Republic of the Philippines

PARTIDO STATE UNIVERSITY

Camarines Sur

College of Business and Management

Main Campus

Module 4

Demand

Name of Student: Section:

Course Code: BAC1 Week number: 4 & 5
Course Title: Basic Microeconomics Name of Faculty: Kevin C. Baltar

I. Objective

1. State the law of demand and supply

2. Identify the determinants of supply and demand

3. Explain how forces of demand and supply interact to attain the market equilibrium

4. Apply the law of demand and supply to different economic situation

II. Lesson
Ceteris paribus:
• When changing one variable in a function (e.g. demand for some product), we assume everything else
held constant
Demand:
• The relationship between the price of a certain good or service and the quantity of that good or service
someone is willing and able to buy
Demand curve:
• A graphic representation of the relationship between price and quantity demanded of a certain good or
service, with price on the vertical axis and quantity on the horizontal axis
Demand schedule:
• a table that shows the quantity demanded for a certain good or service at a range of prices
Law of demand:
• The common relationship that a higher price leads to a lower quantity demanded of a certain good or
service and a lower price leads to a higher quantity demanded, while all other variables are held constant
Price:

• What a buyer pays for a unit of the specific good or service

Quantity demanded
• The total number of units of a good or service consumers wish to purchase at a given price

Demand for Goods and Services

Economists use the term demand to refer to the amount of some good or service consumers are
willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be
able to differentiate between a need and a want, but from an economist’s perspective, they are the
same thing. Demand is also based on ability to pay. If you can’t pay for it, you have no effective demand.

What a buyer pays for a unit of the specific good or service is called the price. The total number
of units purchased at that price is called the quantity demanded. A rise in the price of a good or service
almost always decreases the quantity of that good or service demanded. Conversely, a fall in price will
increase the quantity demanded. When the price of a gallon of gasoline goes up, for example, people
look for ways to reduce their consumption by combining several errands, commuting by carpool or mass
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transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship
between price and quantity demanded the law of demand. The law of demand assumes that all other
variables that affect demand are held constant.

An example from the market for gasoline can be shown in the form of a table or a graph. A table
that shows the quantity demanded at each price, such as Table 1, is called a demand schedule. Price in
this case is measured in dollars per gallon of gasoline. The quantity demanded is measured in millions of
gallons over some time period (for example, per day or per year) and over some geographic area (like a
state or a country).

Table 1. Price and Quantity Demanded of Gasoline

Price (per gallon) Quantity Demanded (millions of Gallons)
1.00 800
1.20 700
1.40 600
1.60 550
1.80 500
2.00 460
2.20 420

A demand curve shows the relationship between price and quantity demanded on a graph like
Figure 2, below, with price per gallon on the vertical axis and quantity on the horizontal axis.
Note that this is an exception to the normal rule in mathematics that the independent variable
(x) goes on the horizontal axis and the dependent variable (y) goes on the vertical. Economics is
different from math! Note also that each point on the demand curve comes from one row in
Table 1.

For example, the upper most point on the demand curve corresponds to the last row in Table 1,
while the lower most point corresponds to the first row.

The demand schedule (Table 1) shows that as price rises, quantity demanded decreases, and
vice versa. These points can then be graphed, and the line connecting them is the demand curve (shown
by line D in the graph, above). The downward slope of the demand curve again illustrates the law of
demand—the inverse relationship between prices and quantity demanded.

The demand schedule shown by Table 1 and the demand curve shown by the graph in Figure 2
are two ways of describing the same relationship between price and quantity demanded.
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Camarines Sur

Demand curves will look somewhat different for each product. They may appear relatively steep
or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity
that they slope down from left to right. In this way, demand curves embody the law of demand: As the
price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity
demanded increases.

Watch It
The demand curve shows how much of a good people are willing to buy at different prices. Watch this video
to see an example of the demand for oil. When oil prices are high, fewer people are willing to pay the hefty price
tag but some consumers, like airliners, depend so heavily on using oil for fuel, they are willing to pay a lot. Other
low-value consumers will be less likely to pay for expensive oil, as they could find substitutes or alternatives.

Watch this video online: [Link]

Demand vs. Quantity Demanded

In economic terminology, demand is not the same as quantity demanded. When economists talk
about demand, they mean the relationship between a range of prices and the quantities demanded at
those prices, as illustrated by a demand curve or a demand schedule. When economists talk about
quantity demanded, they mean only a certain point on the demand curve, or one quantity on the
demand schedule. In short, demand refers to the curve and quantity demanded refers to the (specific)
point on the curve.

The Ceteris Paribus Assumption

A demand curve or a supply curve (which we’ll cover later in this module) is a relationship
between two, and only two, variables: price on the vertical axis and quantity on the horizontal axis. The
assumption behind a demand curve or a supply curve is that no relevant economic factors, other than
the product’s price, are changing.

Economists call this assumption ceteris paribus, a Latin phrase meaning “other things being
equal.” Any given demand or supply curve is based on the ceteris paribus assumption that all else is held
equal. Therefore, a demand curve or a supply curve is a relationship between two, and only two,
variables when all other variables are held equal. If all else is not held equal, then the laws of supply and
demand will not necessarily hold.

WHEN DOES CETERIS PARIBUS APPLY?

Ceteris paribus is applied when we look at how changes in price affect demand or supply, but
ceteris paribus can also be applied more generally. In the real world, demand and supply depend on
more factors than just price. For example, a consumer’s demand depends on income, and a producer’s
supply depends on the cost of producing the product. How can we analyze the effect on demand or
supply if multiple factors are changing at the same time—say price rises and income falls? The answer is
that we examine the changes one at a time, and assume that the other factors are held constant.

For example, we can say that an increase in the price reduces the amount consumers will buy
(assuming income, and anything else that affects demand, is unchanged). Additionally, a decrease in
income reduces the amount consumers can afford to buy (assuming price, and anything else that affects
demand, is unchanged). This is what the ceteris paribus assumption really means. In this particular case,
after we analyze each factor separately, we can combine the results. The amount consumers buy falls
for two reasons: first because of the higher price and second because of the lower income.
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Camarines Sur

Watch It
Watch this video to review the theory of demand. Remember that, according to the law of demand and all other
things being equal (ceteris paribus):
• the lower the price of a product, the more of it will be bought
• the higher the price of a product, the less of it will be bought

Watch this video online: [Link]

 There is negative relationship between the price of the good and the quantity demanded for the
good.
 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.

P Q
R U
I A
C N
T
E
I
T
Y
 The negative slope of the demand curve is due to income and substitution effects

Income and substitution effect

Income effect

• When a change in the price of a good changes consumer real income or purchasing power,
which the capacity to buy with a given income.
o Purchasing power – is the volume of goods and services once can buy with his/her
income

• If a good becomes more expensive the real income decreases and the consumer can only buy
less goods and services with the same amount of money.

• Opposite holds with a decrease in the price of goods and increase income.

Substitution effect

• Is felt when a change in the price of a good changes demand due to alternative consumption of
substitute goods.

Law of demand

• Using the assumption ceteris paribus (all other related variables except those that are being
studied at the moment are held constant)

• There is an inversely relationship of the price of goods and the quantity demanded for good
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o As the price decreases the quantity demanded increases

o As the price increases the quantity demanded decreases

Changes in the quantity demanded and movement along the demand curve

Hypothetical demand schedule of Martha for vinegar

Points Price in Php Quantity
A 2 50
B 4 40
C 6 30
D 8 20
There is an upward slope E 10 10
from point A to point B
when the PRICE of 10 As price goes up to 8, the quantity
vinegar increases B she is willing to buy goes down to
10 bottles
8

6
A

4 At price 4 per bottle, Martha is

willing to buy 30 bottle of
vinegar for a given price.
2

10 20 30 40 50

Watch It
A change in price does not shift the demand curve. It only shows a difference in the quantity demanded.
The demand curve will move left or right when there is an underlying change in demand at all prices.

Watch this video online: [Link]

Factors affecting the demand curve

• Changes in income
• Change in taste in preferences
• Changes in population
• Change in speculation
• Change in the price of related good

Change in income

 The purchasing power for goods and services changes as the income changes

 When there is an increase income the consumer will buy more goods even if their price
remain constant

 In this instances, the demand curve will shift to right if the income increases
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 If the income decreases the consumer will buy fewer goods, shifting to left.

Example: the Philippines is facing the global pandemic known as COVID19 since March resulting to a
decrease in the income of some Filipino workers because of lockdowns implemented by the National
government. What happen in the demand for canned goods?

This is the original Demand

Curve without a change in
income

P1

D1

Q1 Q

Figure 1. Demand curve without a change in their income

Shift to the left Because of the

P
change/decrease in income
Price
remain
constant

Changes in the
P1 demand curve
from D1 to D2
Decrease in
demand for
canned good from
Q1 to Q2
D2 D1

Q2 Q1 Q

Figure 2. Demand curve with a change in their income

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Camarines Sur

Change in taste and preferences

 Ex. Since 2000, the Filipinos demand for cellular phone has drastically increased, the
introduction of new, modern, and innovative phones has attracted the attention of a
buyer. what will happen in the demand for old model phone?

 Old phone model no longer marketable

This is the original Demand

Curve without a change in taste
and preferences

P1

D1

Q1 Q

Figure 1. Demand curve without a change in their tastes and preferences

P Shift to the left Because of the

change/decrease in Change in taste
Price and preferences
remain
constant  Ex. Since 2000, the
Filipinos demand for
cellular phone has
Changes in the
drastically increased,
P1 demand
the introduction of curve
new, modern, from D1 to D2
and
Decrease in innovative phones has
demand for old attracted the
model phone attention of a buyer.
from Q1 to Q2 what will happen in
D2 D1 the demand for old
model phone?

 Old phone model no

Q2 Q1 Q
longer marketable

Figure 2. Demand curve with a change in their Change in taste and preferences

 Ex. Since 2000, the Filipinos demand for cellular phone has
drastically increased, the introduction of new, modern, and
innovative phones has attracted the attention of a buyer. what will
happen in the demand for old model phone?

 Old phone model no longer marketable

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Change in the size of population

 Population growth means an increase in the size of the market demand

 Decline in population means decrease in demand

 Ex. A rise in the number of families in metro manila results to greater demand for basic
goods,

This is the original Demand

Curve without a change in
population

P1

D1

Q1 Q

Figure 1. Demand curve without a change in population

P Shift to the right because of

the change/increase in
Price
population
remain
constant

Changes in the
P1 demand curve
from D1 to D2
Increase in
demand for basic
good from Q1 to
Q2
D1 D2

Q1 Q2 Q

Figure 2. Demand curve with a a change in population

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Changes in consumer’s speculation

 Ex. The outbreak of AH1N1 flu virus caused people to purchase flu vaccine of different
kinds. If the spread of disease was abated, the demand for vaccine would also decrease.

 The demand curve would shift to left.

This is the original Demand

Curve without a change in
consumer’s speculation

P1

D1

Q1 Q

Figure 1. Demand curve without a change in consumer’s speculation

P Shift to the left Because of

the change/decrease in
Price
consumer’s speculation
remain
constant

Changes in the
P1 demand curve
from D1 to D2
Decrease in
demand for flu
vaccine from Q1
to Q2
D2 D1

Q2 Q1 Q

Figure 2. Demand curve with a change in consumer’s speculation

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Price of related goods

(Substitute) goods that are used in place of each other

 An increase in the demand good will lead to the decrease of the demand for other good.

 If the price of good increase the demand for that good will decrease while the demand for its
substitute will increase.

Example: there is an increase in the price of Butter. What will happen in the price of margarine?

This is the original Demand

Curve without a change in price
of related goods (substitute)

P1

D1

Q1 Q

Figure 1. Demand curve without a change in price of related goods (substitute)

P Shift to the right Because of

the change/increase in price
Price
of related goods (substitute)
remain
constant

Changes in the
P1 demand curve
from D1 to D2
Increase in
demand for
Margarine good
from Q1 to Q2
D1 D2

Q1 Q2 Q

Figure 2. Demand curve with a change in price of related goods (substitute)

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(Complement) goods that are used together

 An increase for the demand for good will lead to an increase in the demand for complement
since they are used together.

Example: there is a decrease in the demand for coffee. What will happen in the demand for
creamer?

This is the original Demand

Curve without a change in price
of related goods (complement)

P1

D1

Q1 Q

Figure 1. Demand curve without a change in in price of related goods (complement)

P Shift to the left Because

of the change/decrease
Price
in income
remain
constant

Changes in the
P1 demand curve
from D1 to D2
Decrease in
demand for
creamer from Q1
to Q2
D2 D1

Q2 Q1 Q

Figure 2. Demand curve with a change in in price of related goods (complement)

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III. Activities

Instruction: choose the letter of the correct answer.

1. Jomar is a small business owner who sells delivery trucks to local retailers. Last month the price
of a new truck was Php 50,000 and he sold a total of 16 trucks during that month. This month
the price of a new truck has increased to Php 55,000. Which quantity demanded might Jamal
expect to observe this month according to the law of demand?
a. 15 trucks
b. 17 trucks
c. 18 trucks
d. 20 trucks

2. After Jomar increased the price of his trucks, he actually observed that his buyers increased
rather than decreased their number of vehicle purchases. While he sold 16 trucks to his
customers the month before the price increase, he sold a total of 18 trucks one month later.
What is the most likely explanation for this apparent violation in the law of demand?
a. The law of demand does not apply to the market for trucks. As price increase, we would
expect to see quantity demanded increase as well
b. Not all variables that affect demand have held constant this past month. For example,
Jomar’s costumer businesses have done exceptionally well this past month and so they are
willing to buy more trucks despites the higher price.
c. Economist need to rethink the law of demand, which has no way of accounting for the
phenomenon

3. Which of the following demand curve for tomatoes violates the law of demand?

a.

b.
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c.

4. You are given the following demand schedule for used cars. Which of the following demand
curves accurately represents this demand schedule and has proper formatting?

The demand schedule for used cars

Price (Php) Quantity Demanded
1000 7600
2000 6500
3000 5400
4000 4300
5000 3200
6000 2100
7000 1000
8000 300

a.

b.
The Price is displayed on the vertical axis, quantity on the horizontal, and all points are faithfully
plotted according to the demand schedule
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c.

5. Below is the demand curve for oranges in a Goa supermarket. Select the demand schedule that
best corresponds to this demand curve.

a.
Demand Schedule for orange
Quantity (thousand) Price (per peso)
1 10
2 9
3 8
4 7
5 6
6 5
7 4
8 3
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b.
Demand Schedule for orange
Quantity (thousand) Price (per peso)
8 10
7 9
6 8
5 7
4 6
3 5
2 4
1 3

c.
Demand Schedule for orange
Quantity (thousand) Price (per peso)
1 20
2 18
3 16
4 14
5 12
6 10
7 8
8 6

6. Jomar owns a small business selling power tools. This past month she has noticed that the
quantity demanded for high-end electric drills has decreased by 25%. Which of the following
demand curve shifting events is a possible explanation for this change?
a. The price of electric drills has increased
b. Customer’s income have decreased
c. Customer’s income have increased

7. Mary runs a fast food stand selling hot dogs and soft drinks. A decrease in the price of which
good below is likely to negatively impact her bottom line?
a. Mustard
b. Foot long
c. T-shirts

8. You are in charge of data analytics for Home Depot’s in Naga City. Recently you have observed a
change in the market for power generators illustrated below. Which explanation best
corresponds with the observed data?
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a. The Price of Home depot generators has dropped 20%

b. The price of competitors generator has fallen
c. A hurricane is expected to arrive next week

9. You are a consultant analyzing the American car market for the new Toyota Prius. Your chief
competitor Tesla has recently dropped the list price of their vehicles by 20%. When illustrating
shifts of the demand curve it is customary to draw arrows to show the direction of change.
Which directions should the arrows be drawn in the graph below? Which curve represents old
demand and which curve the new demand?

a. The arrow should be drawn pointing leftwards. The curve on the right represents the new
demand and the curve in the left represent the old demand curve
b. The arrows should be drawn pointing leftwards. The curve in the right represents the old
demand and the curve in the left represent the new demand.
c. The arrows should be drawn pointing rightwards. The curve on the right represents the new
demand and the curve on the left represent the old demand
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10. Analyze the following diagram: (assume that the table below is in Peso form)

If the price was PhP 1.40 per gallon and increased to PhP 2.00 per gallon, how does quantity of
gasoline demanded change?
a. 550 million gallons to 460 million gallons
b. 460 million gallons to 700 million gallons
c. 600 million gallons to 460 million gallons
d. 460 million gallons to 600 million gallons

IV. Suggested reference

[Link]

[Link]
gen-micro

[Link] › introduction to microeconomics - Purdue University Fort Wayne

[Link]
ds/[Link]&ved=2ahUKEwinquna2v3oAhUAyDgGHeSiB88QFjACegQIAhAB&usg=AOvVaw3v
eCWc1NQ8-S8G_572zHEU

Principles of Microeconomics 1.4. Authored by: OpenStax College. Provided by: Rice University. Located
at: [Link]

Can-Be-Organized. License: CC BY: Attribution. License Terms: Download for free at

[Link]

LEGO World - Fan Zone. Authored by: Brickset. Located at:

[Link] License: CC BY: Attribution

Sphinx. Authored by: David Stanley. Located at:

[Link] License: CC BY: Attribution

[Link]

[Link]
gen-micro

[Link] › introduction to microeconomics - Purdue University Fort Wayne

[Link]
ds/[Link]&ved=2ahUKEwinquna2v3oAhUAyDgGHeSiB88QFjACegQIAhAB&usg=AOvVaw3v
eCWc1NQ8-S8G_572zHEU
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[Link]