MODULE 3:
APPLICATION OF SUPPLY AND
DEMAND
HOW DO YOU PRODUCTS THEY BUY
REGULARLY (E.G., FOOD, GAMES, CLOTHES).
1. What makes you decide to buy these items?
2. What happens when prices change?
3. What are some reasons they might buy more or less of
a product?
APPLICATION OF SUPPLY
AND DEMAND
A market is an interaction between the
buyers and sellers of trading or
exchange.
It is where the consumer buys, and the
seller sells.
APPLICATION OF
SUPPLY AND DEMAND
Demand is the willingness of a
consumer to buy a commodity at a given
price. Supply refers to the quantity of
goods that a seller is willing to offer for
sale. Equilibrium is the state in which
market supply and demand balance each
other, and as a result, prices become
stable.
APPLICATION OF SUPPLY
AND DEMAND
A market system is a powerful tool for the
allocation because the changes in price from
market transactions create incentives and
disincentives on buyers and sellers to
address disparities between demand and
supply. The instrument of allocation is the
market price determined by the interactions
of the buyers and the seller in the market.
MELCS
Analyze market demand, market supply,
and market equilibrium.
(ABM_AE12-Ie-h-4to5)
LAW OF SUPPLY AND
DEMAND
What a buyer pays for a unit of the specific
good or service is called price. The total
number of units purchased at that price is
called the quantity demanded. A table that
shows the quantity demanded at each price is
called a demanding schedule. A demand
curve shows the relationship between price
and quantity demanded on a graph.
LAW OF SUPPLY AND
DEMAND
The law of supply and demand
explains the interaction between the
sellers of a product and the buyers. It
shows the relationship between the
availability of a particular product and
the demand for that product has on its
price.
DEMAND
is the willingness of a consumer to buy a
commodity at a given price. A demand
schedule shows the various quantities the
consumer is willing to buy at different
prices. A demand function shows how the
quantity demanded of a good depends on
its determinants, the most important of
which is the price of the good, thus the
equation: Qd = f (P). This signifies that
the quantity demanded good is dependent
on the price of that good.
Presented in Table 1is a hypothetical monthly demand for vinegar (in
bottles) for one individual, Ana.
At a price of Php10 per bottle, Ana is willing to buy one bottle of
vinegar for a given month. As the price goes down to Php8, the
quantity she is willing to buy goes up to two bottles. At a price of Php
2, she will buy five bottles.
Qd = f (P)
The general form of a linear demand function is:
Qd=a−bP
where:
•a is the intercept (the quantity demanded when price is zero).
•b is the slope (it shows how much the quantity demanded
changes with each unit increase in price).
•P is the price.
Qd = 6 - P/2.
At a price of Php10 per bottle, Ana is willing to buy one
bottle of vinegar for a given month. As the price goes
down to Php8, the quantity she is willing to buy goes up to
two bottles. At a price of Php 2, she will buy five bottles.
Price per Number of
Bottle bottles
0 6
2 5
4 4
6 3
8 2
QD = 6-P/2
To clarify the impact of the slope:
•If P increases by 2: the quantity demanded
decreases by 1 bottle because P/2 = 1.
•If P increases by 4: the quantity demanded
decreases by 2 bottles because P/2 = 2.
FIGURE 1 HYPOTHETICAL DEMAND CURVE OF
MARTHA FOR VINEGAR (IN BOTTLES) IN ONE
MONTH
Y
X
The demand curve is a graphical illustration of
the demand schedule with the price measured on
the vertical axis (Y), and the quantity demanded
measured on the horizontal axis (X). The value is
plotted in the graph and is represented as
connected dots to derive the demand curve
(Figure 1). The demand curve slopes downward,
indicating the negative relationship between the
two variables: price and quantity demanded.
The downward slope of the curve indicates
that as the price of vinegar increases,
the demand for the sound decreases.
The negative slope at the demand curve is
due to the income and substitution effect.
The income effect is felt when a change
in the price of a good changes consumers'
real income or purchasing power, which is
the capacity to buy with a given income.
Purchasing power is the volume of goods
and services one can buy with his/her
income.
The substitution effect is felt when a change
in the price of a good changes demands due
to alternative consumption of substitute
goods. For example, lower prices encourage
consumption away from higher-priced
substitutes on top of buying more with the
budget (income effect). The higher price of a
product encourages cheaper substitutes,
further discouraging demand for the former
already limited by less purchasing power
(income effect).
THE LAW OF DEMAND
Using the assumption of” ceteris paribus,” (the
marginal utility of that good or service
decreases as the quantity of the good
increases), which means all other related
variables except those that are being studied
at the moment and are held constant, there is
an inverse relationship between the price of a
good and the quantity demanded good.
Law of Diminishing Marginal Utility?
The law of diminishing marginal utility states that all else
equal, as consumption increases, the marginal utility
derived from each additional unit declines. Marginal utility
is the incremental increase in utility that results from the
consumption of one additional unit. "Utility" is an economic
term used to represent satisfaction or happiness.
“The higher the price, the lower the quantity
demanded, and vice versa.”
The amount of a good that buyers purchase at a
higher price is fewer because as the price of goods
goes up, the opportunity cost of buying the good
is less. Consumers will avoid buying the
product.For example, if the price of video game
drops, the demand for the games may increase as
more as people want the games.
The demand curve is always downward sloping
due to the law of diminishing marginal utility.
FACTORS AFFECTING DEMAND
OF A COMMODITY
• Income - The willingness of a consumer to
buy a commodity is influenced by the price of
the commodity & his/her taste for the
commodity. The capacity to purchase the
commodity is influenced by his/her income of
the consumer. A higher level of income will
give him/her higher capacity to consume
while a lower income will give him limited
purchasing power.
FACTORS AFFECTING DEMAND OF A
COMMODITY
Price of other commodities – Prices of other goods and
services may influence the demand for goods and services.
The prices on commodities may affect the demand of a
particular good; the influence of related goods is more
palpable. For example, if the other good is a substitute, the
increase in the price of the substitute goods may increase
the demand for the commodity at hand. Thus, when the
price of beef increases, the demand for chicken will increase.
If the other goods are a complementary good, a decrease in
its price will impact positively on demand for the goods
being investigated. For instance, when the price of bread
decreases, the demand for butter may increase since butter
and bread may be considered as complementary goods.
FACTORS AFFECTING DEMAND OF A
COMMODITY
Tastes or preferences- The formation of taste
is influenced by several factors like cultural
values, peer pressure, or the power of
advertising. For example, on the celebration of
New Year’s Eve, it is customary for families to
have round fruits at their fruit plate to attract
good luck. This tradition increased the demand
for fruits during this season
FACTORS AFFECTING DEMAND OF A
COMMODITY
• Consumer expectations – The expectation or prospect
of what will happen to the price can influence the demand
for the commodity. For example, if you believe that rice
prices will increase tomorrow, there is a tendency for
consumers to increase their consumption today.
• Market – The size and characteristics of the market can
also be influencing the demand for a commodity. An
increasing population can contribute to the expansion of
existing markets for various commodities. A lower birth
rate, coupled with an aging population, may alter the
composition of demand by shifting the demand toward the
needs of the elderly and away from goods and services that
target the youth.
