Economics 1, TFr, 1:00-2:30 December 2, 2011

2nd Semester, S.Y. 2011-2012 Prof. Vitaliana Cabatingan-Guerrero, Ph.D

Group 1
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CHAPTER 1: NATURE OF ECONOMICS

Economics Economics and Development Nationalism & Economics Microeconomics & Macroeconomics

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CHAPTER 2: BASIC ECONOMIC PROBLEMS

Basic Decision Problems Role of Scarcity Economic Resources Law of Diminishing Returns

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CHAPTER 3: MARKET ANALYSIS Elements of Supply & Demand

Demand and Supply Shifts in Demand Shifts in Supply Elasticity

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CHAPTER 4: COST, SUPPLY AND THE FIRM

The Firm & Competitive Industry Costs of the Firm Production Side of Cost Curves Production Function

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CHAPTER 5: MARKET STRUCTURE Monopoly and Imperfect Competition

Competitive Market Stage of Development and Market Structures Proce-Output Determination in a Monopoly Imperfect Competition

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CHAPTER 6: INCOME AND FACTORS OF PRODUCTION

Marginal Productivity: Theory of Distribution Wages and Rent Capital and Interest Profits and Income Distribution

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CHAPTER 7: ENTERPRISES AND THEIR ORGANIZATION

Business Organization

CHAPTER 8: NATIONAL INCOME MEASUREMENT

Basis of National Income Measurement National Income Accounts: Inter-Relationship of All Parts Two New Income Concepts

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CHAPTER 8.2: NATIONAL INCOME MEASUREMENT

Prices and National Income Measurement Philippine National Income Accounts Note on Estimation Methods

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CHAPTER 9: EXPENDITURE, SAVING AND INCOME

Personal Income and Consumption

CHAPTER 9.2: EXPENDITURE, SAVING AND INCOME

Prelude to National Income Analysis

Saving and Investment

Llego, Jessica B. 1st Yr, BSBA Management Economics 1, TFr, 1:00-2:30 Oral Report: Summary December 2, 2011 Group #1, Seat #2

2nd Semester, S.Y. 2011-2012 Prof. Vitaliana Cabatingan-Guerrero, Ph.D

Market Analysis: Elements of Supply and Demand What is a Market? Market is any established operating means or exchange for business dealings between buyers and sellers. It implies trade that is transacted with some regularity and regulation and a certain amount of competition is involved1. A market exists so long as there is an interaction of buyers and sellers. In a situation of many sellers and many buyers, in which no seller or buyer can singly operate to affect the price of a transaction, there is a competitive market situation. Demand and Supply. The Law of Demand states that at a high price, fewer goods are bought. At any lower price, more goods are bought. On the other hand, the Law of Supply states that at a high price, more goods are offered for sale. At a lower price, however, fewer goods are offered for sale. Law of Diminishing Marginal Utility. Utility diminishes with each successive units of consumption of the same thing; the total utility will grow, but at a diminishing rate. Interaction of Supply and Demand. Market interaction between buyers and sellers leads to a unique price, at which sellers sell all that they are willing to sell and buyers buy what they are willing to buy. So an equilibrium price and output is jointly determined. Shifts in Demand. (1) Preference Patterns, (2) Changing Incomes, (3) Effects of Distribution of Income, (4) Population Change and (5) Changes in Expectation. An increase in demand, other things equal, will raise the equilibrium price and quantity. A fall in demand will reduce the price and quantity. Shifts in Supply. (1) Increase in Use of Factors of Production, (2) Technological Change and (3) Increasing supply by Importation. An increase in supply, other things remaining the same, will reduce the price and raise the quantity sold. Elasticity of Demand and Supply. The price of elasticity of demand measures the percentage increase of quantity sold with respect to changes in price. A similar elasticity of supply concept can be derived. Demand. (1) Inelastic demand (1>E), (2) Unitary demand (1=E) and (3) Elastic demand (E>1). Supply. (1) Fixed Supply (Zero Elasticity, E=1), (2) Inelastic Supply (1>E), (3) Elastic Supply (E>1) and (4) Infinitely Elastic Supply (Horizontal Supply). Limitations. The so-called law of supply and demand applies to a competitive market situation. When regulatory actions or government interventions are made, the law of supply and demand is used to suit certain objectives. In the case of controls of the

market by monopolies or cartels, the law of supply and demand is an unsuitable technique of analysis. Llego, Jessica B. 2nd Semester, S.Y. 2011-2012 1st Yr, BSBA Management Prof. Vitaliana Cabatingan-Guerrero, Ph.D Economics 1, TFr, 1:00-2:30 Oral Report: Supply and Demand December 2, 2011 Group #1, Seat #2 Market Analysis: Elements of Supply and Demand What is a Market? Market is any established operating means or exchange for business dealings between buyers and sellers. It implies trade that is transacted with some regularity and regulation and a certain amount of competition is involved1. A market exists so long as there is an interaction of buyers and sellers, not necessarily needing personal contact. Today, the more economically advance a society is, the greater the use of impersonal modes of market interactions. In a situation of many sellers and many buyers, in which no seller or buyer can singly operate to affect the price of a transaction, there is a competitive market situation. Demand and Supply The Law of Demand states that at a high price, fewer goods are bought. At any lower price, more goods are bought. Reasons for this may be that: (1) buying the good reduces the budget for other commodities and so (2) those who cant afford wont buy the good, or (3) theyll find substitutes of the good with lesser price. Complements or complementary goods, where a reduction in one demand reduces another, are formed. On the other hand, the Law of Supply states that at a high price, more goods are offered for sale. At a lower price, however, fewer goods are offered for sale. A seller normally wishes to sell more at a higher price. Reasons for this may be that: (1) at a low price, only the most efficient producers can sell products without sustaining any loss while (2) at a high price all producers profit; and (3) it pays more to sell more.
Legend: P Price Q Quantity Figure 1.1 Demand Schedule Figure 1.2 Supply Schedule

Law of Diminishing Marginal Utility The law of demand is explained by the psychological law of diminishing marginal utility. A utility is the level of satisfaction a consumer gets from units of consumption. After consuming the first unit, satisfaction rises and demand of the good also rises. Utility diminishes with each successive units of consumption of the same thing; the total utility will grow, but at a diminishing rate.
Legend: TU Total Utility

MU Marginal Utility UC Units Consumed Figure 2.1 Total Utility Figure 2.2 Marginal Utility

Law of Consumption A consumer will only use up goods, given his budget, if he can equalize the marginal utility (MU) derived from each good in proportion to its price, that is, MU of Good 1 MU of Good 2 Price of 1 Price of 2

Interaction of Supply and Demand There is a market interaction between buyers and sellers. This leads to a unique price, at which sellers sell all that they are willing to sell and buyers buy what they are willing to buy. So an equilibrium price and output is jointly determined. If the price were above it, there is excess supply and the price will fall. If the price were below, there is excess demand and the price will rise. Shifts in Demand Many factors affect the demand: (1) Preference Patterns when people buy more of a commodity at a given price; (2) Changing Incomes more demands with more incomes; (3) Effects of Distribution of Income income distribution affects demand pattern; (4) Population Change more demands with more consumers; and (5) Changes in Expectation future expectations affects demand pattern. An increase in demand, other things equal, will raise the equilibrium price and quantity. A fall in demand will reduce the price and quantity. Shifts in Supply Many factors affect the supply: (1) Increase in Use of Factors of Production increased utilization of resources increases supply; (2) Technological Change costreducing innovations increases supply; and (3) Increasing supply by Importation if there is a shortage of supply, importation occurs. An increase in supply, other things remaining the same, will reduce the price and raise the quantity sold. Elasticity of Demand and Supply The price of elasticity of demand measures the percentage increase of quantity sold with respect to changes in price. A similar elasticity of supply concept can be derived. Elasticity Q P Q2-Q1 P2-P1 Legend: P Price Q P (Q1+Q2)/2 (P1+P2)/2 Q Quantity

-/ - =

Demand. (1) Inelastic demand (1>E) fall in price does not increase the quantity sold in the same proportion as the price reduction; lesser price effect on the volume of sales. (2) Unitary demand (1=E) the seller would not benefit by increasing or reducing the price; the proportionate gains, or losses, in quantity sold is the same as the decrease, or increase, in price. (3) Elastic demand (E>1) less will be the increase in price and greater will be the expansion of quantity sold; a change in price affects the quantity of sales significantly; the seller benefits from reducing the price.

Supply. (1) Fixed Supply (Zero Elasticity, E=1) no increase in price can change the supply. (2) Inelastic Supply (1>E) a rise in price leads to a smaller increase in quantity of sales. (3) Elastic Supply (E>1) less is the increase in price, the greater the increase in quantity sold. (4) Infinitely Elastic Supply (Horizontal Supply) a seller offers for sale any amount available at the same price. Market Periods (1) Immediate Period To the immediate period, buyers and sellers find it difficult to adjust to changes in conditions of the market; mostly applied to perishables such as fruits, meats and vegetables. (2)Short-run Period suppliers can alter their level of supply in accordance with the capacity of their existing goods. (3) Long-run Period greater adjustment as it has more elasticity Limitations The so-called law of supply and demand applies to a competitive market situation. When regulatory actions or government interventions are made, the law of supply and demand is used to suit certain objectives. In the case of controls of the market by monopolies or cartels, the law of supply and demand is an unsuitable technique of analysis.

Microsoft Encarta (2007). Microsoft Corporation.