the consumption of gasoline during
tends to change every now and high prices by not using their cars,
then. but tend to increase their
consumption during low prices by
utilizing more of their cars.

On the hand, because of the increase in

the price of gasoline, the sale of cars has
declined. This is because cars and gasoline
are complementary goods so that the
increase in the price of gasoline may result
in a decline in the sale of cars.
 Supply
Supply is the quantity of goods and services
that firms are ready and willing to sell at a
given price within a period of time, other
factors being held constant. It is the
quantity of goods and services which is firm
is willing to sell at a given price at a given
point in time. Thus, is a product made
available for sale of items. It should be
remembered that sellers normally sell more
at a higher price than at lower price. This is
because higher price results to higher
profits.
 Methods in Supply
Analysis
Supply schedule is a table listing
the various prices of a product and
the specific quantities supplied at
each of these prices at a given point
in time. Generally, the information
provided by a supply schedule can be
used to construct a supply curve
showing the price/quantity supply
relationship in graphical form.
Supply Curve

A supply curve is a graphical representation showing the

relationship between the price of the product sold or factor of

production and the quantity supplied per time period. The

typical market supply curve for a product slopes upward from

left to right indicating that as price (falls) more (less) is

supplied.
 SUPPLY FUNCTION
Thus, we can show our mathematical function for demand as:

Qs= f (product’s own price, number of sellers, price of factor input , etc.)

We can therefore come up with the demand function as”

Qs= a + b P
where:
Qs= quantity demanded at a particular price
a= intercept of the demand curve
b= slope of the demand curve
P= price of the good at a particular time period
Change in Quantity Supplied
vs. Change in Supply
 Change in Quantity
Supplied
A change in quantity supplied occurs if
there is a movement from one point to
another along the same supply curve. A
change in quantity supplied is brought
about in an increase or decrease in the
product’s own price.
Change in Quantity
Supplied
 Change in Supply

A change in supply happens when the

entire supply curve shifts leftward or
rightward. At the same price, therefore,
less (more) amount of a good or service is
supplied by producers or sellers.
Change in Supply
 Forces that cause the supply curve
to change
Optimization in the use of factors
of production

An optimization in the utilization of It is the efficient use

resources will increase supply, while of resources. In
a failure to achieve such will result
business parlance, it
to a decrease in supply. Process or
methodology of making or creating can mean maximum
something as fully perfect, functional production of output
or effective as possible.
at minimum cost.
 Forces that cause the supply curve
to change
Technological Change

The growth of outsourcing, which led The introduction of

to manufacturing companies moving cost-reducing
much of their production to cheaper,
innovations in the
overseas locations could not have
happened without the internet production
technology increase
supply on one hand.
 Forces that cause the supply curve
to change
Future Expectations

This factor impacts sellers as much If sellers however

as buyers. If sellers anticipate a rise expect a decline in
in prices, they may choose to hold
the price for their
back the current supply to take
advantage of the future increase in products, they will
price, thus reducing market supply. increase present
supply.
 Forces that cause the supply curve
to change
Number of Sellers Weather Conditions

Bad weather, such as

The number of sellers has a direct
typhoons, drought or other
impact on quantity supplied. Simply
natural disasters, reduces of
put, the more sellers there are in the agricultural commodities while
market the greater supply of goods good weather has an opposite
and services will be available impact.
 Forces that cause the supply curve
to change
Government Policy

Removing quotas and tariffs on

imported products also affect
supply. Lower trade restrictions
and lower quotas or tariff boost
imports, thereby adding more
supply in the market.
 Market Equilibrium

Market equilibrium generally pertains to a

balance that exists when quantity
demanded equals quantity supplied. It is
the general agreement of the buyer and
seller in the exchange of goods and
services at a particular price and at a
particular quantity. At equilibrium point,
there are always two sides of the story,
the side of the buyer and that of the seller.
Equilibrium market price

Equilibrium market price is the price

agreed by the seller to offer its good or
service for sale and for the buyer to pay
for it. Specifically, it is the price at which
quantity demanded of a good is exactly
equal to quantity supplied of the same
good.
What happens when there is
market equilibrium

1. Surplus – a condition in the

market where the quantity supplied
is more than the quantity demanded.
When there is a surplus, the
tendency is for sellers to lower
market prices in order for the goods
and services to easily disposed from
the market.
Surplus
This means that there is a downward
pressure to price when there is a surplus
in order to restore equilibrium in the
market.

Generally, surplus happens when there

are more products sold in in the market
buy sellers but few bought by consumers.
This is because the quantity of goods that
buyers are willing to buy at a given price
is less than the quantity of goods that
sellers are willing to sell at the same
price.
Surplus
This means that there is a downward
pressure to price when there is a surplus
in order to restore equilibrium in the
market.

Generally, surplus happens when there

are more products sold in in the market
buy sellers but few bought by consumers.
This is because the quantity of goods that
buyers are willing to buy at a given price
is less than the quantity of goods that
sellers are willing to sell at the same
price.
Shortage
A condition in the market in which
quantity demanded is higher than
the quantity supplied at a given
price.

When there is a shortage of goods

and services in the market, what
happens is that there is an upward
pressure on prices to restore
equilibrium in the market.
Shortage
In this particular situation, it is the
consumers who will influence the
price to go up since they bid up
prices in order for them to acquire
the goods or services that are short
in supply.
Changes in Demand, Supply and Equilibrium

This is our concern to show the

effect on equilibrium price and
quantity when either demand or
supply changes because of the effect
of the factors other than price.
 Changes in Demand

Suppose that the supply of some

goods (say, bread) is constant and
demand increases (because of the
increase of income or change in
tastes and preferences of consumers
for example.
 Changes in Demand

Suppose that the supply of some

goods (say, bread) is constant and
demand increases (because of the
increase of income or change in
tastes and preferences of consumers
for example.
 Changes in Supply

Suppose that the supply of some

goods (say, bread) is constant and
demand increases (because of the
increase of income or change in
tastes and preferences of consumers
for example.
Complex Cases
Price Controls

When the marker is experiencing a surplus

there is a possibility that producers will
lose. Conversely, when the market is
encountering shortage, there is likehood
that consumers will be abused.

It is the specification by the government of

minimum or maximum prices for certain
goods or services when the government
considers it disadvantageous to the
producer or consumer. The price must be
fixed at a level below the market
equilibrium or above it depending on the
objective mind in mind.
Price Controls

Classified into two

types:

Floor price and Ceiling

price
Floor Price

The legal minimum price imposed

by the government on certain
goods and services. A price at or
above the price floor is legal; a
price below it is not. The setting
of a floor price is undertaken by
the government if a surplus in
the economy persists.
Complex Cases
Price Ceiling

Price ceiling 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.
Price Ceiling

The government regularly

monitors the market and impose
a maximum price on the
commodities which is to be
strictly followed by producers and
sellers.

It is usually done after typhoon

or severe flooding.
Market Equilibrium : A
Mathematical Approach

Demand Function : QD= a –bP

Supply Function : Qs= a +bP
Equilibrium Condition = QD=QS
Problem

Look for the PE and QE given the

following information:

QD = 68-6P
QS = 33+10P

Solving the problem, we can

simply state our equilibrium
equation as:
A-b(P)=a+b(P)
Substituting our values, we have:

68-6(P)=33+10(P)

Solving for the unknown (P), we

simply group similar terms, thus

68-33=10P+6P
35=16P

Dividing both sides by 16, we get

P=2.19
Now we have determined the
price of the good. The next
problem for us to determine the
equilibrium quantity. Since we
already know the price, all we
have to do is substitute the value
of the price to our previous
equation, thus:

68-6(2.19)=33+10(2.19)
Thank
you very
much!