Chapter 3: Elements of Demand and Supply

Demand
It is the number of goods and services desired
by the consumers at various prices in a
particular period of time.

Quantity Demanded
Is the amount of goods or services, consumers
are willing and able to buy at a given price,
place and period of time.
Law of Demand
 States that as price increases, the quantity
demanded decreases; as the price decreases, the
quantity demanded increases.
Justification for the law of demand
• Income Effect
 When the price of goods decreases, the consumer
can afford to buy more of it.
• Substitution Effect
 It is expected that consumer tend to buy goods
with a lower price; hence if the price of goods
increases, they look for substitute with a lower
price.
 Determinants of Demands
Consumer’s Income
Change of income can cause change in demand
Change in income depends on the following;
1. Normal Goods – refers to a good for which
demand at every price increases.
2. Inferior goods – refers to goods which
demands fall when income arises.
Consumer s’ Expectation of future prices.
The quantity of good demanded within any
period depends not only on prices but also on
price expected in the future.
Prices of Related Products
Demand for any particular good will be
affected by changes in the prices of related
goods.
Change in prices of related products depends on
the following;
1. Substitute Products – goods that can be used
in place of other products.
2. Complementary Products – goods that go
together or cannot be used without the
other.
Consumer’s Taste and Preferences
 Are major factors in determining the demand for
any product.
Population
 An increase in population means more demands
for goods and services and vice versa.

Demand Function
 It is a representation of the relationship between
demand and fall of its determinants expressed in
a mathematical language using functional form.
Functinal Form
Qdₓ = f ( PₓY,e,P-rel ,T,Pop)
Where:
Qdₓ = Quantity demand
Pₓ = Price of Goods and Services
Y = Income of Consumers
e = Consumers expectation
P-rel = Price of related Products
T = consumer’s tastes and preferences
Pop = Population Size
The Demand function above can be rewritten as
follows if all determinants except price are kept
constant
A linear equation can be constructed using the
simplified functional expression;
Qd = a – bp
Where a is the intercept and b is the slope of
the function. Notice, however, that the sign of
the slope the demand equation is negative
suggesting an inverse relation between two
variables.
For example, consider the following linear
demand function for sports utility vehicle (SUV)
Qd = 4, 000 – 500P
Demand Schedule
Shows the tabular representation of the
relationship between the quantity of a good
demanded and the price of that good.
Utilizing the price given in Table 3.

Points Price (in Million) Quantity Demanded

A 0 4, 000
B 1 3, 500
C 2 3, 000
D 3 2, 500
E 4 2, 000
F 5 1, 500
G 6 1, 000
Demand Curve
 Shows the graphical representation of the
relationship between the quantity of a good
demanded and its corresponding price, with
other variables held constant.
Change in Quantity Demanded
 It is represented by a movement along a demand
curve which indicates a movement from one
point to another point of the same curve.
Change in Demand
 It is brought by the changes in the non – price
determinants of demand.
Supply
 Defined as the maximum quantity of goods or
services producers can offer.
Quantity Supplied
 Refers to the amount of goods and services
producers are willing and able to sell at a given
price and at a given period of time.

Law of Supply
 As the price increases, quantity supplied also
increases; as price decreases, the quantity
supplied also decreases.
 Determinants of Supply
Change in Technology
 State of the art technology that uses hi tech
machines increases in the quantity supplies of
goods and services which causes reduction of
production cost.
Cost of Input used
 An increase in the price of an input or the cost of
production decreases the quantity supply
because the probability of a certain business
decreases.
Expectation of Future Price
 Expectation to future price can shift the supply
curve.
Price related products
 Change in the price of goods have a significant
effect in the supply of such good.
Government Regulation and Taxes
 Expected that taxes imposed by the government
increase the production cost which in turn
discourage productions.
Government Subsidies
 Financial aids given by the government reduce
cost of production which encourage more supply.
Number of firms in the market
 An increase in the number of firms in the market
leads to an increase in supply of goods and
services.
Supply Function
 Is mathematical expression of the law of supply
or the relationship between price (P) and
quantity supplied (Qs).
Qs = a + b(P)
Supply Schedule
 Show the tabular representation of the
relationship between the quantity of goods
supplied and its price.
Supply curve
 Shows the graphical representation of the
relationship of quantity supplied and its
corresponding price.
Change in Quantity Supplied
Movement of supplied along the curve.
Change in Supply
Shifting from one supply curve to another.
( Supply Schedule for SUV)
POINTS PRICE ( In MILLIONS) Qs, for SUV
A 0 - 1, 000
B 1 0
C 2 1, 000
D 3 2, 000
E 4 3, 000
F 5 4, 000
G 6 5, 000
Market Equilibrium
States which implies a balance between the
opposing forces, a situation in which quantity
demanded and quantity supplied are equal.
Law of Demand and Supply
Stipulated when demand is greater than
supply, price increases; when supply is greater
than demand, price decreases; and when
demand is equal to supply, price remains
constant.
Market Equilibrium ( Mathematical Approaches)
As discussed earlier, Market is in equilibrium
when supply is equal to demand the
equilibrium can be derived.
Means;
Qd = Qs

Market Equilibrium
a – b(P) = a + b (P)
Interference in the Market
 Thus far we have utilized demand and supply
model in an unregulated market, where price is
determined solely by interaction between buyers
and seller; hence the government try to control
price from market based perspective.
Price ceiling and Price Floors
Price Ceiling – defined as the maximum price of
goods or services is sold or bought.
Price Floors – impose minimum price to goods and
services.
For example: Solve the Market Equilibrium.
1. Qd = 100 – 15P 2. Qd = 30 – 4P
Qs = 10 + 30P Qs = 12 + 2P
• Solve for Equilibrium PE and QE. (30 pts.)
1.QD = 1120 – 168P 3. QD = 672 – 308P
QS = 1043 + 1856P QS = 791 + 1147P

2.QD = 891 – 287P

QS = 952 + 1538P