Demand and Supply

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 Factors Affecting Demand

1. Price of the commodity

2. Prices of related commodities
(substitutes and complements)
3. Consumer incomes
4. Tastes and preferences
5. Number of consumers
6. Price expectations

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 The Concept of DEMAND
Demand - refers to the various quantities of
a good or service that consumers are willing
and able to purchase at alternative prices,
ceteris paribus.

Conveys both the elements of desire for the

commodity and capacity to pay (must be willing
and able).

Emphasizes the relationship between quantity

bought and its price, although there may be other
factors that determine how much a consumer
wants to purchase.
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 The Law of Demand
“Thereis an inverse relationship
between price and quantity demanded”.

When the price increases, less of the good or

service will be bought
When the price decreases, more of the
commodity will be purchased.

WHY ?
4
 Two Reasons for the Inverse
Relationship
Substitution effect
When price of a good decreases, the
consumer substitutes the lower priced
good for the more expensive ones.
Hence the demand for the cheaper good
increases and the demand for the
expensive good decreases.
Income effect
When price decreases, the consumer’s
real income (or purchasing power)
increases, so he tends to buy more.
P Q
5
 Ways of presenting
the demand relationship

The relationship between quantity

purchased and alternative prices may be
presented in 3 ways:

 Demand schedule –in tabular form.

 Demand curve – in graphical form
 Demand function – in equation form

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 Demand Schedule
TABLE 3.1. Demand Schedule

Price Quantity
0 750
1 700
2 650
3 600
4 550
5 500
6 450
7 400
8 350
7 9 300
 Demand Curve
P
Price (in pesos)

200 400 600 800

Q
0

Quantity

Figure 1. Demand Curve. The negative slope of the

demand curve depicts the inverse relationship between
8 price and quantity demanded. Geometric representation.
 Change in Quantity Demanded
vs.
Change in Demand
Change in quantity demanded – is a
movement along the same demand curve,
due solely to a change in price, i.e., all other
factors held constant.

Change in demand – is a shift in the entire

demand curve (either to the left or to the
right) as a result of changes in other factors
affecting demand.
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 Change in quantity
demanded
Price
•A decrease in price from p1
to p2 brings about an
p1 increase in quantity
demanded from q1 to q2
•It is shown as a movement
p2 along the same demand
curve

Quantity
q1 q2
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 Change in demand
•An increase in demand

Price means that at the same price

such as p1 more will be
brought, due to other factors
such as increased incomes,
p1 increase in number of
consumers, etc.
•It is shown as a shift in the
entire demand curve

This is a
decrease in
demand D1

D0
D2
Quantity
q1 q2
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 Change in Demand
P P

D’ D
D’
D

Q Q

Increase in Demand Decrease in Demand

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 Change in Quantity Demanded
versus Change in
Demand
Variables that A Change in
Affect Quantity This Variable . . .
Demanded
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
13 buyers
 Other factors affecting
demand

Income: as income changes, demand a

commodity usually changes

Normal goods – are goods whose demand

respond positively to changes in income.
 Most goods are normal goods. As income increases,
more of shoes, TVs, clothes, are bought.

Inferior goods – are goods whose demand

respond negatively to change in income
 Few but existent. Examples are firewood, bicycles, etc.

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 Consumer Income
Normal Good
Price of
Ice-Cream
Cone
$3.0 An
0
2.5 increase
0 Increase in
2.0 in demand income...
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
15 0 1 2 3 4 5 6 7 8 9 1 1 12 of Ice-
0 1 Cream
 Consumer Income
Inferior Good
Price of
Ice-Cream
Cone
$3.0
0
2.5 An
0
2.0
increase
0 Decrease
in
1.5 in demand income...
0
1.0
0
0.5
0
D2 D1 Quantity
16 0 1 2 3 4 5 6 7 8 9 1 1 1 of Ice-
0 1 2 Cream
 Other factors affecting
demand
Prices of related commodities in
consumption:
Substitutes – are goods that are substitutable
with each other (not necessarily perfect).
 Examples are coffee and tea, Coke and Pepsi
 When the price of a substitute increases, quantity
bought of a good increases.

Complements – are goods that are used or

consumed together.
 Examples are coffee and sugar, bread and butter, tennis
rackets and tennis balls.
 When the price of a complement increases, quantity
bought of a good decreases.
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 Other factors affecting
demand
Consumer tastes and preferences:

When consumer tastes shift towards a particular

good, greater amounts of a good are demanded
at each price.
 Example: consumers preference for drinking mineral
water increases so its demand curve will shift rightward.

If consumer preferences change away from a

good, its demand will decrease; at every possible
price, less of the good is demanded than before.
 Example: the demand for VCDs and VHS tapes
decreases due to preference for DVDs.

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 Other factors affecting
demand
Number of Consumers: affects the total
demand for a good.
Total demand is also known as market demand. It
is the summation of the individual demand of all
consumers
An increase in the number of consumers
shifts the market demand curve to the right
Example: demand for housing and transportation
increases with an increase in population.
On the other hand, less consumers will
cause the market demand to decrease,
resulting in a shift to the left of the entire
demand curve.

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 Other factors affecting
demand
Consumer expectations: Expectations
about future prices and income affect our
current demand for many goods and
services.
If we expect prices of dried fish to increase with
coming of the rainy season, we might stock up
on the good to avoid the expected price
increase. Thus, current demand for dried fish
might increase
those who expect to lose their jobs due to bad
economic conditions, will reduce their demand
for a variety of goods in the current period.

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 Market Demand
 Market demand refers to the sum of all
individual demands for a particular good or
service.

 Graphically, individual demand curves are

summed horizontally to obtain the market
demand curve.

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 Demand
Aggregating Demand

Market Demand
B’s Demand
A’s Demand

P1

P2

Q3 Q4

Q1 Q2
Q1+Q2

22 Q3+Q4
 The Concept of SUPPLY
Supply - refers to the various quantities of
a good or service that producers are willing
and able to sell at alternative prices, ceteris
paribus.

Obviously, firms are motivated to produce and

sell more at higher prices.

Emphasizes the relationship between quantity

sold of a commodity and its price. However,
there are other factors that determine how much
a producer would like to produce and sell.

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 The Law of Supply
“The quantity sold of a good or
service is positively or directly
related to its own price”.
When the price increases, more of the good or
service will be sold
When the price decreases, less of the
commodity will be purchased.

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 3 Ways of presenting
the supply relationship
The relationship between quantity supplied
and alternative prices may be presented
in 3 ways:

 Supply schedule –in tabular form.

 Supply curve – in graphical form
 Supply function – in equation form

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 Supply Schedule
TABLE : Supply Schedule for Denim Pants

Price of Denim Pants Quantity Supplied per month

(in pesos) (No. of pairs)
0 0
50 1
100 2
150 3
200 4
250 5
300 6
350 7
400 8
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 Supply Curve
P

400
S
Price (in pesos)

300

200

100

0 2 4 6 8
Q

Quantity

Figure 3.2. Supply Curve. The positive slope of the supply

curve depicts the direct relationship between price and
27 quantity supplied.
 Supply Function
Quantity supplied (Qs) is expressed as a
mathematical function of price (P). The
supply function may thus be written as:

Qs = c + dP
where
c is the horizontal intercept of the equation
or the quantity demanded when price is zero
d is the slope of the function.

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 Change in Quantity Supplied
vs.
Change in Supply

Change in quantity supplied – is a movement

along the same supply curve, due solely to a
change in price, i.e., all other factors held
constant.
Change in supply – is a shift in the entire
supply curve (either to the left or to the right)
as a result of changes in other factors affecting
supply.
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 Change in quantity supplied
S
Price
•An increase in price from p1
to p2 results in an increase in
p2 quantity supplied from q1 to
q2
•It is shown as a movement
p1 along the same supply curve

Quantity
q1 q2
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 Change in supply
S
S2 0

S1
Price

•An increase in supply

p1 means that at the same

price such as p1 more will be
sold, due to other factors
such as improvement in
technology, increase in
number of producers, etc.
This is a
decrease in •It is shown as a shift in the
supply entire supply curve

Quantity
q1 q2
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 Change in Supply
S’
P S P
S
S’

D’ D

Q Q

Increase in Supply Decrease in Supply

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 Change in Quantity Supplied
versus Change in Supply

Variables that
Affect Quantity Supplied A Change in This Variable . . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
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 Other factors affecting supply
 There are other factors aside from price
that affect the supply schedule. These are

1. resource prices
2. prices of related goods in
production
3. technology
4. expectations
5. number of sellers.
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 Other factors affecting supply
 Resource prices:

 When prices of inputs to

production increase, the supply of
the firm's product decreases.
 Decreases in resource prices,
however, translate to an increase
in supply. The entire supply curve
shifts to the right.
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 Other factors affecting supply
 Prices of related goods in production:
 Resources can be employed to produce several
alternative goods and services.

 Examples from agriculture:

 a piece of farmland can be use to grow rice,
corn, or sugarcane. An increase in price of
sugarcane may result in decreased supply of
rice and corn.
 farmers can use their land and labor to
produce ornamental flowers instead of
vegetables. If vegetable prices decrease, the
supply of ornamental flowers may increase.
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 Other factors affecting supply
 Technology:
 A change in production techniques can
lower or raise production costs and
affect supply.
 Improvements in technology shift the
supply curve to the right.
 A cost-saving invention will enable
firms to produce and sell more goods
than before at any given price.
 New high yielding crop varieties will
increase production on the same
37 amount of land.
 Other factors affecting supply
 Producer expectations:
 When producers expect the price of their
product to increase in the future, they may
hoard their output for later sale, thus reducing
supply in the present period. Thus the supply
curve shifts to the left.

 If firms expect that the price of their product

will fall in the near future, supply may increase
in the current period as firms try to increase
production as well as to dispose of their
inventory.
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 Other factors affecting supply
 Number of sellers: As the number of
sellers increases, so will total supply.

 The market supply is the horizontal

summation of the supply schedules of
individual producers.
 As more firms enter the market, more will
offered for sale at each possible price, thus
shifting the supply curve to the right.
 Similarly, the supply curve shifts to the left
when firms exit the market.
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 Market Equilibrium
Market equilibrium is that state in which the quantity
that firms want to supply equals the quantity that
consumers want to buy.
or
Market Equilibrium is arrived at when the quantity
demanded by consumers is exactly equal to the
quantity supplied by producers.
Market clearing price - at this price everyone is satisfied

The price that clears the market is called the equilibrium

price and the quantity (sold and bought) is called the
equilibrium quantity.
The market is said to be "at rest" since the equilibrium
price and equilibrium quantity will stay at those levels until
either demand or supply changes.
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 Market Equilibrium
TABLE : Market for Denim Pants
Quantity Demanded Quantity Supplied
Price of Denim Pants per month per month
(in pesos) (No. of pairs) (No. of pairs)
0 8 0
Equilibrium 50 7 1
Price=200
100 6 2
150 5 3
200 4 4
250 3 5
300 2 6
350 1 7
400 0 8

41 Equilibrium Quantity=4
 Market Equilibrium
At prices above the equilibrium price, quantity
supplied is greater than quantity demanded,
resulting in a temporary surplus.
In a surplus situation, producers will try to
reduce price to entice consumers to buy more
denim pants. Actions by both producers and
the public will wipe out the temporary surplus
At prices below the equilibrium price, consumers
desire to buy more denim pants than are
available, creating a temporary shortage.
Consumers will try to outbid each other, thus
pushing up the price. As price rises, firms
increase their production while some
42 consumers reduce their purchases.
 Market Equilibrium

400
S
Surplus
Price (in pesos)

300

200

100
Shortage

0 2 4 6 8
Q

Quantity

43
 .

How an Increase in Demand

Affects the Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

$2.50 New equilibrium

2.00
2. ...resulting Initial
in a higher equilibrium
price...
D2

D1
0 3. ...and a higher7 10 Quantity of
44
quantity sold. Ice-Cream Cones
 How a Decrease in Supply
Affects the Equilibrium
Price of 1. Shortage of Ice cream reduces
Ice-Cream the supply of ice cream...
Cone S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
45 3. ...and a lower Ice-Cream Cones
quantity sold.
 Thank You

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