CHAPTER 5

CHAPTER 5
BASIC OF DEMAND AND SUPPLY

LESSON 1
THE LAW OF DEMAND
DEMAND
A RELATIONSHIP BETWEEN PRICE AND QUANTITY
DEMANDED
THE QUANTITY OF GOODS AND SERVICES THAT THE
CONSUMERS ARE WILLING AND ABLE TO BUY.
LAW OF DEMAND
ALL OTHER THINGS REMAINING CONSTANT (CETERIS
PARIBUS), PRICE AND QUANTITY DEMANDED ARE
INVERSELY PROPORTIONAL.
LAW OF DEMAND
AS THE PRICE OF THE COMMODITY INCREASES, ITS
QUANTITY DEMANDED DECREASES.
THERE IS A NEGATIVE RELATIONSHIP BETWEEN PRICE
AND QUANTITY DEMANDED.
CETERIS PARIBUS
LAT.: HOLDS OTHER VARIABLES CONSTANT
THREE FORMS OF REPRESENTATION OF DEMAND
1. DEMAND SCHEDULE A TABULAR REPRESENTATION SHOWING THE
PRICE AND QUANTITY DEMANDED FOR A PARTICULAR GOOD.
THIS SCHEDULE SHOWS THE DIFFERENT QUANTITIES OF GOOD X
THAT WILL BE BOUGHT BY BUYERS AT EACH OF THE GIVEN PRICE IF
THEY ONLY HAVE PHP 6,000.00
PRICE (PHP) QUANTITY DEMANDED (KGS)

100 60
150 40
200 30
300 20
500 12
DEMAND SCHEDULE OF GOOD X (PER KG)

2. DEMAND CURVE SHOWS RELATIONSHIP BETWEEN PRICE AND
QUANTITY SUPPLIES.
. THE GRAPHICAL PRESENTATION OF THE DEMAND SCHEDULE.
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
IT SLOPES DOWNWARD WHICH IMPLIES THAT THAT THERE IS AN

INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY
DEMANDED.
QUANTITY SUPPLIES.
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
THE NEGATIVE SLOPE OF THE DEMAND CURVE COMES FROM
THE FACT THAT WHEN PRICE DECREASES, THE QUANTITY
DEMANDED INCREASES. THIS IS DUE TO INCOME EFFECT.
WHEN THE PRICE OF GOOD CHANGES, THIS CHANGE WILL
AFFECT THE CONSUMERS REAL INCOME
QUANTITY SUPPLIES.
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
REAL INCOME IS OBTAINED FROM HIS MONEY INCOME.
INCREASE IN PURCHASING POWER MEANS AN INCREASE IN QUANTITY
DEMANDED FOR GOODS AND SERVICES
IF A GOOD BECOME MORE EXPENSIVE, THE REAL INCOME OF THE
CONSUMERS SUFFERS AND LESSENS THEIR PURCHASING POWER.
QUANTITY SUPPLIES.
500
400
PRICE
300
200
100
12 20 30 40 60
QUANTITY
TO COPE WITH THIS PRICE INCREASE, THE CONSUMERS BUY LESS OF
THAT GOOD.
THE OPPOSITE HAPPENS WHEN THE PRICE OF CERTAIN GOOD
DECREASES. IN THIS CASE, THE CONSUMERS REAL INCOME
INCREASES AND THEY CAN BUY MORE OF THAT GOOD.
CHANGES BROUGHT BY PRICE FACTOR
MOVEMENT ALONG THE DEMAND CURVE/CHANGE IN QUANTITY DEMANDED.
THIS WILL HAPPEN IF THE PRICE FACTOR HAS BEEN CHANGED.
THE PRICE OF GOOD X RISES FROM PHP 3 TO PHP 5. THE CHANGES OCCUR
BASED ON THE SITUATION THAT THE DEMAND CURVE REMAINS ITS
POSITION BUT THE POINT WILL MOVE ALONG THE CURVE AS SHOWN IN THE
FIGURE BELOW. THE POINT MOVES FROM POINT A TO POINT B. WHEN PRICE
OF COMMODITY X INCREASES, QUANTITY DEMANDED WILL DECREASE.
CASE NO. 2.1.: PANEL A -RICE
B
5
A
3
Qd
9 15
CHANGES BROUGHT BY PRICE FACTOR
MOVEMENT ALONG THE DEMAND CURVE/CHANGE IN QUANTITY DEMANDED.
THIS WILL HAPPEN IF THE PRICE FACTOR HAS BEEN CHANGED.
AS THE PRICE OF GOOD X DECREASES FROM PHP 5 TO PHP 3. THE
QUANTITY DEMANDED INCREASES FROM 9 TO 15. THE POINT MOVES
FROM POINT A TO POINT B. WHEN PRICE OF COMMODITY X DECREASES,
QUANTITY DEMANDED WILL INCREASE.
CASE NO. 2.1.: PANEL A - SARDINES
A
5
B
3
Qd
9 15
CHANGES BROUGHT BY NON-PRICE FACTOR
SHIFT OF THE DEMAND CURVE/CHANGE IN DEMAND
SHIFT OF THE DEMAND CURVE OCCURS WHEN THE NON-PRICE
FACTOR CHANGED. THE FOLLOWING ARE THE NON-PRICE
FACTORS THAT AFFECT THE DEMAND CURVE.
1. NUMBER OF BUYERS (POPULATION)
2. INCOME
3. TASTE AND PREFERENCE
4. EXPECTATION
5. RELATED PRODUCT
1. NUMBER OF BUYERS OR POPULATION.
. DEMAND IS THE RELATIONSHIP BETWEEN PRICE

AND QUANTITY DEMANDED BY ALL CONSUMERS
IN THE MARKET. IF THE NUMBER OF CONSUMERS
INCREASES, THEN DEMAND WILL ALSO INCREASE .
1. NUMBER OF BUYERS OR POPULATION
CASE NO. 2.2.
WHEN THE LATE 1990 COMES, MOST OF THE GOVERNMENT AGENCIES
AND SOME OF THE PRIVATE COMPANIES TOOK INTO CONSIDERATION
ADVANCED STUDIES AS ONE OF THE REQUIREMENTS TO PROMOTE AN
EMPLOYEE. WHAT HAPPENDED TO THE DEMAND OF GRADUATE
STUDIES SERVICES?
N.B.:
P
The demand curve shifts to the right because there are
additional potential customers who will enrol in the advanced
studies. The more enrolees who will enrol, the higher the
demand for the service.
PHP 20,000 D2
D1
Qd
100 150
2. INCOME.
. THE AMOUNT OF MONEY THAT THE INDIVIDUAL OR

HOUSEHOLD RECEIVES IN PROVIDING THE FACTORS OF
PRODUCTION.
2.1. DISPOSABLE INCOME PART OF INCOME USED BY
INDIVIDUAL TO PURCHASE THE GOODS AND SERVICES
THE INDIVIDUAL OR HOUSEHOLD NEEDED.
2.2. NON-DISPOSABLE INCOME PART OF INCOME THAT IS
NOT USED BY HOUSEHOLD OR INDIVIDUAL FOR THEIR
CONSUMPTION. IT IS THAT PART OF INCOME THAT IS
BEOING SAVED FOR FUTURE PURPOSES. SOMETIMES
IT BECOMES AN INVESTMENT OF HOUSEHOLD OR
INDIVIDUAL IN THE FUTURE.
DO YOU KNOW ABOUT SAVINGS AND
INVESTMETS?
DO YOU KNOW
THAT
MOST PEOPLE WANT TO SAVE BUT DONT KNOW HOWMOST
PEOPLE KNOW ONLY HOW TO SPEND.
SPEND WHAT YOU EARNED RULE: THE POVERTY

FORMULA
INCOME EXPENSES = SAVINGS INCOME EXPENSES = SAVINGS
10,000 10,000 = 00,000
10,000 12,000 = - 2,000
THE 10-20-70 RULE: THE PROSPERITY FORMULA

INCOME 10% (TITHES) 20% (SAVINGS) = EXPENSES
10,000 1,000 2,000 = 7,000
51.5 % SPEND AS 43.9 % SPEND 4.6 % SPEND
MUCH AS THEIR MORE THAN LESS THAN
INCOME THEIR INCOME THEIR INCOME
SOURCE: CONSUMER SURVEY 2012, BANGKO SENTRAL

NG PILIPINAS
DISCIPLINE YOURSELF TO LIVE BELOW YOUR

INCOME!
DO YOU KNOW ABOUT SAVINGS AND
INVESTMETS?
HOW ARE YOU DOING SO FAR?
10 300,000 3,000,000 ???

=
NO. OF YEARS AVERAGE TOTAL EARNED

SAVINGS
WORKED ANNUAL SALARY INCOME
HAD YOU SAVED REGULARLY IN THE LAST 5 OR 10

Income / YEARS 10
20 % 1 YEAR 5 YEARS
Month YEARS
5,000 1,000 12,000 60,000 120,000
10,000 2,000 24,000 120,000 240,000
36,000 360,000
15,000 3,000 180,000
480,000
20,000 4,000 48,000 240,000
720,000
30,000 6,000 72,000 360,000
1,200,00
50,000 10,000 120,000 600,000 0
A PENNY SAVED IS A PENNY EARNED. ( BENJAMIN

FRANKILIN )
2. INCOME.
REMEMBER:
THE CHANGES IN DISPOSABLE INCOME AFFECT THE CURRENT

DEMAND, BUT IF THE OVERALL INCOME INCREASES, IT IS MORE
LIKELY THAT THE DISPOSABLE INCOME WILL ALSO INCREASE.
2. INCOME.
. NORMAL GOOD IF THE DEMAND FOR THE COMMODITY

INCREASES AS THE INCOME (DISPOSABLE INCOME) ALSO
INCREASES. FOR EXAMPLE, GROCERIES AND SHOPPING
GOODS.
. INFERIOR GOOD IF THE DEMAND FOR THE COMMODITY

DECREASES AS THE INCOME OF INDIVIDUAL INCREASES.
FOR EXAMPLE, BARGAIN SALES GOODS, IMITATION
PRODUCTS AND OTHERS.
2. INCOME.
CASE NO. 2.3.
JOSEPH, A CARPENTER EARNS PHP 3,000 A MONTH. FROM HIS INCOME

HE USUALLY CONSUMES 25 KG OF RICE A MONTH AND 20 CANS OF
SARDINES EVERY MONTH. BUT HE WAS PROMOTED AS FOREMAN AND
HIS INCOME INCREASES TO PHP 5,000, HE IS NOW COMSUMING 30 KG
OF RICE PER MONTH AND 10 CAN OF SARDINES IN A MONTH.
IN THIS CASE, RICE IS A NORMAL GOOD FOR JOSEPH WHILKE

SARDINES ARE INFERIOR GOODS TO HIM.
2. INCOME
FIGURE 2.3. PANEL A - RICE
THE DEMAND CURVE BELOW SHOWS THE CHANGE IN THE DEMAND
CURVE FOR RICE AS INCOME (DISPOSABLE INCOME) OF JOSEPH
INCREASES. THE DEMAND CURVE SHIFTS TO THE RIGHT. AS WE CAN
OBSERVE IN THE GRAPH, THE DEMAND FOR RICE INCREASES FROM 25
TO 30 KGS EVEN IF THE PRICE OF RICE REMAINS AT 28. THIS IS THE
REASON WHY RICE IS CONSIDERED A NORMAL GOOD.
P
28 D2
D1
Qd
25 30
2. INCOME
FIGURE 2.3. PANEL B - SARDINES
THE DEMAND CURVE SHOWS THE CHANGE IN DEMAND CURVE OF
SARDINES. CONSIDERING THAT THE INCOME OF JOSEPH INCREASES,
THE DEMAND FOR SARDINES FROM 20 CANS TO 10 CANS. THE DEMAND
FOR SARDINES CHANGES EVEN IF THE PRICE OF SARDINE IS STILL 13.
THIS IS THE MASIN REASON WHY SARDINE IN THIS CASE IS
CONSIDERED AN INFERIOR GOOD.
P
13 D2
D1
Qd
10 20
3. TASTE AND PREFERNCE OF CONSUMER.
. THE BEHAVIOR OF CONSUMER WHICH IS AFFECTED BY WEATHER,
PERCEPTION, INFORMATION, OCCASION AMONG OTHERS.
CASE NO. 2.4.
WHAT WILL HAPPEN TO THE DEMAND OF HALO-HALO DURING

SUMMER? HOW ABOUT DURING RAINY SEASONS?
IN THIS SITUATION FOR EXAMPLE: WE PREFER HALO-HALO

DURING SUMMER WHILE DURING RAINY SEASONS, WE PREFER
NOT TO BUY IT. FOR THISD REASON, OUR TASTE AND
PREFERENCES IS BEING AFFECTED BY THE WEATHER
CONDITION.
3. TASTE AND PREFERENCE OF CONSUMER.
FIGURE 2.4. PANEL A - SUMMER
CURVE OF HALO-HALO WHEN THE SEASON CHANGE TO SUMMER. AS
MENTIONED EARLIER, DEMAND FOR HALO-HALO WILL INCREASE
BECAUSE WE PREFER IT DURING SUMMER. AN INDIVIDUAL MAY
CONSUME 10 ORDERS OF HALO-HALO A WEEK DURING SUMMER AND 3
ORDERS OF HALO-HALO IF NOT SUMMER.
P
20 D2
D1
Qd
3 10
3. TASTE AND PREFERENCE OF CONSUMER.
FIGURE 2.4. PANEL B - RAINY
HALO-HALO WHEN THE SEASON CHANGES TO RAINY SEASON. UNLIKE
THE FIRST PANEL, THE DEMAND CURVES SHIFTS TO THE LEFT
BECAUSE ONLY FEW WANTS HALO-HALO DURING RAINY DAYS. PLEASE
NOTE THAT EVEN IF THE PRICE DID NOT CHANGE, THE DEMAND FOR
HALO-HALO DECLINES FROM 7 TO 3.
P
20 D2
D1
Qd
3 7
4. EXPECTATION OF THE CONSUMER.
. IF PEOPLE EXPECT THE PRICE OF GOOD TO INCREASE, THEY
WILL WANT TO BUY IT MORE AT PRESENT BEFORE THE PRICE
INCREASES. CONVERSELY, IF THE PEOPLE EXPECT A PRICE TO
DECLINE, THEY WILL PURCHASE LESS OF THAT GOOD AT
PRESENT.
CASE NO. 2.5.
WHAT WILL HAPPEN TO THE DEMAND OF FLOWERS DURING

VALENTINES DAY? HOW ABOUT AFTER THE VALENTINES DAY?
FIGURE 2.5. PANEL A DURING VALENTINES DAY
CURVE OF FLOWERS DURING VALENTINES DAY. AS WE ALL KNOW,
MORE PEOPLE WILL PURCHASE FLOWER TO CELEBRATE THE
OCCASION. AT PRICE PHP 300 PER DOZEN OF FLOWERS, CONSUMERS
WILL INCREASE THEIR PURCHASES OF FLOWERS FROM 25 DOZENS TO
30 DOZENS.
P
PHP 300 D2
D1
Qd
25 30
FIGURE 2.5. PANEL A AFTER VALENTINES DAY

FLOWER AFTER THE VSALENTINES DAY. AT PRICE PHP 300 PER
DOZEN, CONSUMER WILL LESSEN THEIR PURCHASES FROM 30
DOZENS TO 25 DOZENS. THE DEMAND CURVE SHIFTS FROM RIGHT TO
LEFT.
P
PHP 300 D2
D1
Qd
25 30
5. PRICE OF RELATED COMMODITY.
. SUBSTITUTE GOODS ARE THOSE COMMODITIES WHICH
PERFORM THE SAME FUNCTION AND CAN SATISFY THE SAME
NEEDS AND WANTS. THESE GOOD ARE USED TO TAKE THE PLACE
OF ANOTHER GOOD. FOR EXAMPLE: BALLPEN OR PENCIL, SUGAR
OR HONEY, COFFEE OR TEAS, OMNUBUS SERVICES OR JEEP
SERVICES.
. COMPLEMENTARY GOODS ARE GOODS IN WHICH YOU

CONSUME IT ON HAND. THESE GOODS ARE CONSUMED
TOGETHER. FOR EXAMPLE: COFFEE AND SUGAR, SOCKS AND
SHOES, BELT AND PANTS, HOSPITAL SERVICES AND DOCTORS
FEES, DVD AND DVD PLAYER
CASE NO. 2.6.
THE FARE FOR OMNIBUS SERVICES INCREASES BY PHP 3.00 EACH.

WHAT WILL HAPPEN TO THE DEMAND OF JEEPNEY SERVICES?
IF WERE GOING TO ANALYZE, OMNIBUS SERVICES AND JEEPNEY

SERVICES PERFORM THE SAME FUNCTION THEREFORE OMNIBUS
SERVICES IS A SUBSTITUTE FOR JEEP SERVICES. IF THE PRICE OF
OMNIBUS SERVICES INCREASES, QUANTITY DEMANDED FOR OMNIBUS
SERVICES WILL DECREASE AND CONSUMERS OF OMNIBUS SERVICES
WILL SHIFT TO JEEPNEY SERVICES.
FIGURE 2.7. PANEL A OMNIBUS
N.B.:
THE DEMAND CURVE SHOWS THE CHANGE IN DEMAND OF
P
OMNIBUS SERVICES AS ITS PRICE INCREASES. BECAUSE THE
CHANGE THAT OCCURS IS BROUGHT BY THE PRICE OF
OMNIBUS, FROM POINT A THE QUANTITY DEMANDED FOR
B OMNIBUS SERVICES DECLINES FROM 15 TO 10, AND MOVE TO
40 POINT B AS ITS PRICE INCREASES FROM PHP 20 TO PHP 40.
A
20
Qd
10 15
FIGURE 2.7. PANEL B JEEPNEY
N.B.:
THE PANEL SHOWS THE CHANGES IN DEMAND CURVE IN
JEEPNEY SERVICES BROUGHT BY THE CHANGES IN DEMAND
CURVE IN OMNIBUS SERVICES. BECAUSE THE PRICE OF
JEEPNEY SERVICES DID NOT CHANGE , THEREFORE, THE
P DEMAND FOR JEEPNEY SERVICES INCREASES AND THE
DEMAND CURVE SHIFTS TO THE RIGHT.
10 D2
D1
Qd
100 200
IF THE CHANGES THAT OCCUR IS BROUGHT BY PRICE FACTOR,

CHANGE IN QUANTITY DEMANDED OR MOVEMENT ALONG THE
DEMAND CURVE OCCUR.
IF THE CHANGES THAT OCCUR ARE BROUGHT BY THE NON-PRICE

FACTORS, DEMAND CURVE WILL EITHER SHIFT TO THE RIGHT OR TO
THE LEFT; THIS IS CALLED CHANGE IN DEMAND OR SHIFT OF THE
DEMAND CURVE.
LESSON 2
THE LAW OF SUPPLY
SUPPLY
THE RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED
THE QUANTITY OF GOODS AND SERVICES THAT THE SELLERS
ARE WILLING AND ABLE TO SELL OR PRODUCE.
LAW OF SUPPLY
ALL OTHER THINGS REMAINING CONSTANT, PRICE AND
QUANTITY SUPPLIED ARE DIRECTLY PROPORTIONAL.
THERE IS A POSITIVE RELATIONSHIP BETWEEN PRICE AND

QUANTITY SUPPLIED.
THREE FORMS OF REPRESENTATION OF SUPPLY
1. SUPPLY SCHEDULE A TABULAR REPRESENTATION OF SUPPLY
SHOWING THE PRICE AND QUANTITY SUPPLIED OF A PARTICULAR
GOOD.
THIS SCHEDULE SHOWS THE DIFFERENT QUANTITIES OF GOOD X
THAT WILL BE SOLD AND PRODUCED BY SELLERS AT EACH OF THE
GIVEN PRICE.
PRICE (PHP) QUANTITY SUPPLIED (KGS)
500 1000
400 800
350 600
200 400
100 200
SUPPLY SCHEDULE FOR THE COMMODITY

2. SUPPLY CURVE A GRAPHICAL PRESENTATION OF THE SUPPLY
SCHEDULE SHOWING THE PRICE AND QUANTITY SUPPLIED OF A
PARTICULAR GOOD.
THIS IS UPWARD SLOPING TO THE RIGHT SHOWING A DIRECT
RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED.
THEREFORE, WHEN PRICE INCREASES IN THE Y AXIS, ITS QUANTITY

SUPPLIED ALSO INCREASES IN THE X AXIS.
2. SUPPLY CURVE.
IN THE FIGURE BELOW, AS PRICE INCREASES FROM PHP 100 TO PHP 500, ITS QUANTITY
SUPPLIED ALSO INCREASES FROM 200 TO 1,000 YARDS OF CLOTH. SELLERS ARE MORE WILLING
TO SELL IF THE PRICE IS HIGH AND THEY ARE NOT WILLING TO SELL IF THE PRICE IS LOW.
500
400
PRICE
350
200
100
0
200 400 600 800 1000
QUANTITY
CHANGES IN SUPPLY BROUGHT BY PRICE FACTOR
(MOVEMENT ALONG THE SUPPLY CURVE/CHANGE IN QUANTITY SUPPLIED)
CASE NO. 2.8.
THE PRICE OF CORN IN THE MARKET INCREASES. WHAT WILL HAPPEN TO THE SUPPLY OF CORN.
THE ANSWWER IS SHOWN IN THE FIGURE BELOW.
THIS FIGURE PRESENTS THE MOVEMENT ALONG
P THE SUPPLY CURVE AS THE PRICE OF THE CORN
S INCREASES. THIS CONNOTES THAT AS THE PRICE
OF THE CORN INCREASES, THE SELLERS ARE
MORE WILLING TO SELL CORN. AS THE PRICE
INCREASES FROM PHP 50 TO PHP 60 PER KG OF
B CORN, SELLERS ARE MORE WILLING TO SELL
60 CORN. THE QUANTITY SUPPLIED FOR CORN
INCREASES FROM 100 KGS TO 150 KGS OF CORN.
50 A THIS SHOWS THE DIRECT RELATIONSHIP
BETWEEN PRICE AND QUANTITY SUPPLIED. THE
Qs MOVEMENT OF SUPPLY CURVE FROM POINT A TO
POINT B SHOWS A MOVEMENT ALONG THE
100 150 SUPPLY CURVE OR CHANGE IN QUANTITY
SUPPLIED BROUGHT BY PRICE FACTOR.
CHANGES IN SUPPLY BROUGHT BY NON-PRICE FACTOR
(SHIFT OF THE SUPPLY CURVE / CHANGE IN SUPPLY)
SHIFT OF THE SUPPLY CURVE OCCURS WHEN THE NON-PRICE

FACTORS CHANGED.
THE FOLLOWING ARE THE NON-PRICE FACTORS THAT AFFECT THE

SUPPLY CURVE.
1. TECHNOLOGY.
2. COST OF PRODUCTION.
3. NUMBER OF SELLERS.
4. WEATHER.
5. TAXES AND SUBSIDIES.
1. TECHNOLOGY THIS REFERS TO TECHNIQUES OR METHODS OF

PRODUCTION.
MODERN TECHNOLOGY WHICH USES MODERN MACHINES INCREASES
SUPPLY OF GOODS.
TRADITIONAL TECHNOLOGY WHICH USES ANIMAL AND PEOPLE IS VERY
SLOW IN PRODUCING GOODS.
TECHNOLOGY REDUCES COST OF PRODUCTION, AND THIS ENCOURAGES
THE PRODUCERS TO INCREASE THEIR SUPPLY.
2. COST OF PRODUCTION TAKES INTO ACCOUNT THE PRICE OF RAW
MATERIALS WHICH ARE NEEDED TOGETHER WITH THE COST OF LABOR.
AS THE PRICE OF RAW MATERIALS OR THE SALARIES OF LABORERS
INCREASES, IT MEANS HIGHER COST OF PRODUCTION.
HIGHER COST OF PRODUCTION DECREASES SUPPLY BECAUSE THE
VIABILITY OR PROFITABILITY OF THE BUSINESS DECREASES.
GENERALLY, BUSINESSMEN ARE NOT WILLING TO OFFER MORE GOODS
IF THEY ARE NOT SURE OF PROFIT.
3. NUMBER OF SELLERS MORE SELLERS OR MORE FACTORIES

MEANS AN INCREASE IN SUPPLY. ON THE OTHER HAND, LESS
SELLERS OR LESS FACTORIES MEANS LESS SUPPLY.
4. WEATHER PRODUCTION OF GOODS ALSO DEPENDS ON WEATHER

CONDITIONS. A BUSINESS MAN WILL PRODUCE:
MORE SWEATERS DURING COLD SEASON
MORE UMBRELLAS DURING RAINY SEASON
MORE LIGHT CLOTHING MATERIALS AND WALKING SHORTS
DURING SUMMER
5. TAXES AND SUBSIDIES THIS REFERS TO THE POWER OF THE

GOVERNMENT TO INTERVENE IN THE MARKET THAT WILL AFFECT
THE SUPPLY. SOME OF THE GOVERNMENT ACTIONS ARE SUBSIDIES,
TAXES AND REGULATION.
. SUBSIDIES THE INCENTIVE GIVEN BY THE GOVERNMENT TO
MOTIVATE THE PRODUCER TO PROVIDE MORE PRODUCTS IN
THE MARKET. IF THE GOVERNMENT IMPOSES SUBSIDIES, THEN
THE SUPPLY FOR COMMODITY WILL INCREASE AND SUPPLY
CURVE SHIFT TO THE RIGHT.
. TAXES THE POWER OF THE GOVERNMENT TO IMPOSE A
CERTAIN PERCENTAGE TO PERSONS AND PROPERTY. IT IS SAID
THAT IT IS UNIVERSAL BECAUSE THE STATE CAN IMPOSE TAX.
CASE NO. 2.9.
A PHARMACIST CAN ONLY PRODUCE 1,000 TABLETS OF VITAMIN C A DAY WITH A SELLING PRICE OF 10
PESOS PER TABLET.
BUT BECAUSE HE ACQUIRED A MACHINE, HE CAN PRODUCE 5,000 TABLETS OF VITAMIN C A DAY.
WHAT IS THE CHANGE THAT OCCURS IN THE SUPPLY CURVE? HOW ABOUT IF AN EARTHQUAKE COMES AND
DESTROYS THE MACHINE AND THE BAKERY?
THIS FIGURE SHOWS THE CHANGE IN SUPPLY

P S1 CURVE AS PRODUCTIVITY CHANGES.
S2 THE SUPPLY CURVE SHIFTS TO THE RIGHT AS
THE PHARMACIST ACQUIRED MACHINE.
THIS IS SHOWN IN THE SHIFT OF THE SUPPLY

CURVE FROM S1 TO S2. THE PRICE DID NOT
CHANGE BUT THE SUPPLY OF VITAMIN C
INCREASES FROM 1,000 TO 5,000 TABLETS.
10
Qs
1000 5000
CASE NO. 2.9.
A PHARMACIST CAN ONLY PRODUCE 1,000 TABLETS OF VITAMIN C A DAY WITH A SELLING PRICE OF 10
PESOS PER TABLET.
BUT BECAUSE HE ACQUIRED A MACHINE, HE CAN PRODUCE 5,000 TABLETS OF VITAMIN C A DAY.
WHAT IS THE CHANGE THAT OCCURS IN THE SUPPLY CURVE? HOW ABOUT IF AN EARTHQUAKE COMES AND
DESTROYS THE MACHINE AND THE BAKERY?
P S2
S1 AS MACHINE AND THE BAKERY WERE DESTROYED BY
AN EARTHQUAKE, PRODUCTIVITY AND SUPPLY
DECLINE.
SUPPLY CURVE WILL SHIFT TO THE LEFT FROM S1
TO S2 AND THE SUPPLY DECREASES FROM 5,000
TO 500 TABLETS OF VITAMIN C A DAY.
10
Qs
500 5000
LESSON 3
THE MARKET EQUILIBRIUM
MARKET EQUILIBRIUM
TAKES PLACE AT THAT PRICE AND QUANTITY WHERE THE
SUPPLY AND DEMAND ARE IN BALANCE.
TAKES PLACE WHERE QUANTITY SUPPLIED AND
QUANTITY DEMANDED ARE EQUAL.
IT MEANS THAT THE AMOUNT THAT BUYERS WANT TO PAY
IS JUST EQUAL TO THE AMOUNT THAT SELLERS WANT TO
SELL.
SUPPLY AND DEMAND SCHEDULE INDICATING EQUILIBRIUM
PRICE AND EQUILIBRIUM QUANTITY
QUANTITY SUPPLIED PRICE QUANTITY DEMANDED

5 6 9
6 7 8
7 8 7
8 9 6
9 10 5
10 11 4
EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY
ESTABLISHED BY INTERACTION
BETWEEN DEMAND AND SUPPLY
PRICE
12
11
10 S
SURPLUS
Pe 8
SHORTAGE
D
6
4
2
QUANTITY
0
1 2 3 4 5 6 7 8 9 10
Qe
PRICE
12
11
10 S
SURPLUS
Pe 8
SHORTAGE D
6
4
2
QUANTITY
0
1 2 3 4 5 6 7 8 9 10
Qe
PRICE
12
11
10 S
SURPLUS
Pe 8
SHORTAGE D
6
4 S D
2
QUANTITY
0
1 2 3 4 5 6 7 8 9 10
Qe
SHIFT IN SUPPLY CURVE CHANGES EQUILIBRIUM
PRICE LET US ASSUME THAT THE DEMAND CURVE IS CONSTANT AND THE
11 SUPPLY CURVE SHIFTED TO THE RIGHT DUE TO THE PRODUCERS USE
OF MODERN TECHNOLOGY.
10
9
QS
8
7
6
5
4
3
2 QD
1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1 Qe2
SHIFT IN SUPPLY CURVE CHANGES EQUILIBRIUM
PRICE LET US ASSUME THAT THE DEMAND CURVE IS CONSTANT AND THE
11 SUPPLY CURVE SHIFTED TO THE RIGHT DUE TO THE PRODUCERS USE
OF MODERN TECHNOLOGY.
10
9
8 S1
S2
7
6 NOTE THAT THE MARKET PRICE
5 HAS BEEN REDUCED FROM P5
TO P4 WITH DEMAND BEING
4
CONSTANT AT 5.
3
2
QD
1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1 Qe2
SHIFT IN DEMAND CURVE CHANGES EQUILIBRIUM
PRICE INCREASE IN INCOME INCREASES DEMAND
11 FOR GOODS AND SERVICES. DEMAND CURVE
SHIFTS TO THE RIGHT TO SHOW AN
10
INCREASE IN DEMAND.
9
8
7 D1
6
5
4
3
2
1 Q1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1
SHIFT IN DEMAND CURVE CHANGES EQUILIBRIUM
PRICE INCREASE IN INCOME INCREASES DEMAND
11 FOR GOODS AND SERVICES. DEMAND CURVE
SHIFTS TO THE RIGHT TO SHOW AN
10
INCREASE IN DEMAND.
9
8
D2
7 D1
6
5 WITH A CONSTANT SUPPLY, AN
INCREASE IN DEMAND ALSO
4 INCREASES MARKET
3 EQUILIBRIUM PRICE.
2
Q2
1 Q1
QUANTITY
0 1 2 3 4 5 6 7 8 9 10
Qe1 Qe2
HYPOTHETICAL SHIFT IN THE MARKET DEMAND
AND MARKET SUPPY CURVES OF BETADINE
PRICE (P/GRAM) LET US SUPPOSE THAT THERE IS AN EQUAL
INCREASE IN THE DEMAND FOR BETADINE AND THE
3.00
SUPPLY OF BETADINE, WHAT WILL BE THE
EQUILIBRIUM PRICRE AND EQUILIBRIUM QUANTITY?
2.50
BOTH THE DEMAND AND SUPPLY
CURVES SHOW A RIGHTWARD
2.00 SHIFT. SINCE THE INCREASE IN
DEMAND IS PROPORTIONAL TO
THE INCREASE IN SUPPLY, THE
1.50
EQUILIBRIUM PRICE IS
MAINTAINED.
1.00 HOWEVER, THE EQUILIBRIUM
QUANTITY HAS INCREASED
FROM Qe1 TO Qe2.
.50
Q (IN GRAMS)
0 30 60 90 120 150 180
Qe1 Qe2
LESSON 4
ELASTICITY OF DEMAND AND SUPPLY
PRICE ELASTICITY OF DEMAND
THE NATURAL AND VARIED REACTION OR AN INCLINATION
OF BUYERS TO WILLINGLY AND TO BE ABLE TO PURCHASE
MORE GOODS AND SERVICES AT LOWER PRICES THAN AT
HIGHER PRICES.
PRICE ELASTICITY OF SUPPLY

THE NATURAL AND VARIED REACTION OR AN INCLINATION
OF PRODUCERS OR SELLERS TO SELL MORE GOODS AND
SERVICES WHEN PRICES ARE HIGHER.
OTHER CONCEPTS OF ELASTICITY
ELASTICITY
A MEASURE USED IN RESPONSE TO CHANGES IN THE
DETERMINANTS OF DEMAND AND SUPPLY.
PRICE ELASTICITY
A MEASURE USED IN DETERMINING THE PERCENTAGE CHANGE
IN QUANTITY AGAINST THE PERCENTAGE CHANGE IN PRICE.
INCOME ELASTICITY
THE PERCENTAGE CHANGE IN QUANTITY COMPARED TO THE
PERCENTAGE CHANGE IN INCOME
CROSS ELASTICITY
THE PERCENTAGE CHANGE IN QUANTITY OF ONE GOOD
COMPARED TO THE PERCENTAGE CHANGE IN THE PRICE OF
RELATED GOODS.
REFERS TO THE DEGREE OF REACTION OR RESPONSE OF THE
BUYERS TO CHANGES IN PRICE OF GOODS AND SERVICES.
BUYERS TEND TO REDUCE THEIR PURCHASES AS PRICE
INCREASES AND TEND TO INCREASE THEIR PURCHASES AS
PRICE FALLS.
PRICE /KG. (RICE) QUANTITY DEMANDED (KGS)
P1 16.00 Qd1 100,000
P2 16.50 Qd2 97,000
pe = Qd2 Qd1 Qd1 pe = 97,000 100,000 100,000 pe = - 0.03 pe = 1

P2 P1 P1 16.50 16.00 16.00 0.03
NOTE: THE MATHEMATICAL PRESENTATION OF PRICE ELASTICITY OF

DEMAND HAS A NEGATIVE SIGN. THIS IS DUE TO THE INVERSE
RELATIONSHIP OF PRICE AND QUANTITY DEMANDED. DISREGARD THE
SIGN.
REFERS TO THE DEGREE OF REACTION OR RESPONSE OF THE
BUYERS TO CHANGES IN PRICE OF GOODS AND SERVICES.
BUYERS TEND TO REDUCE THEIR PURCHASES AS PRICE
INCREASES AND TEND TO INCREASE THEIR PURCHASES AS
PRICE FALLS.
PRICE /KG. (RICE) QUANTITY DEMANDED (KGS)
P1 4 Qd1 100
P2 5 Qd2 80 / 60
pe = Qd2 Qd1 Qd1 pe = 80 100 100 pe = - 0.2 pe = 0.8

P2 P1 P1 544 0.25
pe = 60 100 100 pe = - 0.4 pe = 1.6

544 0.25
TYPES OF ELASTICITY
TYPES DESCRIPTION COEFFICIENT OF ELASTICITY
PERCENTAGE CHANGE IN PRICE

LEADS TO A PROPORTIONATELY
1. ELASTIC GREATER THAN 1
GREATER PERCENTAGE CHANGE IN
QUANTITY DEMANDED
A PERCENTAGE CHANGE IN PRICE

RESULTS IN A PROPORTIONATELY
2. INELASTIC LESS THAN 1
GREATER PERCENTAGE CHANGE IN
QUANTITY DEMANDED.
A PERCENTAGE CHANGE IN PRICE

LEADS TO A PROPORTIONATELY
3. UNITARY EQUAL TO 1
EQUAL PERCENTAGE CHANGE IN
QUANTITY DEMANDED.
PERCENTAGE CHANGE IN QUANTITY

4. PERFECTLY ELASTIC NIL
DEMANDED CAN CHANGE INFINITELY.
PERCENTAGE CHANGE IN PRICE

5. PERFECTLY
CREATES NO CHANGE IN QUANTITY ZERO
INELASTIC
DEMANDED.
DEMAND CURVES AND THEIR ELASTICITY
P1 P1
P2 P2
Qd1 Qd2 Qd1 Qd2
A) INELASTIC B) ELASTIC
P
P1
P2
D
Qd1 Qd2
C) UNITARY D) PERFECTLY ELASTIC

P
D) PERFECTLY INELASTIC
THE RESPONSE OF QUANTITY OFFERED FOR SALE FOR EVERY
CHANGE IN PRICE.
es = Qs2 Qs1 Qs1
P2 P1 P1
PRICE /KG. (RICE) QUANTITY SUPPLIED (PER UNIT)

P1 12.00 Qs1 38
P2 21.00 Qs2 56
es = Qs2 Qs1 Qs1 es = 56 38 38 es = -0.47 es = 0.62

P2 P1 P1 21.00 12.00 12.00 0.75
NOTE: THE COEFFICIENT OF PRICE ELASTICITY OF SUPPLY IS POSITIVE

BECAUSE OF THE DIRECT PROPORTIONALITY OF PRICE AND QUANTITY
SUPPLIED.
CHANGE IN PRICE.
es = Qs2 Qs1 Qs1
P2 P1 P1

P1 12.00 Qs1 38
P2 21.00 Qs2 56
es = Qs2 Qs1 Qs1 es = 56 38 38 es = -0.47 es = 0.62

P2 P1 P1 21.00 12.00 12.00 0.75
WHAT DOES 0.62 MEAN?

THIS MEANS THAT FOR EVERY ONE PERCENT (1%) INCREASE IN THE PRICE,
QUANTITY SUPPLIED WILL INCREASE BY 0.62 OR BY 62%.
CHANGE IN PRICE.
es = Qs2 Qs1 Qs1
P2 P1 P1

P1 12.00 Qs1 38
P2 21.00 Qs2 56
es = Qs2 Qs1 Qs1 es = 56 38 38 es = -0.47 es = 0.62

P2 P1 P1 21.00 12.00 12.00 0.75
SUPPLY CURVE ALSO EXHIBITS DIFFERENT ELASTICITIES DEPENDING UPON ITS

PRICE ELASTICITY COEFFICIENTS.
IF IT IS GREATER THAN 1, THE SUPPLY CURVE IS ELASTIC.
IF IT IS LESS THAN 1, THE SUPPLY CURVE IS INELASTIC.
INCOME ELASTICITY
MEASURES A PRODUCTS PERCENTAGE CHANGE IN QUANTITY AS A RATIO OF THE
PERCENTAGE CHANGE IN INCOME WHICH CAUSED THE CHANGE IN QUANTITY.
ey= Qd2 Qd1 Qd1

Y2 Y1 Y1
INCOME QUANTITY DEMANDED
Y1 1,000 Qd1 200
Y2 2,000 Qd2 800
ey = Qd2 Qd1 Qd1 ey = 800 200 200 ey = 3 ey = 3

Y2 Y1 Y1 2,000 1,000 1,000 1
FOR EVERY ONE PERCENT (1%) INCREASE IN INCOME QUANTITY DEMANDED WILL INCREASE BY
300%
IF QUANTITY DEMANDED IS GREATER THAN 1 INCOME IS ELASTIC AND THE GOOD IS SUPERIOR.
IF QUANTITY DEMANDED IS LESSER THAN 1 INCOME IS INELASTIC AND THE GOOD IS INFERIOR.
IF IT IS EQUAL TO 1 , IT IS UNITARY AND THE GOOD IS NORMAL.
CROSS ELASTICITY
THE COEFFICIENT OF CROSS ELASTICITY OF DEMAND RELATES A PERCENTAGE
CHANGE IN QUANTITY DEMANDED OF GOOD A IN RESPONSE TO A PERCENTAGE
CHANGE IN THE PRICE OF GOOD B.
ec= QA2 QA1 QA1

PB2 PB1 PB1
PRICE OF GOOD B QUANTITY DEMANDED OF GOOD A
PB1 10.00 QA1 500
PB2 15.00 QA2 600
ec= QA2 QA1 QA1 ec= 600 500 500 ec= 0.2 ec = 0.4
PB2 PB1 PB1 15.00 10.00 10.00 0.5
FOR EVERY ONE PERCENT (1%) INCREASE IN THE PRICE OF GOOD B QUANTITY DEMANDED OF
GOOD A WILL INCREASE BY 40%.
GOODS A AND B MAY BE RELATED IN 2 WAYS: SUBSTITUTES AND COMPLEMENTS.
IF THE COEFFICIENT OF CROSS ELASTICITY IS POSITIVE, GOODS A AND B ARE SUBSTITUTES.
AN INCREASE IN THE PRICE OF GOOD B WILL CAUSE CONSUMERS TO PURCHASE MORE OF GOODS
A, THE SUBSTITUTE GOOD, THUS CAUSING THE QUANTITY OF GOOD A TO INCREASE.
CROSS ELASTICITY
THE COEFFICIENT OF CROSS ELASTICITY OF DEMAND RELATES A PERCENTAGE
CHANGE IN QUANTITY DEMANDED OF GOOD A IN RESPONSE TO A PERCENTAGE
CHANGE IN THE PRICE OF GOOD B.
ec= QA2 QA1 QA1

PB2 PB1 PB1
PRICE OF GOOD B QUANTITY DEMANDED OF GOOD A
PB1 10.00 QA1 500
PB2 15.00 QA2 600
ec= QA2 QA1 QA1 ec= 600 500 500 ec= 0.2 ec = 0.4
PB2 PB1 PB1 15.00 10.00 10.00 0.5
ON THE OTHER HAND, IF THE CROSS ELASTICITY IS NEGATIVE, GOODS A AND B ARE COMPLEMENTS
AND ARE USED TOGETHER.
IF THE PRICE OF GOOD B INCREASES, THE DEMAND FOR GOODS B AND A DECREASES.
1. DEFINE THE FOLLOWING:
1.1. LAW OF DEMAND
1.2. LAW OF SUPPLY
1.3. MARKET EQUILIBRIUM
2. HOW SHALL THE DEMAND CURVE MOVE BASED ON:

2.1. THE PRICE FASCTOR?
2.2. THE NON-PRICE FACTOR?
3. HOW SHALL THE SUPPLY CURVE MOVE BASED ON:

1. DEFINE THE FOLLOWING:
1.1. LAW OF DEMAND
1.2. LAW OF SUPPLY
2. HOW SHALL THE DEMAND CURVE MOVE BASED ON:

2.1. THE PRICE FACTOR?
3. HOW SHALL THE SUPPLY CURVE MOVE BASED ON:


CHAPTER 5 - Basics of Demand and Supply

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CHAPTER 5 - Basics of Demand and Supply

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BASIC OF DEMAND AND SUPPLY

PRICE (PHP) QUANTITY DEMANDED (KGS)

DEMAND SCHEDULE OF GOOD X (PER KG)

IT SLOPES DOWNWARD WHICH IMPLIES THAT THAT THERE IS AN

. DEMAND IS THE RELATIONSHIP BETWEEN PRICE

. THE AMOUNT OF MONEY THAT THE INDIVIDUAL OR

SPEND WHAT YOU EARNED RULE: THE POVERTY

THE 10-20-70 RULE: THE PROSPERITY FORMULA

SOURCE: CONSUMER SURVEY 2012, BANGKO SENTRAL

DISCIPLINE YOURSELF TO LIVE BELOW YOUR

10 300,000 3,000,000 ???

NO. OF YEARS AVERAGE TOTAL EARNED

HAD YOU SAVED REGULARLY IN THE LAST 5 OR 10

A PENNY SAVED IS A PENNY EARNED. ( BENJAMIN

THE CHANGES IN DISPOSABLE INCOME AFFECT THE CURRENT

. NORMAL GOOD IF THE DEMAND FOR THE COMMODITY

. INFERIOR GOOD IF THE DEMAND FOR THE COMMODITY

JOSEPH, A CARPENTER EARNS PHP 3,000 A MONTH. FROM HIS INCOME

IN THIS CASE, RICE IS A NORMAL GOOD FOR JOSEPH WHILKE

WHAT WILL HAPPEN TO THE DEMAND OF HALO-HALO DURING

IN THIS SITUATION FOR EXAMPLE: WE PREFER HALO-HALO

WHAT WILL HAPPEN TO THE DEMAND OF FLOWERS DURING

THE DEMAND CURVE SHOWS THE CHANGE IN DEMAND CURVE OF

. COMPLEMENTARY GOODS ARE GOODS IN WHICH YOU

THE FARE FOR OMNIBUS SERVICES INCREASES BY PHP 3.00 EACH.

IF WERE GOING TO ANALYZE, OMNIBUS SERVICES AND JEEPNEY

IF THE CHANGES THAT OCCUR IS BROUGHT BY PRICE FACTOR,

IF THE CHANGES THAT OCCUR ARE BROUGHT BY THE NON-PRICE

THERE IS A POSITIVE RELATIONSHIP BETWEEN PRICE AND

SUPPLY SCHEDULE FOR THE COMMODITY

THEREFORE, WHEN PRICE INCREASES IN THE Y AXIS, ITS QUANTITY

CASE NO. 2.8.

SHIFT OF THE SUPPLY CURVE OCCURS WHEN THE NON-PRICE

THE FOLLOWING ARE THE NON-PRICE FACTORS THAT AFFECT THE

1. TECHNOLOGY THIS REFERS TO TECHNIQUES OR METHODS OF

3. NUMBER OF SELLERS MORE SELLERS OR MORE FACTORIES

4. WEATHER PRODUCTION OF GOODS ALSO DEPENDS ON WEATHER

5. TAXES AND SUBSIDIES THIS REFERS TO THE POWER OF THE

THIS FIGURE SHOWS THE CHANGE IN SUPPLY

THIS IS SHOWN IN THE SHIFT OF THE SUPPLY

QUANTITY SUPPLIED PRICE QUANTITY DEMANDED

PRICE ELASTICITY OF SUPPLY

pe = Qd2 Qd1 Qd1 pe = 97,000 100,000 100,000 pe = - 0.03 pe = 1

NOTE: THE MATHEMATICAL PRESENTATION OF PRICE ELASTICITY OF

pe = Qd2 Qd1 Qd1 pe = 80 100 100 pe = - 0.2 pe = 0.8

pe = 60 100 100 pe = - 0.4 pe = 1.6

PERCENTAGE CHANGE IN PRICE

A PERCENTAGE CHANGE IN PRICE

A PERCENTAGE CHANGE IN PRICE

PERCENTAGE CHANGE IN QUANTITY

PERCENTAGE CHANGE IN PRICE

Qd1 Qd2 Qd1 Qd2

C) UNITARY D) PERFECTLY ELASTIC

PRICE /KG. (RICE) QUANTITY SUPPLIED (PER UNIT)

es = Qs2 Qs1 Qs1 es = 56 38 38 es = -0.47 es = 0.62

NOTE: THE COEFFICIENT OF PRICE ELASTICITY OF SUPPLY IS POSITIVE

PRICE /KG. (RICE) QUANTITY SUPPLIED (PER UNIT)

es = Qs2 Qs1 Qs1 es = 56 38 38 es = -0.47 es = 0.62

WHAT DOES 0.62 MEAN?

PRICE /KG. (RICE) QUANTITY SUPPLIED (PER UNIT)

es = Qs2 Qs1 Qs1 es = 56 38 38 es = -0.47 es = 0.62

SUPPLY CURVE ALSO EXHIBITS DIFFERENT ELASTICITIES DEPENDING UPON ITS

ey= Qd2 Qd1 Qd1