Fundamental Law of

Economics
Brigitte Shane L. Gedorio
Shalen Galucgoc
Glendelle Ross Torreda
What is fundamental law of economics?
• Fundamental Law. The constitution of a state or nation; the
basic law and principles contained in federal and state constitutions
that direct and regulate the manner in which government is
exercised.
• Economics. The social science that studies the production,
distribution, and consumption of goods and services.

Basically, it is the basic law that regulates the production, distribution,

and consumption of goods and services of ones society or country.
Fundamental Law of Economics
• The most basic laws in economics are the law of supply and the law
of demand.
• Indeed, almost every economic event or phenomenon is the product
of the interaction of these two laws.
What is Supply?
• Supply is a fundamental economic concept that describes the total
amount of a specific good or service that is available to consumers.

What is Demand?
• Demand is an economic principle referring to a consumer's desire to
purchase goods and services and willingness to pay a price for a
specific good or service.
5 Determinants of Supply
• Number of Sellers
• Prices of Resources
• Taxes and Subsidies
• Technology
• Suppliers' Expectations
 How Each Determinant Affects Demand
• Number of Sellers
Greater the number of sellers, greater will be the quantity of a product or service supplied in a market and vice versa. Thus
increase in number of sellers will increase supply and shift the supply curve rightwards whereas decrease in number of sellers will
decrease the supply and shift the supply curve leftwards. For example, when more firms enter an industry, the number of sellers
increases thus increasing the supply.
• Prices of Resources
• Increase in resource prices increases the production costs thus shrinking profits and vice versa. Since profit is a major incentive for
producers to supply goods and services, increase in profits increases the supply and decrease in profits reduces the supply. In
other words supply is indirectly proportional to resource prices. Increase in resource prices reduces the supply and the supply
curve is shifted leftwards whereas decrease in resource prices increases the supply and the supply curve is shifted rightwards.
• Taxes and Subsidies
• Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in taxes increase supply. Subsidies reduce the
burden of production costs on suppliers, thus increasing the profits. Therefore increase in subsidies increase supply and decrease
in subsidies decrease supply.
• Technology
• Improvement in technology enables more efficient production of goods and services. Thus reducing the production costs and
increasing the profits. As a result supply is increased and supply curve is shifted rightwards. Since technology in general rarely
deteriorates, therefore it is needless to say that deterioration of technology reduces supply.
• Suppliers' Expectations
• Change in expectations of suppliers about future price of a product or service may affect their current supply. However, unlike
other determinants of supply, the effect of suppliers' expectations on supply is difficult to generalize. For example when farmers
suspect the future price of a crop to increase, they will withhold their agricultural produce to benefit from higher price thus
reducing the supply. In case of manufacturers, when they expect the future price to increase, they will employ more resources to
increase their output and this may increase current supply as well.
5 Determinants of Demand
• The price of the good or service.
• Income of buyers.
• Prices of related goods or services. These are either complementary,
those purchased along with a particular good or service, or
substitutes, those purchased instead of a certain good or service.
• Tastes or preferences of consumers.
• Expectations. These are usually about whether the price will go up.
How Each Determinant Affects Demand
• How Each Determinant Affects Demand
• You can understand how each determinant affects demand if you first assume that all the other determinants don't change. That principle is called ceteris paribus or “all other
things being equal.” So, ceteris paribus, here's how each element affects demand.
• Price. The law of demand states that when prices rise, the quantity of demand falls. That also means that when prices drop, demand will grow. People base their purchasing
decisions on price if all other things are equal. The exact quantity bought for each price level is described in the demand schedule. It's then plotted on a graph to show
the demand curve.
• The demand curve only shows the relationship between the price and quantity. If one of the other determinants changes, the entire demand curve shifts.
• If the quantity demanded responds a lot to price, then it's known as elastic demand. If the volume doesn't change much, regardless of price, that's inelastic demand.
• Income. When income rises, so will the quantity demanded. When income falls, so will demand. But if your income doubles, you won't always buy twice as much of a particular
good or service. There's only so many pints of ice cream you'd want to eat, no matter how wealthy you are. That's where the concept of marginal utility comes into the picture.
The first pint of ice cream tastes delicious. You might have another. But after that, the marginal utility starts to decrease to the point where you don't want any more.
• Prices of related goods or services. The price of complementary goods or services raises the cost of using the product you demand, so you'll want less. For example, when gas
prices rose to $4 a gallon in 2008, the demand for Hummers fell. Gas is a complementary good to Hummers. The cost of driving a Hummer rose along with gas prices.
• The opposite reaction occurs when the price of a substitute rises. When that happens, people will want more of the good or service and less of its substitute. That's why Apple
continually innovates with its iPhones and iPods. As soon as a substitute, such as a new Android phone, appears at a lower price, Apple comes out with a better product. Then the
Android is no longer a substitute.
• Tastes. When the public’s desires, emotions, or preferences change in favor of a product, so does the quantity demanded. Likewise, when tastes go against it, that depresses the
amount demanded. Brand advertising tries to increase the desire for consumer goods. For example, Buick spent millions to make you think its cars are not only for older people.
• Expectations. When people expect that the value of something will rise, they demand more of it. That explains the housing asset bubble of 2005. Housing prices rose, but people
bought more because they expected the price to continue to go up. Prices increased even more until the bubble burst in 2006. Between 2007 and 2011, housing prices fell 30
percent. But the quantity demanded didn't grow. Why? People expected prices to continue falling. Record levels of foreclosures entered the market due to the subprime
mortgage crisis. Demand didn't increase until people expected future prices would, too.
What is the law of Supply ?
• The law of supply states that the quantity of a good supplied (i.e., the
amount owners or producers offer for sale) rises as the market price
rises, and falls as the price falls.
What is law of Demand ?
• The law of demand states that when the price of a good rises, the
amount demanded falls, and when the price falls, the amount
demanded rises.
• One of the most important building blocks of economic analysis is the
concept of demand. When economists refer to demand, they usually
have in mind not just a single quantity demanded, but a demand
curve, which traces the quantity of a good or service that is
demanded at successively different prices.
Supply and Demand Curves
• Supply and demand factors are unique for a given product or service.
These factors are often summed up in demand and supply profiles
plotted as slopes on a graph. On such a graph, the vertical axis
denotes the price, while the horizontal axis denotes the quantity
demanded or supplied.
• A demand curve slopes downward, from left to right. As prices
increase, consumers demand less of a good or service.
• A supply curve slopes upward. As prices increase, suppliers provide
more of a good or service.