(2) Demand and Supply

Demand and Supply

Considered one of the most important laws in Economics. It provides a detailed view of the system of exchange within the circular flow. In the Philippines, the economic system operates strongly under the forces of it, emphasizing the importance of this law. An introduction to this law is included to familiarize students with microeconomic principles and enable them to relate these concepts to the study of economic aggregates (macroeconomics).

Market

Defined as a means of interaction between buyers and sellers for trading or exchange. It is an arrangement that brings buyers (demanders) and sellers (suppliers) together.

• Goods Market

• Labor Market

• Stock Market

Types of Market

Goods Market

The most common type, exemplified by a wet market (pork, fish) or a dry market (shoes, clothes).

Labor Market

Where workers offer their services and employers look to hire.

Stock Market

Where commodities traded consist of corporate securities.

Demand

The quantity of a good that buyers are willing to buy. A function demonstrates how the quantity demanded of a good is dependent on its determinants, with the price of the good being the most important.

Law of Demand

• Describes the relationship between price and quantity demanded.

• It states that, holding "all other things remaining constant" (ceteris paribus)

• Describes an inversely related schedule.

Ceteris Paribus

If the price of a good rises, the quantity demanded decreases, and if the price of a good falls, the quantity demanded increases.

• The Income Effect

• The Subtitution Effect

Reasons for the inverse relationship (downward slope of the curve)

The Income Effect

When the price of a good decreases, the consumer’s real income (purchasing power) increases, allowing them to buy a greater amount.

The subtitution Effect

When the price of a commodity decreases, it becomes relatively cheaper compared to substitutes, leading the consumer to buy more of the cheaper commodity.

Demand Schedule

Is a table that shows the different quantities of a good that will be bought at various given prices. It reflects the individual or market schedule of a group of consumers.

Demand Curve

Graphical representation of the relationship between the quantity demanded of a good and its price, assuming all other influencing factors remain the same. The downward slope of its is the graphically illustrates the law of demand.

Supply Schedule

A table showing the quantities of a good that suppliers are willing to sell at different prices, assuming other factors remain constant. It helps visualize how the quantity supplied changes with price.

Supply Curve

Graph derived from the supply schedule, plotting price on the vertical axis and quantity supplied on the horizontal axis. It typically slopes upward, reflecting that higher prices motivate suppliers to offer greater quantities.

Law of Supply

States that, all else equal, as the price of a good rises, the quantity supplied increases, and as the price falls, the quantity supplied decreases. This relationship is what shapes the supply curve.

Change in Quality Supplied

A movement along the existing supply curve caused by a change in the good's price. For example, when price increases, suppliers increase the quantity offered, moving upward along the curve.

Change in Supply

Means the entire supply curve shifts either right (increase in supply) or left (decrease in supply) due to factors other than price, such as changes in production costs, technology, taxes, or the number of sellers.

Methods of Demand Analysis

Systematic approaches used to study how consumers behave when prices or other market conditions change. These methods help economists, policymakers, and businesses predict how much of a product will be demanded at various price level

• Demand Curve

• Demand Schedule

• Demand Function

3 Methods of Demand Analysis

Demand Schedule

Tabular presentation that shows the different quantities of a good or service that consumers are willing and able to buy at different possible prices during a specific period, assuming all other factors remain constant (ceteris paribus)

• Individual Demand Schedule

• Market Demand Schedule

Two Types of Demand Schedule

Individual Demand Schedule

Shows the quantities demanded by a single consumer at different prices.

Market Demand Schedule

Shows the total quantities demanded by all consumers in the market at various prices, derived by horizontally summing individual demand schedules

Demand Curve

The graphical representation of the demand schedule. It plots the price on the vertical (Y) axis and the quantity demanded on the horizontal (X) axis.

Demand Function

Expresses the relationship between the quantity demanded and all the variables that affect it in the form of a mathematical equation. It is a more formal and analytical tool compared to schedules and curves.

Supply Schedule

List of quantities supplied at each different price when all other influences on selling plans remain the same. It is a table that shows the relationship between the price of a good and the quantity supplied

• Individual Demand Schedule

• Market Demand Schedule

Two Types of Supply Schedule

Individual Demand Schedule

Tabular representation of various quantities of product that is supplied by certain individual or a firm at different price levels all over a period of time, with other factors are constant.

Market Demand Schedule

Also a tabular statement of various quantities of the product where all of the suppliers in the market are willing to supply at various price levels throughout a specific time period.

Upward-sloping curve

Indicates that there is an increasing relationship between the price and the quantity supplied, producers are driven to supply more as prices go higher.

Elasticities of Demand and Sup

Are economic measures used to determine the responsiveness of demand and supply to changes in their various determinants. The concept helps determine whether goods are more responsive or less responsive to these changes.

• Elastic

• Inealastic

• Unitary Elastic

3 General Degrees of Elasticity

Elastic

Demand or supply is considered when a change in a determinant leads to a proportionately greater change in the quantity of demand or supply. The coefficient of elasticity is greater than 1.00

Inelastic

Demand or supply is considered when a change in a determinant results in a proportionately lesser change in the quantity of demand or supply. The coefficient of elasticity is less than 1.00

Unitary Elastic

Demand or supply is when a change in a determinant leads to a proportionately equal change in the quantity of demand or supply. The coefficient of elasticity is equal to 1

• Price Elasticity of Demand (ϵp)

• Income Elasticity of Demand (ϵe)

• Cross Elasticity of Demand (ϵc)

3 Types of Demand Elasticity

Price Elasticity of Demand (ϵp)

The first type of elasticity. It measures the responsiveness of demand to changes in the price of the goods.

Income Elasticity of Demand (ϵe)

Second type of elasticity. It studies the responsiveness of demand to a change in consumer income.

Cross Elasticity of Demand (ϵc)

Third type of elasticity. It relates a percentage change in the demand for a good (Good X) with a percentage change in the price of another good (Good Y).

• Perfectly Elastic Supply

• More than Unit Elastic Supply

• Unit Elastic Supply

• Less than Unit Elastic Supply

• Perfectly Inelastic Supply

5 Types of Elasticity Supply

Perfectly Elastic Supply

A commodity becomes perfectly elastic when its elasticity of supply is infinite. This means that even for a slight increase in price, the supply becomes infinite. The percentage change in the price is zero for any change in the quantity supplied.

More than Unit Elastic Supply

When the percentage change in the supply is greater than the percentage change in price, then the commodity has the price elasticity of supply greater than 1.

Unit Elastic Supply

A product is said to have a unit elastic supply when the change in its quantity supplied is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.

Less than Unit Elastic Supply

When the supply of a product changes less than its price, we can say that the supply is relatively inelastic. In this situation, the price elasticity of supply is less than.

Perfectly Inelastic Supply

Product supply when the percentage change in the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply applies to exclusive items. For example, a designer gown styled by a famous personality

• Marginal Cost

• Time

• Number of Firms

• Mobility of Factors of Production

Determinants of Elasticity of Supply

Market Equilibrium

When the quantity of a good or service that consumers are willing and able to purchase equals the quantity that producers are willing and able to sell, at a given price.

Shortage

A situation in which the quantity demanded exceeds the quantity supplied.

Surplus

A situation in which the quantity supplied exceeds the quantity demanded.

Price Control

Economic policy where the government set a limit on the prices of goods and services. This happens when the government steps in to either set a maximum or minimum price allowed on goods and services.

• Price Ceiling

• Price Floor

2 Types of Price Conrol

Price Ceiling

Type of price control that set the highest price can seller charge for goods or services. It is imposed when the government or other regulatory purpose is to ensure that the goods or services remain affordable for the consumers

Price Floor

Established by the government to set the minimum price that can be charge to goods and services, mainly to protect producers or workers from receiving too little.

Sticky Price

Also called price stickiness, happen when prices refuse to move, even when the market around them changes. Businesses often keep their prices steady, even if it would make more sense to change them.