DEMAND and SUPPLY

(in this chapter, we will introduce economics main branches the microeconomics)

Market is the place where buyers and sellers meet.

Demand - the willingness of
the buyer or consumer to pay for a certain good.

Supply - the willingness

to produce.

A perfectly competitive market has a plurarity of buyers and sellers.

The Demand Curve and the Demand Schedule

Quantity demanded - the amount of goods and services consumers are willing to purchase
given a certain price.

Chart 2.1 Demand Curve

Chart Title
50 40 30 20 10 0 A B Price in Php C D Quantity E

Table 2.1 The Demand Schedule for Bread

Point A B C D E Price in Php 4 3 2 1 0 Quantity 0 10 20 30 40

Law of Demand
inverse relationship

Getting the Slope of the Demand Curve

Point Price in Quanti Php ty

A
B C D E

4
3 2 1 0

0
10 20 30 40

rise y P P 2 P1 slope = ---------- = ---------- = ---------- = --------------run x Q Q2 Q1

Slope of the Demand of the Bread 34 1 slope = -------- = -- -----10 0 10

The negative number of the slope explains the inverse relationship of price and the quantity demanded.

P0

Shift in Demands and their Determinants

1. Changes in the Average Income
Price

income increase- shifts to the right income decreases shifts to the left

P0 Q0 Q1 Quantity

Fig. 2.2 Shifts in Demands

2. Changes in the Size of Population Like income, when population increases, the demand of goods also increases, when population decreases the demand of goods also decreases. 3. Changes in taste and preferences 4. Changes in consumers speculations

The Supply Curve and the Supply Schedule

35 30 25 20 15 10 5 0 A B C D E Point Price in Php Quantity

A
Price in Php Quantity

0 1 2
3 4

0 10 20
30 40

B C
D E

Table 2.2 The Supply Schedule for Bread

Figure 2.3 Supply Curve

Law of Supply
direct relationship

Getting the Slope of the Supply Curve

rise y P P 2 P1 slope = ---------- = ---------- = ---------- = --------------run x Q Q2 Q1 1 -0 1 slope = ------------ = ------10 - 0 10

Other Factors that Influence Supply

1. Changes in the number of sellers
If there are many sellers who are willing to produce, more output will be available in the market. Similarly, given a fixed price of commodity, if fewer sellers are willing to participate in the production process, the supply diminishes.

2. Changes in cost of Production

The cost of production refers to the prices of all resources necessary to produce a product. When the cost of producing a bread increase, the output will consequently diminish.

3. Changes in technology
The utilization of machinery and other equipment leads to a faster way of producing goods thus yielding higher output.

4. Changes in government policies

For instance, government encourages small businessmen to set up bakeries, the size of the bread industry will increase. This will then yield to more output as more people are willing to produce or sell breads.

Market Equilibrium
A condition of equilibrium is reached when the quantity of supply and demand are balanced or equal at a given price level.

Getting the Equilibrium Condition via the Schedule Approach

If we merge the demand and supply schedules given in the previous discussion, we will observe from the combined table (Table 2.3) a common point , C, where price for bread is Php 2.00. At Php 2.00, consumers will be able to purchase the number of bread they want to buy and the sellers will be able to sell the number of bread they are willing to sell. Point A Price Php 4 Quality Demanded 0 Quantity Supplied 40

B
C D E

3
2 1 0

10
20 30 40

30
20 10 0

Table 2.3 Demand and Supply Schedule for Bread

The Graphical Approach

45 40 35 30 25 20 15 10 5 0 A B C D E Price in Php Quantity Demanded Quantity Supplied

Figure 2.4 Market Equilibrium

Surplus and Shortage

In a competitive market, surplus or a shortage may occur when there are movements or changes within the same supply and demand schedule.

Surplus is experienced when the price of a good is above the equilibrium point.sss
Shortage occurs when the quantity demanded exceeds the quantity being supplied.