MARKET FORCES:

DEMAND AND SUPPLY

Casas, Dacula, Gaza, Gutierrez, Olajay, Pascual, Tubig
BSA 1-2
What is DEMAND?

Willingness and ability to purchase a

commodity or service at a specified price and
time.
 LAW OF DEMAND
Fundamental economic principle that says
holding all other factors constant, the price and
quantity demanded are inversely related.
LAW OF DEMAND
↑Price, ↓Quantity Demanded

↓Price, ↑Quantity Demanded

 MARKET DEMAND CURVE
A curve indicating a total quantity of goods all
consumers are willing and able to purchase at
each possible price, holding all other factors
constant.
DEMAND CURVE
 DEMAND SHIFTERS

Variables other than the price of a good that

influence demand curve.
 DEMAND SHIFTERS
• Income
• Prices of related goods
• Advertising and consumer tastes
• Population
• Consumer expectations
• Other factors
Change in quantity demanded
• Changes in the price of a good lead to a change in the
quantity demanded of that good. This corresponds to a
movement along a given demand curve.

Change in demand
• Changes in variables other than the price of a good lead
to a change in demand. This corresponds to a shift of the
entire demand curve.
Change in Demand
 Income
Changes in income tend to have profound
effects on the demand.
• Normal goods→ increase as income increase
• Inferior goods→ decrease as income increase
 Prices of Related Goods
• Substitutes- increase (decrease) in the price of
one good leads to an increase (decrease) in the
demand for the other good.
↑Price of good ↑Demand of good
1, 2
 Prices of Related Goods
• Complements- increase (decrease) in the price
of one good leads to a decrease (increase) in
the demand for the other good.
↑Price of good1, ↓Demand of good2
 Advertising and Consumer Tastes
Impact of advertising on demand can be
interpreted in two ways:
• ↑Unit, constant price
• Constant unit, ↑price
 Types of Advertising
• Informative Advertising- provides consumers
with information about the existence or quality
of a product.
• Persuasive Advertising- altering the underlying
tastes of consumers.
 Population
Changes in sizes and composition of the
population influence demand.

↑Population, ↑Demand
 Consumer Expectations
Changes in consumers expectation also can
change the demand curve.
• Stockpiling- a consumer behavior where
consumers substitute current purchases for
future purchases.
 Other Factors
Any other variables that affect the willingness
or ability of consumers to purchase a particular
good is a potential demand shifter.
E.g. Health, birth
THE DEMAND FUNCTION
Describes how much of a good will be purchased at :
Alternative prices of that good (Px) and related goods (Py),
alternative levels of income (M) , and alternative values of other
variables affecting demand (H), such as level of advertising, the size
of population, or consumer expectations.

𝑑
Q =
𝑥
f(Px, Py, M, H)
 Linear Demand Function
Demand for a given good is a linear function of prices,
income levels, and other variables influencing demand.
𝑑
Q = a0+axPx + ayPy + aMM + aHH
𝑥
a= fixed numbers provided by firm’s research dept. or economic consultant to
the manager.
ax < 0
 Linear Demand Function
Price of good Y Consumption of Relationship of
good X good X to Y
ay : Positive ay ⬆ ⬆ Substitute
Negative ay ⬆ ⬇ Complement

Income Consumption of Good X

good X
aM: Positive aM ⬆ ⬆ Normal good
Negative aM ⬆ ⬇ Inferior good
 CONSUMER SURPLUS
Value consumer get from a good but do not have to
pay for. It is “extra money” a consumer willing to
pay and useful in marketing and other disciplines
that emphasizes strategies such as value pricing and
price discrimination.
CONSUMER SURPLUS
What is SUPPLY?
The total amount of a specific good or service
that is available to consumers.
 MARKET SUPPLY CURVE
Summarizes the total quantity all producers are
willing and able to produce at alternative prices,
holding other factors that affect supply
constant.
Changes in Quantity Supplied
Changes in the price of a good lead to a change in the quantity
supplied of that good. This corresponds to a movement along a
given supply curve.

Change in Supply
Changes in variables other than the price of a good, such as
input prices or technological advances, lead to a change in supply.
This corresponds to a shift of the entire supply curve.
 SUPPLY SHIFTERS
Variables that affect the position of the supply
curve.
SUPPLY SHIFTERS
 SUPPLY SHIFTERS
• Input prices
• Technology or Government Regulations
• Number of firms
• Substitutes in production
• Taxes
• Producer Expectations
 Input prices
As the price of an input rises, producers are
willing to produce less output at each given
price.
 Technology or Government Regulations

• The faster and better the technology, the

faster product can be produced.
• Government policies and regulations can
affect supply in numerous ways.
 Number of Firms
As additional firms enter an industry, more
and more output is available at each given
price.
 Substitute in Production
Many firms have technologies that are
readily adaptable to several different
products.
 Taxes
• Excise tax- tax on each unit of output sold,
where the tax revenue is collected from the
supplier.
• Ad valorem – literally means ‘according to the
value’. It is a percentage tax.
Per Unit (Excise) Tax
Ad Valorem Tax
 Producer Expectations
Producer expectations about future prices
also affect the position of the supply
curve.
THE SUPPLY FUNCTION
A function that describes how much of a good
will be produced at alternative prices of that
good, alternative input prices, and alternative
values of other variables affecting supply.
Supply Function
s
Q x= f (Px, Pr, W, H)
QSX - Quantity supplied of a good
Px - Price of the good
Pr - Price of related goods
W - Price of an input
H -Value of some other variables
 Linear Supply Function
s
Qx = ß0 + ßxPx + ßrPr + ßwW + ßHH

QSX - Quantity supplied of a good

ß – Estimated
Px - Price of the good
Pr - Price of related goods
W - Price of an input
H -Value of some other variables
 Inverse Supply Function
A function representing the relationship
between quantity supplied and price, specified
for convenience with price as a function of
quantity instead of the more usual quantity as a
function of price.
 PRODUCER SURPLUS
The amount producers receive in excess of the
amount necessary to induce them to produce
the goods
Producer Surplus
MARKET EQUILIBRIUM
A condition on which the amount of goods
and services purchased by buyers is equal to the
amount of goods and services produced by
sellers.
MARKET EQUILIBRIUM
 Competitive Price
Determined by the interaction of supply and
demand, such that there is neither a shortage
nor a surplus.
• Equilibrium Price- price

• Equilibrium Quantity- corresponding

quantity

There is no tendency for prices to rise or to fall

when supply and demand are balance.
 Competitive Market Equilibrium
States that equilibrium price is the price that
equates quantity demanded with quantity
supplies.
 PRICE RESTRICTIONS AND
MARKET EQUILIBRIUM

• Price Ceiling
• Price Floor
 PRICE CEILING
• The maximum legal price that can be charged in a market
• It will be effective if it is imposed below the equilibrium price
• It results to SHORTAGE:
• Producers are willing to produce less at the lower price or;
• Consumers wish to purchase more at the lower price
Price Ceiling
 PRICE CEILING
• "First come, first serve"
Price ceilings discriminate against people who have a
high opportunity cost of time and do not like to wait in
lines.
 PRICE CEILING
• Full economic price- the amount paid to a firm
under a price ceiling, plus the nonpecuniary price
PF = PC + (PF - PC)
PF = Full economic price
PC = Amount paid by consumer and thus the amount paid to the firm
(PF - PC) = Nonpecuniary price (not paid by money but through opportunity cost)
 PRICE CEILING
• Social welfare - the vertical difference between the
demand and supply curves at each quantity therefore
represents the change in social welfare (consumer value
less relevant production costs)
 PRICE FLOOR
• The minimum legal price that can be charged in a market.
• It will be effective if it is imposed above the equilibrium price
• It results to SURPLUS:
- More goods are produced than consumers are willing to
purchase at that price.
Price Floor
COMPARATIVE STATISTICS
• Comparative Statistics Analysis- the study of
the movement from one equilibrium to
another.
CHANGES IN DEMAND
CHANGES IN DEMAND
The Effect of Changes in Demand on
Equilibrium Price and Quantity
• ↑Demand, ↑equilibrium price and ↑equilibrium quantity
• ↓Demand, ↓equilibrium price and ↓equilibrium quantity
CHANGES IN SUPPLY
 CHANGES IN SUPPLY
The Effect of Changes in Supply on
Equilibrium Price and Quantity
• ↑Supply, ↓equilibrium price and ↑equilibrium quantity
• ↓Supply, ↑equilibrium price and ↓equilibrium quantity
SIMULTANEOUS SHIFTS IN SUPPLY
AND DEMAND
 SIMULTANEOUS SHIFTS IN SUPPLY
AND DEMAND
The Effect of Changes in Supply on
Equilibrium Price and Quantity
Nature of the Change Increase in Demand Decrease in Demand

Increase in Supply Price: Ambiguous Price: Decrease

Quantity: Increase Quantity: Ambiguous
Decrease in Supply Price: Increase Price: Ambiguous
Quantity: Ambiguous Quantity: Decrease
END.