The Basic Analysis of Demand and Supply

Market

where buyers and sellers meet

Demand

pertains to the quantity of a good/service that people are ready to buy at given prices within a given time period, when other factors besides price are held constant

Demand implies three things:

• Desire to possess a thing (good/service)

• The ability to pay for it or means of purchasing it

• Willingness in utilizing it

Methods of Demand Analysis

• Demand Schedule

• Demand Curve

• Demand Function

Demand Schedule

A table that shows the relationship of prices and the specific quantities demanded at each of these prices

Demand Curve

A graphical representation showing the relationship between price and quantities demanded per time period

Demand Function

shows the relationship between demand for a commodity and the factors that determine or influence this demand such as:

• The price of the commodity itseld

• The price of related commodities

• Level of incomes

• Tastes and prefetences

• Size and composition level of the population

• Distribution of income

Factors that Influence Demand

• Prices of related goods

• Expected future prices

• Income

• Expected future income and credit

• Population

• Preferences

Supply

the quantity of goods and services that firms are ready and willing to sell at a given price within a period of time, other factors being held constant

Methods of Supply Analysis

• Supply Scehdule

• Supply Curve

• Supply Function

Supply Schedule

a table that lists the various prices of product and the specific quantities supplied at each of these prices at a given point in time

Supply Curve

a graphical representation showing the relationship between price and quantities supplied per time period

Supply Function

a form of mathematical notation that links the dependent variable, quantity supplied, with various independent variables which determine quantity supplied.

• Prices of factors of production

• Numbers of sellers

• Future expectations

• Government policy

Slope of a supply curve

usually positive as price increases, quantity supplied increases and vice-versa

Factors that Influence Supply

• The prices of factors of production

• The prices of related goods produced

• Expected future prices

• The number suppliers

• Technology

• The state of nature

Equilibrium

a state once achieved tends to persist other things constant

Market equilibrium

occurs when quantity demanded (Qd) is equal to quantity supplied (Qs)

Market equilibrium point

The lint of intersection of the demand and supply curves

Shortage

a condition in the market in which quantity demanded is higher than quantity supplied at a given price

Surplus

a condition in the market where quantity supplied is more than the quantity demanded

Movement

attributed to a change in the price

Shift

attributed to a change in factors other than price

Price control

the specification by the government of minimum or maximum prices for certain goods/services when the government consider it disadvantageous to the producer/consumer

Two Types of Price Control

• Floor price

• Ceiling price

Floor price

• the legal minimum price imposed by the government on certain goods and services

• a price at or above the floor price is legal; a price below it is not

Ceiling price

• the legal maximum price imposed by the government

• utilized by the government if there is a persistent shortage of goods

Consumer Surplus (CS)

the sum total of the benefits derived by consumers who are willing to pay a higher price than the market equilibrium price

Producer Surplus (PS)

the sun total of the benefits derived by producers who are willing to supply a commodity at price lower than the market equilibrium price