BAC1 - BASIC MICROECONOMICS

CHAPTER 3: DEMAND AND SUPPLY

Learning Objectives
At the end of the chapter, the students will be able to:
1. Define the concepts of demand and supply.
2. Explain the laws of demand and supply.
3. Illustrate the relationship between price and quantity using tables and graphs.
4. Interpret demand and supply schedules and curves.
5. Identify non-price determinants affecting demand and supply.
6. Analyze real-life situations using demand and supply principles.
7. Evaluate how changes in price and other factors influence the market.

Understanding demand and supply is essential in economics because they explain how prices and quantities
of goods and services are determined in the market. Demand shows how much consumers are willing and able
to buy at different prices, while supply shows how much producers are willing and able to sell. The laws of
demand and supply, along with their schedules, curves, and non-price determinants, help us analyze market
behavior and predict how changes in price or other factors affect consumer and producer decisions.

Definition of Demand
People have varied needs or want. To fulfill these wants and needs, they buy goods or avail services. The
buying decisions of consumers can be explained by the concept of demand. Demand represents the goods or
services that people buy. For most economists, demand refers to the quantity of goods or services that
consumers are both willing and able to purchase at certain conditions. Since demand is a variable, it can be
quantified. As a condition, for demand to become effective, consumers should have the willingness and the
ability to buy a good or service.

Law of Demand
Demand can be a relationship between the price of the good and the quantity of that good. The Law of
Demand, considered the most popular principle in economics, explains this relationship, and describes how
people react to changes in price. The law of demand indicates the inverse relationship between price and
quantity demanded. Price is the amount of money a consumer pays for a good while quantity demanded is the
amount of good that a consumer is willing and able to buy at a specific price. It states that as the price goes up,
the quantity demanded goes down, and as price goes down, the quantity demanded goes up, ceteris paribus. In
other words, more people will buy more of a good if the price is lower while fewer people will buy less of a
good if the price is higher. Here are the examples:
 If the price of airline tickets drop, people are encouraged to travel more. However, if the price of movie
tickets rises, fewer people want to watch a movie.
 If the price of corn rises, consumers will buy less corn and substitute it for other foods, so the total
quantity of corn consumers demand will fall.

Demand Schedule
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 A demand schedule represents the relationship of price to quantity demanded in the form of a table. In
short, it lists the prices and the corresponding quantities demanded of a particular good or service. Demand
schedule can be an individual schedule or a market demand schedule. Individual demand is the schedule of a
person or household that shows the quantities demanded at each price. Market demand schedule is the sum of
all individual demands. It is derived by adding up the quantities that every person or household is willing and
able to purchase at each price for a particular good. Consider the demand for bottled water. Presented in the
table is the hypothetical individual demand schedule of a store selling bottled water per day. At each price,
consumers will buy a certain quantity of bottled water. For instance, at ₱20 per bottle, consumers will buy 900
bottles per day. At ₱40, there are only 300 bottles demanded. At a price of ₱50, the quantity demanded is at its
lowest at 150 bottles. This means that as the price increases, consumers buy fewer bottles, while a lower price
encourages them to buy more.

Demand Curve
The law of demand can be graphed using the demand curve, which serves as the graphical representation
of the demand schedule. The demand curve is illustrated by plotting the listed prices and quantities from the
given schedule. The demand curve shows how much of good consumers are willing to buy as the price per unit
changes. The demand curve is a graphical representation of the relationship between the price of a good or
service and the quantity demanded for a given period of time. In a typical representation, the price will appear
on the left vertical axis, the quantity demanded on the horizontal axis.
The demand curve will move downward from the left to the right, which expresses the law of demand—
as the price of a given commodity increases, the quantity demanded decreases, ceteris paribus.
Note that this formulation implies that price is the independent variable, and quantity the dependent
variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but law of demand
and law of supply are exception to this rule.

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Demand Function
The demand function is a mathematical equation that has two variables, the dependent and the
independent. The demand equation typically looks like this: Qd=a−bP

Where:
 Qd = quantity demanded (dependent variable)
 P = price of the good (independent variable)
 a = quantity demanded when price is zero (intercept)
 b = slope of the demand curve (shows how much quantity changes as price changes)

Since demand has an inverse relationship with price, the slope b is usually negative.

Example: If Qd=100−2P
P= 10
Qd = 100 – 2(10)
Qd= 100-20
Qd= 80

Non-Price Determinants of Demand

1. Income. The income of consumers is a key determinant of demand. As people’s income changes, they may
buy more or less of a particular good. When considering the influence of a change in income on demand, there
are two goods involved—normal goods and inferior goods.

A normal good is a product in which demand varies directly with income. A rise in income causes an increase
in demand, and a fall in income leads to a decrease in demand. Most of the products are normal goods,
including restaurant meals, branded t-shirts, and electronic devices.

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An inferior good is a product in which demand varies inversely with income. The demand for inferior goods
rises as income decreases, and demand falls when income increases. Common examples of inferior goods
include canteen meals, generic drugs, and surplus goods.

2. Price of related goods. The demand for a good is also affected by the price and availability of related
products. The two categories of related goods are called substitutes and complements.

A substitute good is a product that can be used in replacement of another product. Laptop and tablet,
lemonade and iced tea, and Spotify and Apple Music are pairs of substitute goods. When two goods are
substitutes, an increase in the price of an alternative good will increase the demand for the other good.
Conversely, a decrease in the price of one good will decrease the demand for the other. For instance, when the
price of a laptop increases, consumers will purchase less of it, and increase their demand for a tablet. When the
subscription price of Spotify falls, the demand for say, Apple Music rises.

A complementary good is a product that is always used together with another product. Toothpaste
Personal computer and software, toothpaste and toothbrush, and Netflix and Globe mobile data are some pairs
of complementary goods. When two goods are complements, an increase in the price of good will decrease the
demand for the other good. Conversely, a decrease in the price of one good will increase the demand for the
other. For example, when the price of a PC rises, the demand for software applications will increase. When the
subscription price of Netflix falls, consumers will increase their demand for Globe mobile internet.

3. Tastes and preferences. The demand for any good depends on tastes and preferences which define what
people like and wish to choose. Several factors that may influence how consumers like and prefer goods include
trends, seasonality, health hazards, advertisement, culture, and religion. A favorable consumer taste for a good
may increase demand while unfavorable one may decrease demand. For example, a trending movie best
illustrates a higher demand for movie tickets. However, when the trend dies out, fewer moviegoers will demand
for tickets. The demand for hotels during Valentine’s Day is high, and the demand for air conditioners every
winter season is low. Muslims do not normally buy alcohol and pork because their religion prohibits the
consumption of these goods; thus, the demand for these goods is relatively lower.

4. Number of buyers. Population and market size determines the number of consumers buying a good or
service. The population clearly affects the demand for any good. A higher population or greater market size
results in higher demand, while a lower population or market size takes the reverse situation. The Philippines’
108 million people will buy fewer bananas and smartphones than China’s 1.4 billion individuals. An increase in
the market size for Korean barbecue in the Philippines leads to higher demand among Filipinos for Samgyupsal.

5. Expectations. Expectations refer to the anticipation of consumers concerning future events, which can affect
the demand for a good at present. These expectations comprise price and buyer’s income. Consumers who
expect the price of a good to increase in the future may prompt them to buy today, thus increasing the current
demand for the good. Conversely, those who expect the price of a good to fall in the future may cause them to
buy the good later, thus decreasing the current demand for the good. Motorists who anticipate the gasoline price
to be higher in the near future will likely have a full tank now, thus increasing gasoline demand today. Likewise,

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an expectation about future income may cause consumers to adjust their level of present spending. If consumers
expect a lower future income, they tend to reduce their demand for some goods; thus, current demand decreases.

Supply Defined
Supply represents the goods or services that companies, producers, and sellers provide to the market. For
most economists, supply refers to the quantity of goods or services that sellers are both willing and able to sell
at certain conditions. Since supply is a variable, it can be quantified. As a condition, for supply to become
effective, sellers should have the willingness and the ability to sell a good or service.

Law of Supply
Supply can be a relationship between the price of the good and the quantity of that good. This
relationship is called the law of supply which explains how firms react to changes in price. According to the law
of supply, quantity supplied is positively related to price. In this case, price is the amount of money a seller
charges for a good while quantity supplied is the amount of good or service that a firm is willing and able to sell
at a specific price. The law of supply states that as the price of a good or service increases, the quantity supplied
rises, and as the price of a good or service decreases, the quantity supplied decreases, ceteris paribus. In other
words, firms are more willing to sell more at a higher price than sell at a lower price. Here are the examples:

 If the price of mangoes in the market increases, farmers are encouraged to produce more.
 If the price of MP3 players falls, manufacturers are not encouraged to sell more.
 If the price of rice per sack increases in the market, farmers will be encouraged to plant and harvest
more rice to earn higher profits. However, if the price of rice falls significantly, farmers might reduce the
amount of rice they produce because it will be less profitable.

Supply Schedule
A supply schedule represents the relationship of price to quantity supplied in a table form. In other
words, it lists the prices and the corresponding quantities supplied for a particular good or service. Supply can
be represented on schedule as individual supply or a market supply. An individual supply shows the quantities
supplied at each price by one firm. A market supply is the sum of the individual supply schedules of all firms in
the industry. It is derived by adding up the quantities that each firm is willing and able to offer for sale at each
price for a particular good. Consider the supply of bottled water. Presented in the table is the hypothetical
individual supply schedule of a store selling bottled water per day. At each price, the store will sell a certain
quantity of bottled water. For instance, at ₱20 per bottle, the store will offer 120 bottles per day. At ₱40, there
are 520 bottles. At a price of ₱50, the quantity of bottled water supplied is at its highest at 750 bottles. This
means that as the price increases, the store is willing and able to offer more bottled water.

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Supply Curve
The supply curve shows the quantity of a good that producers are willing to sell at a given price,
holding constant any other factors that might affect the quantity supplied. The curve labeled Supply in the
Figure below illustrates this. The vertical axis of the graph shows the price of a good. This is the price that
sellers receive for a given quantity supplied. The horizontal axis shows the total quantity supplied, measured in
the number of units per period. The supply curve is thus a relationship between the quantity supplied and the
price.

Supply Function
A supply function is a mathematical expression that shows the relationship between the quantity of a
good or service producers are willing and able to sell and the factors that influence it, such as price, input costs,
technology, and the number of sellers. The supply equation usually takes this form: Qs=c+bP

Where:
 Qs = quantity supplied
 P = price of the good

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  c = quantity supplied when price is zero (intercept)
 p= slope of the supply curve (shows how much quantity changes as price changes)

Since supply has a direct relationship with price, the slope d is positive.

Non-Price Determinants of Supply

Like demand, supply is not only influenced by price. There are other factors that can increase or
decrease the level of supply which are referred to as non-price determinants of supply. The determinants of
supply are input costs, technology, number of producers, expectations, government actions, and weather.

1. Input Costs. Firms incur costs when they produce goods and services including the prices of raw materials,
rents, wages of workers, interests and others inputs of production. Input costs are a key factor that determines
supply. If the input costs become more expensive, the supply decreases. Consider for example, a rise in the
wages among workers will increase the production costs of a firm and will lower its supply. A substantial fall in
the price of gasoline will likely decrease the costs of production, therefore, increase supply.

2. Technology. Advances in technology may change the level of supply. Technology improves the productivity
of workers and increases the efficiency of the production process. An improvement in technology leads to an
increase in supply. For example, the application of technology like the use of industrial robots causes an
increase in supply of many consumer electronics products such as smartphones. Also, modern technology in
agriculture helps farmers to plant and produce more crops like corn, rice and the like.

3. Number of producers. Market supply also depends on the number of producers in the market or industry. An
increase in the number of producers may lead to an increase in supply of goods and services. For example, if a
new restaurant opens and offers lunch meals in a city, supply of meals will likely increase.

4. Price expectation. Like buyers, firms expect the price of their goods to increase or decrease in the future,
which may affect their current supply. If price is expected to rise in the future, current supply decreases, and if
it’s expected to fall, supply increases. Take for instance, a manufacturer anticipates the price of shoes to go
higher in the future so it cuts the quantity it will sell, thereby decreasing supply. On the other hand, a farmer
expects the price of rice to decrease next year, so he decides to produce and sell more rice this year, thus,
increasing supply.

5. Government actions. Government actions through the implementation of policies may cause supply to
change. These government actions involve granting subsidies or raising various taxes. A subsidy is an incentive
provided to firms by the government that can improve the supply of a certain good. Subsidies tend to increase
market supply. Tax is an enforced contribution imposed by the government to firms. Taxes tend to cut supply as
it raises the costs of production. For example, the implementation of TRAIN law in the Philippines increases the
excise tax on sweetened beverages, therefore, decreases the supply of these products.

6. Unpredictable events. Unpredictable events happened in a firm, caused by nature, the economy, and other
unforeseen circumstances may change the level of supply. These include labor and industrial disputes, machine

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failure, bad weather due to typhoons and floods, agricultural pests affecting crops, shortage of imported
commodities due to global recession, among others. The COVID-19 pandemic is one straightforward example
as it disrupts the global supply chain of commodities where exports and imports have declined to all regions
across the world affecting the supply of many commodities.

SUMMARY
 Demand is the quantity of goods or services consumers are willing and able to buy at different prices.
 The Law of Demand states that as price increases, the quantity demanded decreases; as price decreases,
the quantity demanded increases, showing an inverse relationship.
 A Demand Schedule is a table that shows the relationship between price and quantity demanded.
 A Demand Curve is a graph that illustrates the relationship between price and quantity demanded,
sloping downward from left to right.
 Non-price determinants of demand include income, prices of related goods, tastes, number of buyers,
and expectations.
 Supply is the quantity of goods or services producers are willing and able to sell at different prices.
 The Law of Supply states that as price increases, the quantity supplied increases; as price decreases, the
quantity supplied decreases, showing a direct relationship.
 A Supply Schedule is a table that shows the relationship between price and quantity supplied.
 A Supply Curve is a graph that illustrates the relationship between price and quantity supplied, sloping
upward from left to right.
 Non-price determinants of supply include input costs, technology, number of producers, expectations,
government actions, and weather.

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