Elements of Demand and Supply

1. 1. ELEMENTS OF DEMAND AND SUPPLY Prepared by: GREGAR DONAVEN E. VALDEHUEZA,

MBA Lourdes College Instructor Chapter 3 ECONOMICS: its concepts and principles
2. 2. DEMAND <ul><ul><li>Refers to the number or amount of goods and services desired by the
consumers. </li></ul></ul><ul><li>Quantity demanded </li></ul><ul><ul><ul><li>The amount of goods
and services consumers are willing and able to buy/purchase at a given price, place, and at a given period of
time. </li></ul></ul></ul>
3. 3. Determinants of Demand <ul><li>Price of goods itself </li></ul><ul><ul><ul><li>As the price of
certain goods and services increases, the demand for these goods and services decreases or vice versa.
</li></ul></ul></ul><ul><li>Consumers’ income </li></ul><ul><ul><ul><li>A change in income will
cause a change in demand. Consumers tend to buy more goods and acquire more services when their
income increases and vice versa. The direction in which the demand will shift in response to a change in
income depends on the type of goods. </li></ul></ul></ul><ul><ul><ul><ul><li>Normal goods – refers
to a good for which quantity demand at every price increases when income rises.
</li></ul></ul></ul></ul><ul><ul><ul><ul><li>Inferior goods – refers to a good for which quantity
demand falls when income rises. </li></ul></ul></ul></ul>
4. 4. <ul><li>Consumers’ expectation of future prices </li></ul><ul><ul><ul><li>The quantity of a good
demanded within any period depends not only on prices in that period but also on prices expected in future
periods. </li></ul></ul></ul><ul><li>Prices of related commodities/goods
</li></ul><ul><ul><ul><li>The quantity demanded of any particular good will be affected by changes in
the prices of related goods. </li></ul></ul></ul><ul><ul><ul><ul><li>Substitute goods – are goods that
can be used in place of other goods. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Complementary
goods – are goods that go together. </li></ul></ul></ul></ul><ul><li>Consumers’ tastes and preferences
</li></ul><ul><ul><ul><li>An increase in the preference and taste for a certain good will certainly
increase the demand for that particular good. </li></ul></ul></ul><ul><li>Population
</li></ul><ul><ul><ul><li>An increase in the population means more demand for goods and services and
vice versa. </li></ul></ul></ul>
5. 5. Demand Schedule <ul><ul><li>The relationship between the quantity of a good demanded and the price
of that good. </li></ul></ul><ul><li>other factors that may affect the quantity demanded, such as prices of
other goods, are held constant (ceteris paribus) in drawing up the demand schedule. </li></ul>
6. 6. Example of a Demand Schedule 200 5 400 4 600 3 800 2 1000 1 Quantity Demanded Price (Php ‘000)
7. 7. Demand Curve <ul><ul><li>Shows graphically the relationship between the quantity of a good
demanded and its corresponding price, with other variables held constant. </li></ul></ul><ul><li>The
demand curve is typically downward-sloping </li></ul>
8. 8. Example of a Demand Curve
9. 9. Law of Demand <ul><ul><li>States that as price increases, quantity demanded decreases; and as price
decreases, quantity demanded increases, if other factors remain constant. </li></ul></ul><ul><li>The law
of demand is only true if the assumption of ceteris paribus is applied or other determinants remain constant.
</li></ul>
10. 10. Justification for the Law of Demand <ul><li>Income effect </li></ul><ul><ul><ul><li>When the
price of goods decreases, the consumer can afford to buy more of it or vice versa.
</li></ul></ul></ul><ul><li>Substitution effect </li></ul><ul><ul><ul><li>It is expected that consumers
tend to buy goods with a lower price. </li></ul></ul></ul>
11. 11. Changes Involving Demand <ul><li>Change in Quantity Demanded
</li></ul><ul><ul><ul><li>Movement along a demand curve which indicates movement from one point to
another point of the same demand curve. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Due to a change
in the price of goods and services. </li></ul></ul></ul></ul></ul><ul><li>Change in Demand
</li></ul><ul><ul><ul><li>Shifting from one demand curve to another demand curve.
</li></ul></ul></ul><ul><ul><ul><ul><ul><li>Brought by the changes in all determinants of demand
except price. </li></ul></ul></ul></ul></ul>
12. 12. SUPPLY <ul><ul><li>Maximum units/quantity of goods or services producers can offer.
</li></ul></ul>
13. 13. Determinants of Supply <ul><li>Change in technology </li></ul><ul><ul><ul><li>State of the art
technology that uses high-tech machines increases the quantity supply of goods which causes the reduction
of cost of production. </li></ul></ul></ul><ul><li>Cost of inputs used </li></ul><ul><ul><ul><li>An
 increase in the price of an input or the cost of production decreases the quantity supplied because the
profitability of certain business decreases. </li></ul></ul></ul><ul><li>Expectation of future price
</li></ul><ul><ul><ul><li>When producers expect higher prices in the future commodities, the tendency
is to keep their goods and release them when the price rises. </li></ul></ul></ul>
14. 14. <ul><li>Change in the price of related goods </li></ul><ul><ul><ul><li>Changes in the price of
goods have a significant effect in the supply of such goods. </li></ul></ul></ul><ul><li>Government
regulation and taxes </li></ul><ul><ul><ul><li>It is expected that taxes imposed by the government
increases cost of production which in turn discourages production because it reduces producers’ earnings.
</li></ul></ul></ul><ul><li>Government subsidies </li></ul><ul><ul><ul><li>Subsidies or the financial
aids/assistance given by the government reduces cost of production which encourages more supply.
</li></ul></ul></ul><ul><li>Number of firms in the market </li></ul><ul><ul><ul><li>An increase in
the number of firms in the market leads to an increase in supply of goods and services.
</li></ul></ul></ul>
15. 15. Supply Schedule <ul><ul><li>The relationship between the quantity of a good supplied and its price.
</li></ul></ul><ul><li>Other factors that may affect the quantity supplied, such as the prices of inputs and
available production techniques, are held constant (ceteris paribus) in drawing up the supply schedule.
</li></ul>
16. 16. Example of a Supply Schedule 1000 5 800 4 600 3 400 2 200 1 Quantity Supplied Price (Php ‘000)
17. 17. Supply Curve <ul><ul><li>Shows graphically the quantity of a good supplied at each price, with other
factors that affect quantity supplied held constant. </li></ul></ul><ul><li>The supply curve is typically
upward-sloping </li></ul>
18. 18. Example of a Supply Curve
19. 19. Law of Supply <ul><ul><li>States that as price increases, quantity supplied also increases; and as price
decreases, quantity supplied also decreases if other factors remain constant. </li></ul></ul><ul><li>The
law of supply is only true if the assumption of ceteris paribus is applied or other determinants remain
constant. </li></ul>
20. 20. Changes Involving Supply <ul><li>Change in Quantity Supplied
</li></ul><ul><ul><ul><li>Movement along the supply curve which shows the movement from one point
to another point on the same supply curve. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Due to a
change in the price of goods and services. </li></ul></ul></ul></ul></ul><ul><li>Change in Supply
</li></ul><ul><ul><ul><li>Shifting from one supply curve to another supply curve.
</li></ul></ul></ul><ul><ul><ul><ul><ul><li>Brought by the changes in all determinants of supply
except price. </li></ul></ul></ul></ul></ul>
21. 21. Determination of Market Equilibrium <ul><li>Law of demand and supply stipulate that when demand
is greater than supply, price increases; when supply is greater than demand, price decreases; and when
demand is equal to supply, price remain constant. </li></ul><ul><li>It is noted that there is contradiction
between the two parties. The consumer dislikes high price while the producer likes high price. Law of
demand infers that consumers are willing and able to buy/purchase goods and services at a lower price
while law of supply infers that producers are willing and able to offer or sell more goods and services at
higher price. </li></ul><ul><li>This force in the market place creates equilibrium price and equilibrium
quantity, or the market equilibrium. </li></ul>
22. 22. Market Equilibrium <ul><ul><li>Is a state which implies a balance between the opposing forces, a
situation in which quantity demanded and quantity supplied are equal. </li></ul></ul><ul><ul><li>The
market equilibrium is determined by the intersection of the demand and supply curves. In other words, the
quantity that consumers will buy is equal to the amount or quantity the producers are able and willing to
offer. </li></ul></ul>
23. 23. Demand and Supply Schedules Downward Surplus (800) 1000 200 5 E Downward Surplus (400) 800
400 4 D Neutral/ Equal Equilibrium (0) 600 600 3 C Upward Shortage (-400) 400 800 2 B Upward
Shortage (-800) 200 1000 1 A Pressure on Price State of Market Quantity Supplied Quantity Demanded
Price (Php ‘000) Points
24. 24. - E N D - <ul><li>Questions? </li></ul><ul><li>Clarifications? </li></ul><ul><li>Reactions?
</li></ul><ul><li>HAVE A NICE DAY!!! ;-) </li></ul>