Prepared by: Dionne Mona Dandoy & Jeffrey Catipay

THE CONCEPT OF DEMAND

- a fundamental building block in any economic analysis.

- One of the elements that make market economics work.

Law of Demand states that, holding all other things constant, the quantity demanded for a commodity or service is negatively or inversely related to its own price.

Law of Demand

3 essential reasons why the price-quantity relationship depicted in a demand curve:

1. Opportunity cost

2. Purchasing power or budget of the consumer

3. Higher Price

The demand-price can be depicted in 3 different ways:

1. Graph

2. Schedule/Table

3. Equation/Demand Function

Demand Schedule- is a numerical tabulation of the quantity demanded of a good or services at selected prices, assuming other things are held constant.

Price per Unit Quantity Demanded per Week

25 0

20 1

15 2

10 3

5 4

0 5

Demand Schedule for Notebooks

Demand function/equation: Qd = a

– bP

Qd – stands for quantity demanded

P – pricea – the horizontal intercept of the

equation or correspondingly, the quantity demanded when price is set at zero.

-b – the slope of the function.

CHANGE IN QUANTITY DEMANDED

All other things remaining unchanged, when price changes, whether in the upward or downward directions, what happens is a movement along the demand curve. The change in price results in changes in quantity demanded.

Market DemandThe market demand or the total

demand for a good or services is the sum of the demand of all individual buyers.

Shifts in the Demand CurvePrice of good is the most important

factor that affects demand because when we defined the demand-price relationship, other factors were held constant.

Factors in the Demand Curve

Income and Income DistributionA higher income generally

translates into greater ability to buy and hence, raises the demand for goods and services.

Normal Goods – are products whose demand increases as income increases or whose demand decreases as income decreases.

Inferior Goods – are products whose demand decreases when a consumer’s income increases.

Prices of related goods in consumption

Prices of related goods in consumption affects our demand for communities.

Substitute Good – goods that can be used in place of another good.

Complementary Good – a good that is consumed along with another good.

Consumer tasks and preferencesWhen consumer tastes and

preferences shift towards a certain good, greater amounts of it are demanded.

Geographic Condition – another factor which influences tastes

Consumer ExpectationsThe demand for specific

commodities may also be affected by expectations about the future.

Unexpected EventsActs of nature and other

unexpected events alter the demand for a good or services.

Number of buyersAs increase in the number of

consumers affects the market demand for a good and shifts the market demand to curve to the right.

THE CONCEPT OF SUPPLY

Supply – describes the behavior of firms that are producing and selling goods and services.

Law of Supply states that the higher the price, the higher the amount or quantity of a good that will be supplied by firms or producers. The lower the price, the lower the quantity of a good that will be bought to the market.

Law of Supply

As prices fall

Quantity

supplied

falls

As prices rise

Quantity

supplied rise

The supply-price relationship can also be depicted in two other ways:

Supply Schedule – a numerical tabulation of the quantity supplied of a good or service at selected prices, assuming other things are held constant.

Supply-price relationship function/equation:

Qs= c + dP

Q – quantity suppliedP – priceC – horizontal intercept of the equationd – the slope function Table or Supply function/equation

Changes in Quantity SuppliedA movement along the supply curve occurs

when the price of the good changes, causing the quantity supplied by forms to change.

Market SupplyMarket supply curved is derived by

considering the behavior of all firms in the market.

Shifts In The Supply CurveOther variables that affect supply:

Technology Changes in the prices of resource

inputs Prices related goods in production Number of firms Expectation of future prices Government taxes, subsidies and

regulations

TechnologyAnything that changes the amount of outputs that a firm can produce with a given amount of inputs can be considered in technology.

Changes in the prices of resource inputsWhen the prices of resource inputs, such as raw material, fuel products and labor increase, it becomes costlier to produce goods.

Prices related goods in productionFactor inputs like land, labor and capital equipment can be used to produce not just one but several goods and services.

Number of firmsThe larger the number of settlers, the greater the market supply, other things remaining the same.

Expectations of future pricesProducers may withhold some of their current output in anticipation of higher prices in the next period.

Government taxes, subsidies and regulations

An increase in sales taxes and other forms of taxes is an added cost to production and will decrease supply.

Subsidies, in contrast, lower producer’s cost and will lead to an increase supply.

Government regulations, which can increase or lower the costs of production, also affect the supply of output of firms.