Managerial Economics

Adapted from Various Authors

JEREMIAH EDISON CARAGA NICART, CPA

CHRISTIAN DIO LUMAGOD, CPA

Module 2

Demand and Supply

This part aims to give an understanding on the definition, scope and importance of
Demand, Supply, and Market Equilibrium.

1.1. Learning Objectives

a) To define demand and supply.

b) To identify demand and supply relationship.
c) To outline demand and supply curve.
d) To describe market equilibrium.
e) To present demand-supply analysis through graphical and other presentation.

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1.2. Supply, Demand, and Equilibrium

Supply and demand, in economics, relationship between the quantity of a commodity that
producers wish to sell at various prices and the quantity that consumers wish to buy. It is
the main model of price determination used in economic theory. The price of a commodity
is determined by the interaction of supply and demand in a market. The resulting price is
referred to as the equilibrium price and represents an agreement between producers and
consumers of the good. In equilibrium the quantity of a good supplied by producers equals
the quantity demanded by consumers (Encyclopædia Britannica, inc., 2019).

Fig. 1. Relationship of price to supply and demand. Illustration of the relationship of

price to supply (S) and demand (D). From “Supply and Demand,” by Encyclopædia
Britannica, Inc., https://www.britannica.com/topic/supply-and-demand.

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1.2.1. The Demand Theory

Demand theory is an economic principle relating to the relationship between consumer

demand for goods and services and their prices in the market. Demand theory forms the
basis for the demand curve, which relates consumer desire to the amount of goods
available. As more of a good or service is available, demand drops and so does the
equilibrium price (Hayes, A., 2019).

Demand theory highlights the role that demand plays in price formation, while supply-side
theory favors the role of supply in the market (Hayes, A., 2019).

Demand is simply the quantity of a good or service that consumers are willing and able to
buy at a given price in a given time period. People demand goods and services in an
economy to satisfy their wants, such as food, healthcare, clothing, entertainment, shelter,
etc. The demand for a product at a certain price reflects the satisfaction that an individual
expects from consuming the product. This level of satisfaction is referred to as utility and
it differs from consumer to consumer. The demand for a good or service depends on two
factors: (1) its utility to satisfy a want or need, and (2) the consumer’s ability to pay for the
good or service. In effect, real demand is when the readiness to satisfy a want is backed up
by the individual’s ability and willingness to pay (Hayes, A., 2019).

The market system is governed by the laws of supply and demand, which determine the
prices of goods and services. When supply equals demand, prices are said to be in a state
of equilibrium. When demand is higher than supply, prices increase to reflect scarcity.
Conversely, when demand is lower than supply, prices fall due to the surplus (Hayes, A.,
2019).

1.2.1.2. Law of Demand

The law of demand introduces an inverse relationship between price and demand for a good
or service. It simply states that as the price of a commodity increases, demand decreases,
provided other factors remain constant. Also, as the price decreases, demand increases
(Hayes, A., 2019). If the price increases, people buy less. The reverse is also true. If the
price drops, people buy more. But price is not the only determining factor. The law of
demand is only true if all other determinants don't change (Amadeo, K., 2019).

1.2.1.3. Determinants of Demand

1. Price

The law of demand states that when prices rise, the quantity of demand falls. That
also means that when prices drop, demand will grow. People base their purchasing
decisions on price if all other things are equal. If the quantity demanded responds
a lot to price, then it's known as elastic demand. If demand doesn't change much,
regardless of price, that's inelastic demand (Amadeo, K., 2020).

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2. Income

When income rises, so will the quantity demanded. When income falls, so will
demand. But if your income doubles, you won't always buy twice as much of a
particular good or service. There's only so many pints of ice cream you'd want to
eat, no matter how wealthy you are, and this is an example of "marginal utility."
Marginal utility is the concept that each unit of a good or service is a little less
useful to you than the first. At some point, you won’t want it anymore, and the
marginal utility drops to zero (Amadeo, K., 2020).

3. Prices of related goods or services

The price of complementary goods or services raises the cost of using the product
you demand, so you'll want less. For example, when gas prices rose to $4 a gallon
in 2008, the demand for gas-guzzling trucks and SUVs fell. Gas is a
complementary good to these vehicles. The cost of driving a truck rose along with
gas prices. The opposite reaction occurs when the price of a substitute rises. When
that happens, people will want more of the good or service and less of its
substitute. That's why Apple continually innovates with its iPhones and iPods. As
soon as a substitute, such as a new Android phone, appears at a lower price, Apple
comes out with a better product. Then the Android is no longer a substitute.
(Amadeo, K., 2020).

4. Tastes

When the public’s desires, emotions, or preferences change in favor of a product,

so does the quantity demanded. Likewise, when tastes go against it, that depresses
the amount demanded. Brand advertising tries to increase the desire for consumer
goods (Amadeo, K., 2020).

5. Expectations

When people expect that the value of something will rise, they demand more of it
(Amadeo, K., 2020).

Expectations of consumers also influence consumers’ decisions to purchase goods

and services. More specifically, consumers’ expectations about the future price of
a commodity can change their current purchasing decisions. If consumers expect
the price to be higher in a future period, demand will probably rise in the current
period. On the other hand, expectations of a price decline in the future will cause
some purchases to be postponed—thus demand in the current period will fall
(Thomas, C. & Maurice, S. C., 2016).

6. Number of buyers in the market

The number of consumers affects overall, or “aggregate,” demand. As more

buyers enter the market, demand rises (Amadeo, K., 2020).

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 An increase in the number of consumers in the market will increase the demand
for a good, and a decrease in the number of consumers will decrease the demand
for a good, all other factors held constant (Thomas, C. & Maurice, S. C., 2016).

1.2.1.4. Demand Function

The general form of the demand function in terms of price and quantity demanded is:

𝑄𝑑 = 𝑓(𝑃, 𝑀, 𝑃𝑅, 𝑇, 𝑃𝐸 , 𝑁)

𝑓 means “is a function of.”

𝑄𝑑 is the quantity demanded.
𝑃 is the price of goods or services.
𝑀 is the consumer’s income.
𝑃𝑅, is the price of the related goods or services.
𝑇 is the taste patterns of the consumers.
𝑃𝐸 is price expected price of the good in some future period.
𝑁 is the number of consumers in the market.

However, the demand function can be expressed in linear form:

𝑄𝑑 = (𝑎 + 𝑏𝑃 + 𝑐𝑀 + 𝑑𝑃𝑅 + 𝑒𝑇 + 𝑓𝑃𝐸 + 𝑔𝑁)

where 𝑄𝑑, 𝑃, 𝑀, 𝑃𝑅 , 𝑇, 𝑃𝐸 , and 𝑁 are as defined above, and a, b, c, d, e, f, and g are

parameters. The intercept parameter a shows the value of 𝑄𝑑 when the variables, 𝑃, 𝑀, 𝑃𝑅 ,
𝑇, 𝑃𝐸 , and 𝑁 are all simultaneously equal to zero. The other parameters, b, c, d, e, f, and g,
are called slope parameters: They measure the effect on quantity demanded of changing
one of the variables 𝑃, 𝑀, 𝑃𝑅 , 𝑇, 𝑃𝐸 , or 𝑁 while holding the rest of these variables constant.
The slope parameter b, for example, measures the change in quantity demanded per unit
change in price; that is, 𝑏 = ∆𝑄𝑑 /∆𝑃. As stressed earlier, 𝑄𝑑 and 𝑃 are inversely related,
and b is negative because ∆𝑄𝑑 and ∆𝑃 have opposite algebraic signs (Thomas, C. &
Maurice, S. C., 2016).

The slope parameter c measures the effect on the amount purchased of a one-unit change
in income (𝑐 = ∆𝑄𝑑 / ∆𝑀). For normal goods, sales increase when income rises, so c is
positive. If the good is inferior, sales decrease when income rises, so c is negative. The
parameter d measures the change in the amount consumers want to buy per unit change in
𝑃𝑅 (𝑑 = ∆𝑄𝑑 /∆𝑃𝑅 ). If an increase in 𝑃𝑅 causes sales to rise, the goods are substitutes and
d is positive. If an increase in 𝑃𝑅 causes sales to fall, the two goods are complements and
d is negative. Since 𝑇, 𝑃𝐸 , and 𝑁 are each directly related to the amount purchased, the
parameters e, f, and g are all positive (Thomas, C. & Maurice, S. C., 2016).

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Illustration: Suppose the income of the consumer is PhP 25,000 and the price of related
good is PhP 40 and the demand function for product ZXQ is

𝑄𝑑 = 1,000 − 10𝑃 + 0.02𝑀 − 10𝑃𝑅

𝑄𝑑 = 1,000 − 10𝑃 + 0.02(25,000) − 10(40)
𝑄𝑑 = 1,000 − 10𝑃 + 500 − 400
𝑄𝑑 = 1,100 − 10𝑃

1,000 shows the value of 𝑄𝑑 when the variables 𝑃, 𝑀, 𝑃𝑅 , 𝑇, 𝑃𝐸 , and 𝑁 are all
simultaneously equal to zero.

1,100 is the amount of the good consumers would demand if price is zero. -10P is the slope
of the demand function indicating that for every peso increase in price, the quantity
demanded will decrease by 10 units.

If, for example, the price is PhP 20,

𝑄𝑑 = 1,100 − 10𝑃
𝑄𝑑 = 1,100 − 10(20)
𝑄𝑑 = 900

If, for example, the price is PhP 80,

𝑄𝑑 = 1,100 − 10𝑃
𝑄𝑑 = 1,100 − 10(80)
𝑄𝑑 = 300

Demand Schedule for Demand Function 𝑄𝑑 = 1,100 − 10𝑃:

Price in Php Quantity

Demanded
110 0
80 300
50 600
20 900
0 1,100

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Demand Curve for Demand Function 𝑄𝑑 = 1,100 − 10𝑃:

Fig. 2. Demand Curve based on Demand Schedule for Demand Function 𝑄𝑑 = 1,100 −
10𝑃 by Lumagod, C.

Suppose the income of the consumer increased and is now at PhP 30,000. The demand
function for product ZXQ would be

𝑄𝑑 = 1,200 − 10𝑃

Demand Schedule for Demand Function 𝑄𝑑 = 1,200 − 10𝑃:

Price in Php Quantity

Demanded
110 100
80 400
50 700
20 1,000
0 1,200

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Demand Curve for Demand Function 𝑄𝑑 = 1,200 − 10𝑃:

Fig. 3. Demand Curve based on Demand Schedule for Demand Function 𝑄𝑑 = 1,200 −
10𝑃 by Lumagod, C.

1.2.1.5. Demand Curve

The quantity of a commodity demanded depends on the price of that commodity and
potentially on many other factors, such as the prices of other commodities, the incomes
and preferences of consumers, and seasonal effects. In basic economic analysis, all factors
except the price of the commodity are often held constant; the analysis then involves
examining the relationship between various price levels and the maximum quantity that
would potentially be purchased by consumers at each of those prices. The price-quantity
combinations may be plotted on a curve, known as a demand curve, with price represented
on the vertical axis and quantity represented on the horizontal axis. A demand curve is
almost always downward-sloping, reflecting the willingness of consumers to purchase
more of the commodity at lower price levels. Any change in non-price factors would cause
a shift in the demand curve, whereas changes in the price of the commodity can be traced
along a fixed demand curve (Encyclopædia Britannica, inc., 2019).

The demand curve has a negative slope as it charts downward from left to right to reflect
the inverse relationship between the price of an item and the quantity demanded over a
period of time. An expansion or contraction of demand occurs as a result of the income
effect or substitution effect. When the price of a commodity falls, an individual can get the
same level of satisfaction for less expenditure, provided it’s a normal good. In this case,
the consumer can purchase more of the goods on a given budget. This is the income effect.
The substitution effect is observed when consumers switch from more costly goods to
substitutes that have fallen in price. As more people buy the good with the lower price,
demand increases (Hayes, A., 2019).

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Sometimes, consumers buy more or less of a good or service due to factors other than price.
This is referred to as a change in demand. A change in demand refers to a shift in the
demand curve to the right or left following a change in consumers’ preferences, taste,
income, etc. For example, a consumer who receives an income raise at work will have more
disposable income to spend on goods in the markets, regardless of whether prices fall,
leading to a shift to the right of the demand curve (Hayes, A., 2019).

Fig. 3. Increase in demand. Illustration of an increase in equilibrium price (p) and

equilibrium quantity (q) due to a shift in demand (D). From “Supply and Demand,” by
Encyclopædia Britannica, Inc., https://www.britannica.com/topic/supply-and-demand.

Demand curves are also used to show the relationship between quantity and price in
aggregate demand, which is the total demand in society (Amadeo, K., 2020).

If any determinants of demand other than the price change, the demand curve shifts. If
demand increases, the entire curve will move to the right. That means larger quantities will
be demanded at every price. If the entire curve shifts to the left, it means total demand has
dropped for all price levels (Amadeo, K., 2020).

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 Fig. 4. Demand Shift. From “Demand Curve,” by Julie Bang,
https://www.investopedia.com/terms/d/demand-curve.asp.

1.2.1.6. Normal Good vs. Inferior Good

A normal good is a good that experiences an increase in its demand due to a rise in
consumers' income. In other words, if there's an increase in wages, demand for normal
goods increases while conversely, wage declines or layoffs lead to a reduction in demand
(Kenton, W., 2019).

A normal good, also called a necessary good, doesn't refer to the quality of the good but
rather, the level of demand for the good in relation to wage increases or declines (Kenton,
W., 2019).

A normal good has an elastic relationship between income and demand for the good. In
other words, changes in demand and income are positively correlated or move in the same
direction. Income elasticity of demand measures the magnitude with which the quantity
demanded for a good changes in reaction to a change in income. It is used to understand
changes in consumption patterns that result from changes in purchasing power (Kenton,
W., 2019).

Inferior goods are the opposite of normal goods. Inferior goods are goods that see their
demand drop as consumers' incomes rise. In other words, as an economy improves and
wages rise, consumers would rather have a more costly alternative than inferior goods.
However, the term "inferior" doesn't refer to quality, but rather, affordability (Kenton, W.,
2019).

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In economics, the demand for inferior goods decreases as income increases or the economy
improves. When this happens, consumers will be more willing to spend on more costly
substitutes. Some of the reasons behind this shift may include quality or a change to a
consumer's socio-economic status. (Kenton, W., 2019).

1.2.1.7. Subtitutes vs. Complements

A substitute, or substitutable good, in economics and consumer theory refers to a product

or service that consumers see as essentially the same or similar-enough to another product.
Put simply, a substitute is a good that can be used in place of another. They provide more
choices for consumers, who are then better able to satisfy their needs (Hayes, A., 2020).

When consumers make buying decisions, substitutes provide them with alternatives.
Substitutes occur when there are at least two products that can be used for the same
purpose, such as an iPhone vs. an Android phone. For a product to be a substitute for
another, it must share a particular relationship with that good. Those relationships can be
close, like one brand of coffee with another, or somewhat further apart, such as coffee and
tea. Demand for substitute increases as the price of a good goes up. This is because people
will prefer to lower cost substitute to the higher cost one. (Hayes, A., 2020).

A complementary good or service is an item used in conjunction with another good or

service. Usually, the complementary good has little to no value when consumed alone, but
when combined with another good or service, it adds to the overall value of the offering.
A product can be considered a complement when it shares a beneficial relationship with
another product offering, for example, an iPhone and the apps used with it (Banton, C.,
2020).

For example, should the price of hot dogs increase, it can cause a decrease in the demand
for hot dog buns. Since the cost of hot dogs has an inverse relationship with the demand
for hot dog buns, they are considered complementary products. Consumers may substitute
hamburgers for their picnic, and weak complementary mustard and ketchup products will
see little impact on the rising price of the hot dog (Banton, C., 2020).

1.2.1.8. Consumer Demand Theory

The branch of economics devoted to the study of consumer behavior, especially as it

applies to decisions related to purchasing goods and services through markets. In particular,
this theory analyzes consumer behavior, especially market purchases, based on the
satisfaction of wants and needs (that is, utility) generated from the consumption of a good
(AmosWEB Encyclonomic WEB*pedia., n.d.).

A basic version of this theory, involves the analysis of total and marginal utility, especially
the role played by the law of diminishing marginal returns. The law of diminishing
marginal utility states that marginal utility, or the extra utility obtained from consuming a
good, decreases as the quantity consumed increases. In essence, each additional good
consumed is less satisfying than the previous one. If each additional unit of a good is less
satisfying, then a buyer is willing to pay less. As such, the demand price declines. This

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inverse law of demand relation between demand price and quantity demanded is a direct
implication of the law of diminishing marginal utility (AmosWEB Encyclonomic
WEB*pedia., n.d.).

A more advanced form of consumer demand theory involves the analysis of indifference
curves. An indifference curve, such as the one labeled U in the exhibit to the right, presents
all combinations of two goods that provide the same amount of utility. Hence a consumer
is "indifferent" between consuming any combination of the two goods anywhere on the
curve (AmosWEB Encyclonomic WEB*pedia., n.d.).

Fig. 5. Indifference curve. From “Consumer Demand Theory,’’ by AmosWEB

Encyclonomic WEB*pedia, https://www.amosweb.com/cgi-
bin/awb_nav.pl?s=wpd&c=dsp&k=consumer+demand+theory.

Indifference curve analysis relies on a relative ranking of preferences between two goods
rather than the absolute measurement of utility (utils) derived from the consumption of a
particular good (AmosWEB Encyclonomic WEB*pedia., n.d.).

The decreasing marginal rate of substitution means that a consumer is willing to give up
increasingly smaller quantities of one good in order to obtain more of another good. The
reason is that as more of a good is consumed it becomes relatively less satisfying. A
decreasing marginal rate of substitution generalizes the law of diminishing marginal utility.
However, rather than stating that the incremental satisfaction declines absolutely, it states
that incremental satisfaction declines relative to that obtained from other goods.
(AmosWEB Encyclonomic WEB*pedia., n.d.).

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1.2.2. Supply

Supply is a fundamental economic concept that describes the total amount of a specific
good or service that is available to consumers. Supply can relate to the amount available at
a specific price or the amount available across a range of prices if displayed on a graph.
This relates closely to the demand for a good or service at a specific price; all else being
equal, the supply provided by producers will rise if the price rises because all firms look to
maximize profits (Kenton, W., 2019).

The amount of a good or service offered for sale in a market during a given period of time
(e.g., a week, a month) is called quantity supplied, which we will denote as 𝑄𝑠 . The amount
of a good or service offered for sale depends on an extremely large number of variables
(Thomas, C. & Maurice, S. C., 2016).

Is supply the same as quantity supplied?

As with demand and quantity demanded, supply is not the same as quantity supplied. When
economists talk about supply, they mean the relationship between a range of prices and the
distinct quantities supplied, as illustrated by a supply curve. When economists talk about
quantity supplied, they mean only a certain point on the supply curve. Like demand, this
means a change in quantity supplied is very different than a change in supply (Dr.
Hutchinson, E., n.d.).

1.2.2.1. Variables that Affect Supply

According to Thomas, C. & Maurice, S. C., 2016, the quantity of a good offered for sale
depends on six major variables:

1. The price of the good itself.

The higher the price of the product, the greater the quantity firms wish to produce
and sell, all other things being equal. Conversely, the lower the price, the smaller
the quantity firms will wish to produce and sell. Producers are motivated by higher
prices to produce and sell more, while lower prices tend to discourage production.
Thus, price and quantity supplied are, in general, directly related (Thomas, C. &
Maurice, S. C., 2016).

2. The prices of the inputs used to produce the good.

Also known as ‘Factors of Production’, these are the combination of labor,

materials, and machinery used to produce goods and services (Dr. Hutchinson, E.,
n.d.).

An increase in the price of one or more of the inputs used to produce the product
will obviously increase the cost of production. If the cost rises, the good becomes
less profitable and producers will want to supply a smaller quantity at each price.
Conversely, a decrease in the price of one or more of the inputs used to produce

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 the product will decrease the cost of production. When cost falls, the good
becomes more profitable and producers will want to supply a larger amount at
each price. Therefore, an increase in the price of an input causes a decrease in
production, while a decrease in the price of an input causes an increase in
production (Thomas, C. & Maurice, S. C., 2016).

3. The prices of goods related in production.

Changes in the prices of goods that are related in production may affect producers
in either one of two ways, depending on whether the goods are substitutes or
complements in production (Thomas, C. & Maurice, S. C., 2016).

Substitutes in production

One of two (or more) goods that use the same resource for production in an
exclusionary manner. A substitute-in-production is one of two alternatives falling
within the other prices determinant of supply. An increase in the price of one
substitute good causes a decrease in supply for the other (AmosWEB
Encyclonomic WEB*pedia., n.d.).

The price of a substitute-in-production is part of the other prices supply

determinant. A change in the price of a substitute-in-production causes a change
in supply and a shift of the supply curve. An increase in the price of one substitute
good causes a decrease in the supply of the other. A decrease in the price of one
substitute good causes an increase in the supply of the other (AmosWEB
Encyclonomic WEB*pedia., n.d.).

Complements in production

One of two (or more) goods that are simultaneously produced using a given
resource. A complement-in-production is one of two alternatives falling within
the other prices determinant of supply. An increase in the price of one complement
good causes an increase in supply for the other (AmosWEB Encyclonomic
WEB*pedia., n.d.).

The price of a complement-in-production is part of the other prices supply

determinant. A change in the price of a complement-in-production causes a
change in supply and a shift of the supply curve. An increase in the price of one
complement good causes an increase in the supply of the other. A decrease in the
price of one complement good causes a decrease in the supply of the other
(AmosWEB Encyclonomic WEB*pedia., n.d.).

4. The level of available technology.

Changes in technology will also shift the supply curve. Why is that the case?
Technology changes have a direct impact on the cost of production. If suddenly a
new innovation allows you to cut your work time in half, you will cut down your

14
 costs of labor. If technology allows you to conserve wasted resources, then your
input prices will decrease. These changes will increase supply, shifting the curve
to the right (Dr. Hutchinson, E., n.d.).

5. The expectations of the producers concerning the future price of the good.

Expectations are usually based on some form of evidence or signal and can cause
supply shifts quite suddenly. In summary, if the firm expects prices to rise, supply
will increase while if the firm expects prices to fall, supply will decrease (Dr.
Hutchinson, E., n.d.).

6. The number of firms or the amount of productive capacity in the industry.

The market is made up of many other producers. By adding all the suppliers
together, we get aggregate supply. This can affect total supply. In summary, when
more firms enter the market, supply will increase while when firms leave the
market, supply will decrease (Dr. Hutchinson, E., n.d.).

1.2.2.2. General Supply Function

𝑄𝑠 = 𝑓(𝑃, 𝑃𝐼 , 𝑃𝑅, 𝑇, 𝑃𝐸 , 𝐹)

𝑓 means “is a function of.”

𝑄𝑠 is the quantity of a good or service offered for sale.
𝑃 is price of the good or service.
𝑃𝐼 is the prices of the inputs used in production.
𝑃𝑅 is the prices of goods that are related in production.
𝑇 is the level of available technology.
𝑃𝐸 is the expectations of producers concerning the future price of the good.
𝐹 is the number of firms or amount of productive capacity in the industry.

However, the supply function can be expressed in linear form:

𝑄𝑠 = (ℎ + 𝑘𝑃 + 𝑙𝑃𝐼 + 𝑚𝑃𝑅 + 𝑛𝑇 + 𝑟𝑃𝐸 + 𝑠𝐹)

where Qs, P, PI, Pr, T, Pe, and F are as defined earlier, h is an intercept parameter,
and k, l, m, n, r, and s are slope parameters (Thomas, C. & Maurice, S. C., 2016).

Illustration: Suppose the general supply function of product ZXY is

𝑄𝑠 = 50 + 15𝑃 − 5𝑃𝐼 + 12𝐹

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The input BBB’s price is PhP 130 and there are 10 producer who can supply for the input
BBB.

𝑄𝑠 = 50 + 15𝑃 − 5(130) + 12(10)

𝑄𝑠 = 50 + 15𝑃 − 650 + 120
𝑄𝑠 = −480 + 15𝑃

50 shows the value of 𝑄𝑠 when the variables 𝑃, 𝑃𝐼 , 𝑃𝑅 , 𝑇, 𝑃𝐸 , and 𝐹 are all simultaneously
equal to zero.

-480 is the amount of the good consumers would demand if price is zero. +15P is the slope
of the supply function indicating that for every peso decrease in price, the quantity supplied
will increase by 15 units.

If, for example, the price is PhP 40,

𝑄𝑠 = −480 + 15𝑃
𝑄𝑠 = −480 + 15(40)
𝑄𝑠 = 120

If, for example, the price is PhP 80,

𝑄𝑠 = −480 + 15𝑃
𝑄𝑠 = −480 + 15(80)
𝑄𝑠 = 720

Supply Schedule for Supply Function 𝑄𝑠 = −480 + 15𝑃:

Price in Php Quantity Supplied

100 1020
80 720
60 420
40 120
0 0

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Supply Curve for Supply Function 𝑄𝑠 = −480 + 15𝑃:

Fig. 6. Supply Curve for Supply Function 𝑄𝑠 = −480 + 15𝑃 by Lumagod, C.

Any particular combination of price and quantity supplied on a supply curve can be
interpreted in either of two equivalent ways. A point on the supply schedule indicates either
(1) the maximum amount of a good or service that will be offered for sale at a specific price
or (2) the minimum price necessary to induce producers to offer a given quantity for sale.
This minimum price is sometimes referred to as the supply price for that level of output
(Thomas, C. & Maurice, S. C., 2016).

1.2.2.3. Supply Curve

The quantity of a commodity that is supplied in the market depends not only on the price
obtainable for the commodity but also on potentially many other factors, such as the prices
of substitute products, the production technology, and the availability and cost of labour
and other factors of production. In basic economic analysis, analyzing supply involves
looking at the relationship between various prices and the quantity potentially offered by
producers at each price, again holding constant all other factors that could influence the
price. Those price-quantity combinations may be plotted on a curve, known as a supply
curve, with price represented on the vertical axis and quantity represented on the horizontal
axis. A supply curve is usually upward-sloping, reflecting the willingness of producers to
sell more of the commodity they produce in a market with higher prices. Any change in
non-price factors would cause a shift in the supply curve, whereas changes in the price of
17
the commodity can be traced along a fixed supply curve (Encyclopædia Britannica, inc.,
2019).

Fig. 7. Decrease in supply. Illustration of an increase in equilibrium price (p) and a

decrease in equilibrium quantity (q) due to a shift in supply (S). From “Supply and
demand,” by Encyclopædia Britannica, Inc., https://www.britannica.com/topic/supply-
and-demand.

A change in supply refers to a shift in the supply curve, affecting the whole diagram and
every interaction between price and quantity while change in quantity supplied refers to a
movement along the supply curve, exploring different points on the same curve (Dr.
Hutchinson, E., n.d.).

18
1.2.2.4. Shifts in the Supply curve

Occurs when firms supply more goods – even at the same price. For example, a new
machine which enables more of the good to be produced for the same cost (Pettinger, T.,
2019).

Fig. 8. Shift in supply curve. From “Factors affecting Supply,” by www.economics

help.org., https://www.economicshelp.org/microessays/equilibrium/supply/.

19
1.2.2.5. Shift in supply to the left

In this case, there is a fall in supply. The supply curve shifts to the left. This causes a higher
price. The supply can shift to the left because of fewer firms in the market, bad weather
(agriculture), higher taxes, and decline in productivity (workers work less hard) (Pettinger,
T., 2019).

Fig. 9. Shift in supply curve to the left. From “Factors affecting Supply,” by
www.economics help.org.,
https://www.economicshelp.org/microessays/equilibrium/supply/.

20
1.2.2.6. Factors that cause a shift in supply to the right

In this case, there is a rise in supply. The supply curve shifts to the right. This causes a
lower price. The supply can shift to the right because of more firms in the market, improved
technology, lower taxes imposed, government gives higher subsidies, and more firms enter
the market (Pettinger, T., 2019).

Fig. 10. Shift in supply curve to the right. From “Factors affecting Supply,” by
www.economics help.org.,
https://www.economicshelp.org/microessays/equilibrium/supply/.

1.2.3. Market Equilibrium

Equilibrium is a situation where for a particular good supply = demand (Pettinger, T.,
2019).

It is the function of a market to equate demand and supply through the price mechanism.
If buyers wish to purchase more of a good than is available at the prevailing price, they
will tend to bid the price up. If they wish to purchase less than is available at the prevailing
price, suppliers will bid prices down. Thus, there is a tendency to move toward the
equilibrium price. That tendency is known as the market mechanism, and the resulting

21
balance between supply and demand is called a market equilibrium (Encyclopædia
Britannica, inc., 2019).

The equilibrium price is the only price where the desires of consumers and the desires of
producers agree—that is, where the amount of the product that consumers want to buy
(quantity demanded) is equal to the amount producers want to sell (quantity supplied). This
mutually desired amount is called the equilibrium quantity. At any other price, the quantity
demanded does not equal the quantity supplied, so the market is not in equilibrium at that
price (Lumen Learning, n.d.).

In this diagram, the equilibrium price is P1. The equilibrium quantity is Q1 (Pettinger, T.,
2019).

Fig. 11. Market equilibrium. From “Market equilibrium,” by www.economics help.org.,

https://www.economicshelp.org/microessays/equilibrium/market-equilibrium/.

22
If price is below the equilibrium

Fig. 12. If price is below the equilibrium. From “Market equilibrium,” by

www.economics help.org.,
https://www.economicshelp.org/microessays/equilibrium/market-equilibrium/.

In the above diagram, price (P2) is below the equilibrium. At this price, demand would be
greater than the supply. Therefore, there is a shortage of (Q2 – Q1). If there is a shortage,
firms will put up prices and supply more. As price rises, there will be a movement along
the demand curve and less will be demanded. Therefore, the price will rise to P1 until there
is no shortage and supply = demand (Pettinger, T., 2019).

23
If price is above the equilibrium

Fig. 13. If price is above the equilibrium. From “Market equilibrium,” by

www.economics help.org.,
https://www.economicshelp.org/microessays/equilibrium/market-equilibrium/.

If price was at P2, this is above the equilibrium of P1. At the price of P2, then supply (Q2)
would be greater than demand (Q1) and therefore there is too much supply. There is a
surplus. (Q2-Q1). Therefore, firms would reduce price and supply less. This would
encourage more demand and therefore the surplus will be eliminated. The new market
equilibrium will be at Q3 and P1 (Pettinger, T., 2019).

24
1.3. Further Readings

These web articles provided below will give readers additional information and better
understanding about Demand, Supply, and Market Equilibrium. Readers may browse and
explore within the website to be able to further expand their knowledge about the topic.

Article: Microeconomics
Authors: Investopedia
Location: https://www.investopedia.com/microeconomics-4689797

Article: 10 Supply and Demand Practice Questions

Authors: Mike Moffatt
Location: https://www.thoughtco.com/supply-and-demand-practice-questions-1146966

Article: How to determine supply and demand equilibrium equations

Authors: Tejvan Pettinger
Location: https://www.economicshelp.org/blog/glossary/how-to-determine-supply-and-
demand-equilibrium-equations/

Article: Equilibrium, Price, and Quantity

Authors: Lumen Learning
Location: https://courses.lumenlearning.com/wm-
introductiontobusiness/chapter/equilibrium-price-and-quantity/

25
1.4. Learning Aid

These video links provided below will give learners additional information and better
understanding of about Demand, Supply, and Market Equilibrium. Readers may browse
and explore within the website to be able to further expand their knowledge about the topic.

1. tutor2u. (2017, May 6). Linear Suppy Functions. YouTube.

https://www.youtube.com/watch?reload=9&v=spWWqGBRHyU.

2. tutor2u. (2017, May 6). Linear Demand Functions. YouTube.

https://www.youtube.com/watch?v=I4CxzkfIq3Y.

3. tutor2u. (2017, May 6). Linear Equations and Market Equilibrium. YouTube.
https://www.youtube.com/watch?v=VSmqxSTCcXE.

4. Khan Academy. (2012, Jan. 3). Market equilibrium | Supply, demand, and market
equilibrium | Microeconomics | Khan Academy. YouTube.
https://www.youtube.com/watch?v=PEMkfgrifDw.

26
1.5. Assessment Exercises

1.5.1. Assessment Exercise 1

1. What is the relation of price to the quantity demanded? Explain.

2. What is the relation of consumers’ income for normal goods to the quantity
demanded? Explain.

3. What is the relation of consumers’ income for inferior goods to the quantity
demanded? Explain.

4. Explain the concept of diminishing utility. Cite an example.

5. If the government passed a tax law on increasing the tobacco as main input of
cigarettes by 50% that would be effective tomorrow, what is its effect on the
demand and price of cigarettes today? Explain.

6. ABC Sports Collectibles is a shop that sells basketball cards. The demand function
for basketball card boxes in the community is 𝑄𝑑 = 25,000 − 10(𝑃). If the price
of each basketball box is at PhP 2,000, what is the total quantity demanded?

7. Refer to item no. 6. Using the same information, if the purchase price of the
basketball card boxes increased by 20%, how many basketball card boxes were
reduced from the previous quantity demanded of ABC Sports Collectibles?

8. Refer to item no. 6. Using the same information and demand function, if the
quantity demanded is 1,550 basketball card boxes, how much will each box cost?

27
1.5.2. Assessment Exercise 2

1. What is the relation of the number of firms manufacturing or selling the same
product to the quantity supplied? Explain.

2. What is the relation of the technology to the quantity supplied? Explain.

3. Mr. Tee sells t-shirts. His supply equation for selling t-shirts is 𝑄𝑠 = 240 + 3(𝑃).
How many t-shirts is Mr. Tee willing to supply if the price of each t-shirt is PhP
60.

4. Refer to item no. 3. What is the price at which Mr. Tee is no longer willing to sell
his t-shirts?

5. Ollie’s Oil sells bottled fragrance oils to the market at cheap price. Assume that
its supply function is 𝑄𝑠 = −30 + 10𝑃.

a) Prepare a supply schedule for prices PhP 4 – PhP12.

b) Make a graph to show the figures from the supply schedule of the product
on item a.

c) Prepare a supply schedule for prices PhP 4 – PhP12 if the supply function
changed to 𝑄𝑠 = −30 + 12𝑃.

d) Make a graph to show the figures from the supply schedule of the product
on item a and item c.

28
1.5.3. Assessment Exercise 3

In a 1-page paper, prepare a concept map on Demand and Supply Analysis based on your
readings and understanding. Submit it in a PDF or image format.

29
1.5.4. Assessment Exercise 4

A. How is the supply of sport shirts (substitute in production) affected if the price of
window curtains should change? Make a graph to present its effect in supply
curve.

1. Suppose the price of window curtains increases.

2. Suppose the price of window curtains decreases.

B. How is the supply of leather (complement in production) affected if the price of

beef should change? Make a graph to present its effect in supply curve.

1. Suppose the price of beef increases.

2. Suppose the price of beef decreases.

30
1.5.5. Assessment Exercise 5

1. Assume that EGG Refrigerator’s demand and supply curve are as follows:

𝑄𝑑 = 100,000 − 60𝑃
𝑄𝑠 = 28,000 + 30𝑃

𝑃 represents the price of EGG Refrigerators.

a) What is the equilibrium price?

b) What is the quantity of EGG Refrigerators bought and sold at

equilibrium?

2. E-numan Drinks is an online store selling beer and deliver’s it to its customers for
a fee. E-numan Drinks’ shift from physical store to online store was due to Covid-
19 pandemic. In anticipation for the lifting of liquor ban in the city next week, E-
numan Drinks purchased 500 cases of beer and sells it for PhP 500 per case. E-
numan Drinks only sold half of the cases it purchased.

a) What economic situation is E-numan Drinks facing?

b) The price will _______ in order for the equilibrium to be attained.

c) Prepare a graph to show the effect or change in equilibrium.

31
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https://www.britannica.com/topic/supply-and-demand. Accessed 22 Sept. 2020.

2. Hayes, A. (2019). Demand Theory. Retrieved from

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3. Amadeo, K. (2019). Demand, Its Explanation, and Its Impact. Retrieved from
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3305708. Accessed 22 Sept. 2020.

4. Amadeo, K. (2020). 5 Determinants of Demand With Examples and Formula.

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examples-and-formula-3305706. Accessed 22 Sept. 2020.

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9. Hayes, A. (2020). Substitute. Retrieved from

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11. AmosWEB Encyclonomic WEB*pedia. (n.d.). CONSUMER DEMAND

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bin/awb_nav.pl?s=wpd&c=dsp&k=consumer+demand+theory. Accessed 24
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14. Kenton, W. (2019). Supply. Retrieved from

https://www.investopedia.com/terms/s/supply.asp. Accessed 28 Sept. 2020.

15. Dr. Hutchinson, E. (n.d.). Principles of Microeconomics by University of

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