Chapter 1

The Nature and

Importance of
Economics

1
Chapter 2

BASIC ELEMENTS OF
DEMAND AND SUPPLY
“What is a cynic? A man who knows
the price of everything and the value
of nothing.” Oscar Wilde
2
 The MARKET

- A market exist when “buyers wishing to

exchange money for a good or service are
in contact with sellers wishing to exchange
goods or services for money.”
- It is where people left alone to make their
own transactions.
- It is also where the forces of demand and
supply interact.
3

- where “buyers make known their decisions to

How a Market Functions

 Market are strictly made up of buyers and

sellers.
 The actions and decisions of buyers
constitute demand for a product or service,
while sellers’ decisions and actions
constitute supply.
 Market are important because they act as
the mechanism by which resources are
allocated.
4
Market Demand

 Refers to the buyers’ willingness and ability

to pay a sum of money for some amount of
a particular good or service.
 However, the quantity demanded of a good
or service will depend on factors such as
needs, preferences, income level,
expectations about the future, the prices of
related commodities, the buyers’ situation,
etc.
 The most important consideration,5
Market Demand

 The relationship between price and

quantity demanded is subject of the law of
demand.
 The law of demand indicates that “quantity
of any good which buyers are ready to
purchase varies inversely with the price of
good.”
 This means that people will tend to buy
more of a product as its price decreases,
assuming that all other factors influencing6
 The Law of Demand

Table 1 Demand Schedule for Bicycles

Price per unit (in pesos) Quantity

Demanded
(in units)

5,000 10,000

6,000 9,000

7,000 8,000

8,000 7,000

7
9,000 6,000
The Demand Curve

 The demand schedule may be presented in

graphic form.
 The price per unit is represented in vertical
axis, while the quantity demanded is
indicated in the horizontal axis.
 The graph shows a curve representing the
inverse relationship between prices of
goods and services and the quantity of
goods and services demanded. This curve
is referred to as demand curve. 8
Non Price Determinants of
Demand
 As much as price is a determinant of
demand, there are other factors that affect
demand as well.
1. Average income of consumers –
persons basically purchase the necessities
with their income. As their income
increase, they tend to buy more of the
things they like to buy.

9
Non Price Determinants of
Demand
2. Size of the market – the demand curve is
affected by the number of people living in a
given area.
3.Price and availability of related goods –
goods that are related tend to influence each
others demand.
 4. Preferences or taste – people of
different cultures vary in taste and
preferences
10
Non Price Determinants of
Demand
 5. Special influences – there are certain
developments that influence demand for a
certain goods and services.
 6. Expectations about future economic
conditions – when people expect changes
in the economy, their reaction will affect
demand for a certain products.

11
Effects of Changes in Non Price
Determinants of Demand
 The law of demand applies only when all of
the factors influencing demand remain
constant.
 A change in any of the non price factor of
demand may affect the original set of
demand for a certain product or service.
 The demand for bicycles (as indicated in
Table 1) is such because the price of the
presumed substitute, the motorbike remain
constant. 12
Table 2 Adjusted Demand Schedule for Bicycles

Price per unit Quantity Supply of Bicycles

(in pesos) Supplied if Taxes are
(in units)

Increased Decreased
(in units) (in units)

5,000 10,000 11,000 9,000

6,000 9,000 10,000 8,000

7,000 8,000 9,000 7,000

13
8,000 7,000 8,000 6,000
Shifts in the Demand Curve

 When the adjusted demand schedule is

plotted in a graph, the original demand
curve (C1) will shift to the left (C2) when
there is a decrease in demand, and shift to
the right (C3) when there is an increase in
demand.
 Shifts in the demand curve happen not only
when there are changes in income but also
when there are changes in other factors.
14
Market Supply

 Supply constitute the one side of the

market equation, of which the other one is
demand.
 Supply may be be defined as “the quantity
of a good or service w/c sellers desire to
sell at a given price.”
 The supply situation may be presented in
two ways;
1. the Supply Schedule; and 15

2. the Supply Curve

Supply Schedule

 The Supply Schedule is a tabular

presentation showing the relationship
between a commodity’s market price and
the amount of that commodity that
producers are willing to produce and sell,
other things held equal.
 Suppliers are encouraged to produce and
sell more of a product if a higher price is
paid for it by buyers.
 The higher the price, the higher the16
Table 3 Hypothetical Supply Schedule for Bicycles

Price per unit (in pesos) Quantity

Supplied
(in units)

5,000 5,000

6,000 6,000

7,000 7,000

8,000 8,000

9,000 17
9,000
Supply Curve

 The Supply Curve is the graphical

illustration of the supply schedule.
 The supply curve moves in an upward,
sloping direction, indicating the direct
relationship between price and quantity
supplied.
 The supply curve is a manifestation of the
law of supply which is stated; “As price
goes up, the quantity of goods and
services under consideration tends to18
Non Price Determinants of
Supply
 Price is not only the factor affecting supply.
There are non-price determinants which
are as follows;
1. cost of production
2. number of suppliers
3. prices of goods and services
4. taxes and subsidies
5. technology
19
Effects of Changes in Non Price
Determinants of Supply
 When taxes applied to bicycles have been
increased, firms will be demotivated to sell
more and the supply of bicycles will tend to
decrease.
 Inversely, when taxes are decreased, the
supply of bicycles will tend to increase.

20
Table 4 Adjusted Supply Schedule for Bicycles

Price per unit Quantity Supply of Bicycles

(in pesos) Supplied if Taxes are
(in units)

Increased Decreased
(in units) (in units)

5,000 5,000 4,000 6,000

6,000 6,000 5,000 7,000

7,000 7,000 6,000 8,000

21
8,000 8,000 7,000 9,000
Shifts in the Supply Curve

 Plotting the adjusted supply schedule in a

graph will show that the original supply
curve (S1) shifts to the left when taxes are
increased, and to the right (S3) when taxes
are decreased.

22
MARKET EQUILIBRIUM

 Supply and demand are opposing forces

that must be considered in the
determination of prices of commodities in
the market.
 When the individual schedules of supply
and demand are put together, there will be
a price where the quantity buyers want to
buy exactly equals the quantity which
sellers are offering for sale.
 The price at which supply and demand are23
Supply and Demand Schedule for Onions

Price per Kilo Quantity Quantity

(Php) Supplied (Kg) Demanded
(kg)

10 5,000 11,000

20 6,000 10,000

30 7,000 9,000

40 8,000 8,000

50 9,000 7,000
24
MARKET EQUILIBRIUM

 The law of demand and supply stated as:

“The amount of a product which is available
is relative to the needs of the possible
customer.”
 Equilibrium is set at that point where the
quantity demanded intersect the quantity
supplied.
 A condition of surplus will occur at prices
above forty pesos because the QD < QS. 25
 Shortage occurs at prices below forty
MARKET EQUILIBRIUM

 Surplus – A price above the equilibrium

price is called surplus.
 Shortage – A price below the equilibrium
price is called shortage.

26
 ACTIVITY 2

In your activity notebook:

1. What is a market?
2. How may the law of demand be described?
3. What does the demand curve show?
4. What are the non price determinants of
supply?
5. What does a shift to the left of a demand curve
27
signify?