The Law of Supply

and Demand
by Jean Lee C. Patindol, c2011-12
Demand and Supply
Determinants
Price of the good
Non-price determinants:
Taste or level of desire for the
good by the buyer
Income of the buyer
Prices of related products
Substitute products (directly
competes with the good in the
opinion of the buyer)
Complementary products (used
along with the good in the
opinion of the buyer
Future expectations
Expected income of the buyer
Expected price of the good
For the total demand: the
number of buyers in the
market

Price of the good
Non-price determinants:
Changes in number of
producers
Resource prices (prices of
the inputs necessary to
produce the good)
Technological changes
Prices of other goods
Substitute
Complementary
Expectations of future prices
Natural bounty/ calamity
Government
incentives/disincentives:
Subsidies
Taxes


by Jean Lee C. Patindol, c2011-12
The Law of Demand,
The Law of Supply
As the price of a good
decreases/increases,
ceteris paribus, the quantity
of that good that consumers
are willing and able to buy
increases/decreases
There is an inverse
relationship between price
and quantity demanded.
Consumers want the lowest
price possible.

As the price of a good
decreases/increases,
ceteris paribus, the quantity
of that good that producers
are willing and able to sell
increases/decreases
There is a direct
relationship between price
and quantity supplied.
Producers want the highest
price possible

by Jean Lee C. Patindol, c2011-12
The Law of Supply and
Demand
P
Q
D
S
Pe
Qe
by Jean Lee C. Patindol, c2011-12
The Law of Supply and
Demand
At any price except one (Pe), the amounts that buyers are willing to buy
and the amounts that sellers are willing to sell are unequal.

It is only at the price where the amount that buyers are willing to buy
and the amount that buyers are willing to sell are equal that there is
market equilibrium (the market clears).

The intersection of supply and demand curves determines the
equilibrium price and quantity.

In a competitive market, price functions to equalize the quantity
demanded by consumers and the quantity supplied by producers,
resulting in an economic equilibrium of price and quantity.

Any point above the equilibrium price and quantity is a surplus (B in
next diagram) ; any point below the equilibrium price and quantity is a
shortage (A in next diagram). Therefore, price floors and price
ceilings become ineffective over the long term.
by Jean Lee C. Patindol, c2011-12
The Law of Supply and
Demand
Price floor
Price ceiling
by Jean Lee C. Patindol, c2011-12
Demand increases/decreases;
Supply is constant
More consumers
Decrease in taste
P
Q
D
S
Pe
Qe
D1
P1
Q1
D2
P2
Q2
by Jean Lee C. Patindol, c2011-12
Demand is constant;
Supply increases/decreases
P
Q
D
S
Pe
Qe
S1
P1
Q1
S2
P2
Q2
by Jean Lee C. Patindol, c2011-12
More workers
Less workers
Demand increases; Supply
increases
Family incomes increase from OCW remittances
More home depots
P
Q
D
S
Pe
Qe
D1
S1
P1
Q1
by Jean Lee C. Patindol, c2011-12
Demand decreases; Supply decreases
Consumers tighten buying due to rising oil prices
Producers curb production due to rising resource costs from rising oil prices; moving towards
recession P
Q
D
S
Pe
Qe
D1
S1
P1
Q1
by Jean Lee C. Patindol, c2011-12
Demand increases; Supply decreases
Speculation and fears of scarcity drives people to consume more fuel
Nigerian bomb blast of two major fuel plants decreases world fuel supply
P
Q
D
S
Pe
Qe
D1
S1
P1
Q1
by Jean Lee C. Patindol, c2011-12
Demand decreases; Supply increases
Due to climate change consciousness, people consume less fuel
Due to oil deregulation law; Producers produce more fuel
P
Q
D
S
Pe
Qe
D1
S1
P1
Q1
by Jean Lee C. Patindol, c2011-12