ECON01G- Lec3

Demand and Supply

DEMAND AND SUPPLY

 In a market economy, the forces of demand and
supply play a very significant role in the
determination of what goods to produce and at
what prices they should be sold.
 This chapter shall analyze demand and supply
first separately and alter on combined, in an
attempt to show how they work together.

THE MARKET MECHANISM

A market is a mechanism through with buyers and sellers Table 4
interact in order to determine the price and quantity of Hypothetical Market Demand
a good or a service. Schedule for Good X per week
 Price is the value of a good in terms of money in
the market system, prices serve as signals to
both the producers and the consumers.
 If a consumer wants more of a good, this will
cause the price of that good to increase. Rising
prices encourage producers to increase the
supply of the good. High prices are therefore a
green light to producers since these normally
mean rising profit margins.

DEMAND

DEMAND SCHEDULE AND DEMAND CURVE

 The demand for a product is defined as the
quantity that buyers are willing to buy.
 The demand schedule show the quantity of the
product demanded by a consumer or an
aggregate of consumers at any given price.
 From our daily experience of buying and selling,
we know that higher prices influence people to
buy less. Therefore, the demand function
shows how the quantity demanded of a
particular good responds to price change.
 The demand schedule must specify the time
period during which the quantities will be
bought (Table 4)
Figure 15
Hypothetical Market Demand Curve for One Week
 The normal demand curve slopes downward
from left to right. Any point on the demand
curve reflects the quantity that will be bought at
the given price.
THE LAW OF DEMAND
After analyzing the above relationship, we can
now state that as price increases, the quantity
demanded of the product decreases, but as price
decreases, the quantity purchases will instead increase.

CETERIS PARIBUS ASSUMPTION

 Let us now restate the Law of Demand by taking
into account that there are factors other than
price which also influence the quantity of
demand, namely; tastes and preferences,
income, expectation on future prices, prices of
 related goods like substitutes and
complements and the size of the population.
 Therefore, the functional relationship between SUPPLY
price and quantity demanded is essential since The concept of supply shows the seller’s side of
these non-price factors are assumed as the market.
constant. The Law of Demand now states,
“Assuming other things constant, price and
SUPPLY SCHEDULE AND SUPPLY CURVE
quantity demanded are inversely proportional”
 The supply of a product is defined as the
quantity that sellers are willing to sell. The
CHANGES IN DEMAND AND SHIFTS IN THE DEMAND
supply schedule shows the quantities that are
CURVE
offered for sale at various prices.
 If the ceteris paribus assumption is dropped,  If the quantities offered are only of one seller,
then changes in the non-price factor shall take then it is an individual supply schedule. The
place. This will result in a change in the position aggregate supply quantities of a group of sellers
of slope of the demand curve and change in the are presented as a market supply schedule.
entire demand schedule.
 The increase of decrease in the entire demand is
shown through a shift of the entire demand
curve and referred to as the change in demand.
(Figure 16)

Table 6
Figure 18

 The supply curve contains the exact prices and

Table 5 in the supply schedule. In effect, it is the
Hypothetical Increase in Demand graphical representation of the supply schedule.
Figure 17  The supply curve is upward sloping from the left
to right. It shows a direct relationship between
price and quantity supplied. Any point on the
supply curve reflects the quantity that will be
supplied at that given price.
 After analyzing the above relationship we can
now state that as price increases, the quantity
supplied of a product tends to increase and as
price decreases, quantity supplied instead
decreases.

CHANGE IN QUANTITY SUPPLIED AND MOVEMENTS

ALONG THE SUPPLY CURVE
 A movement along the supply curve is referred
to as change in the quantity supplied
Hypothetical Shift of the Demand Curve
  Combining the demand and supply curves will
THE LAW OF SUPPLY show the point of market equilibrium. This
 As in the theory of demand, there are also non- equilibrium is attained at point where demand
price determinants that influence supply. These is equal to supply.
include cost of production, availability of  There is only one point in the graph where
economic resources, number of firms in the demand is exactly equal to supply. This point of
market, technology applied, and producer’s equality is called the equilibrium point.
goals.
 Under the ceteris paribus assumption, these
factors are again assumed constant to enable us
to analyze the effect of a change in price on
quantity supplied.
 The law of supply now states, “other things
assumed as constant, price and quantity
supplied are directly proportional.”

CHANGES IN SUPPLY AND SHIFTS OF THE SUPPLY

CURVE
 Once again, let us drop the ceteris paribus
assumption, which means changes in non-price
factors shall now take place.
 This will likewise result in a change in the
position of slope of the supply curve and a Figure 20
change in the entire supply schedule. Hypothetical Marked Demand and Supply Curves for One
 Factors, like the use of improved technology, week
increase in the number of sellers in the market,
and decrease in the cost of production, may all  Surplus - situation wherein quantity supplied is
cause an increase in the actual supply. more than quantity demanded.
 Shortage – the situation wherein quantity
demanded is more than quantity supplied.

Figure 19
Hypothetical Shift of the Market Supply Schedule for One
week

MARKET EQUILIBRIUM
 Demand and supply should eventually be
analyzed as one since the market operates
within the forces of both demand and supply.