THE BASIC ANALYSIS OF

DEMAND AND SUPPLY

As the economy cannot operate

without this interaction between the
consumer and the producer, it is essential,
therefore, that students understand the
different movements of the demand and
supply curve, as well as the concept of
market equilibrium.
Intended Learning Outcomes
(Chapter 2 Part 1)
 Distinguish between Law of Demand and Law of Supply
 To explain what causes a change in quantity demanded
 To explain what causes the demand curve to change
 To explain what causes a change in quantity supplied
 To explain what causes the supply curve to change
 To define market equilibrium
 To explain what happens when there is market
disequilibrium
MARKET
Is where buyers and sellers meet. It is the place
where they both trade or exchange goods or services.
In other words, it is where their transaction takes
place.
In economic parlance, the term market does not
necessary refer to a tangible area where buyers and
sellers could be seen transacting. It can represent an
intangible domain where goods and services are traded
such as the stock market, real estate market, or labor
market where workers offer their services and
employers look for workers to hire.
Ceteris Paribus (Latin word)
All other things being unchanged or constant.
(all other factors remain constant)
Example: Changing the price of one product (coca-
cola) and everything else (like taste, color, etc.) will be
held constant.
DEMAND
Pertains as to the quantity of a good or services
that are people are ready to buy at a given prices within
a given time period, when other factors besides price
are held constant (Ceteris Paribus).
The demand for a product is the quantity of a
good or service that buyers are willing to buy given its
price at a particular period.
Demand therefore implies three things:
1. Desire to possess a thing
2. The ability to pay for it or means of purchasing it
3. Willingness in utilizing it
LAW OF DEMAND
If price goes UP, the quantity demanded will go
DOWN. Conversely, if the price goes DOWN, the
quantity demanded will go UP (Ceteris Paribus).
REASON:
Consumers always tend to MAXIMIZE
SATISFACTION.
DEMAND SCHEDULE
Is the table that shows the relationship of prices
and the specific quantities demanded at each of these
prices.
DEMAND CURVE
It is a graphical representation showing the
relationship between price and quantities demanded per
time period. It has negative slope thus it slopes
downward from the left to right.
CHANGE IN QUANTITY DEMANDED

There is a change in quantity demanded if the

movement is along the same demand curve.
A change in quantity demanded is brought about
by an increase (decrease) in the product’s price.
CHANGE IN DEMAND
There is a change in demand if the entire
demand curve shifts to the right (or left) side resulting
to an increase (or decrease) in demand. At the same
price, therefore, more (or less) amounts of good or
service are demanded by consumers.
FORCES THAT CAUSES THE DEMAND
CURVE TO CHANGE

 Taste or preferences
 Changing incomes
 Occasional or seasonal products
 Population change
 Substitute goods
 Expectations of future prices
TASTE OR PREFERENCES
Pertain to the personal likes or dislikes of
consumers for certain goods and services.
CHANGING INCOMES
Increasing incomes of households raise the
demand for certain goods or services.
 OCCASIONAL or SEASONAL
PRODUCTS
The various events or seasons in a given year
also result to a movement of the demand curve with
preference to particular goods.
POPULATION CHANGE
An increasing population leads to an increase in
the demand for some types of goods and services.
SUBSTITUTE GOODS
Are goods that are interchanged with another
good.
EXPECTATIONS OF FUTURE PRICES

If buyers expect the price of a good or service to

rise (or fall) in the future, it may cause the current
demand to increase (or decrease).
SUPPLY
Is the quantity of goods or services that firms are
ready and willing to sell at a given price within a
period of time, when other factors besides price are
held constant (Ceteris Paribus)..
It is the quantity of goods or services which
firms is willing to sell at a given price, at given point in
time.
It is a product made available for higher price
than at a lower price. This is because higher price
results to higher profits.
LAW OF SUPPLY
If the price of good or service goes UP, the
quantity supplied for such good and services will also
go UP, if the price goes DOWN the quantity supplied
also goes DOWN (Ceteris Paribus).
REASON:
Producers always tend to MAXIMIZE
PROFIT.
SUPPLY SCHEDULE
Is the table listing the various prices of a product
and the specific quantities supplied at each of these
prices.
SUPPLY CURVE
It is a graphical representation showing the
relationship between price of product or factor of
production (e.g. labor) and the quantity supplied per
time period.
CHANGE IN QUANTITY SUPPLIED

If the movement is along the same supply curve.

A change in quantity supplied is brought about
by an increase (decrease) in the product’s own price.
CHANGE IN SUPPLY
There is a change in supply if the entire supply
curve shifts to the right (or left) side resulting to an
increase (or decrease) in supply. At the same price,
therefore, more (or less) amounts of good or service
are supplied by producers.
FORCES THAT CAUSE THE SUPPLY
CURVE TO CHANGE

 Optimization in the use of factors of production

 Technological change
 Future expectations
 Number of seller
 Weather conditions
 Government policy
OPTIMIZATION IN THE USE OF
FACTORS OF PRODUCTION
An optimization in the utilization of resources
will increase supply, while a failure to achieve such
will result to decrease in supply. Optimization refers to
the process, or methodology of making something as
fully perfect, functional, or effective as possible.
TECHNOLOGICAL CHANGE
Cost-reducing innovations in production
technology increases supply and on the other hand
technical trouble decreases supply.
FUTURE EXPECTATIONS
Anticipation in prices.
NUMBER OF SELLERS
The more sellers there are in the market the
greater supply of goods and services will be available.
WEATHER CONDITIONS
Bad weather or other natural disasters reduces
supply.
GOVERNMENT POLICY
Intervention of government.
EQUILIBRIUM
It pertains to a balance that exists when quantity
demanded is equal to quantity supplied.

Example:
If Qd is 100 and Qs is 100, therefore, Qd is equal to
Qs.
MARKET EQUILIBRIUM
The meeting of supply and demand. A state of
balance.
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.

Example:
If Qd is 100 and Qs is 100, therefore, the Equilibrium
Market Price (EMP) is 5.
WHAT HAPPENS WHEN THERE IS
MARKET DISEQUILIBRIUM?
2 conditions may happen:

 SURPLUS

 SHORTAGE
SURPLUS
It is a condition in the market where the quantity
supplied is more than the quantity demanded.

Example:
If Qd is 100 and Qs is 120. There is a Surplus.
SHORTAGE
It is a condition in the market where the quantity
supplied is less than the quantity demanded.

Example:
If Qd is 100 and Qs is 90. There is a Shortage.
FLOOR PRICE
It is the legal minimum price imposed by the
government.
PRICE CEILING
It is the legal maximum price imposed by the
government.
THE END