CHAPTER 2: LESSON 1: DEMAND AND SUPPLY

In this chapter we will introduce one of economic’s main branches - the microeconomics. We will begin by
studying the basic principles of demand and supply, and the theory of demand and supply in a competitive market.
The market is the place where buyers and sellers meet. Buyers go to markets in search of goods that they can buy
with their money.
In economics, the willingness of the buyer or consumer to pay for a certain good is called DEMAND.
On the other hand, sellers or producers, who are willing to produce the goods consumers look for, settle in
the market to trade or sell products in the hope of gaining profits.
The willingness to produce is called SUPPLY.
The market is the place where trade between buyers and sellers or consumers and suppliers takes place.

THE DEMAND CURVE AND THE DEMAND SCHEDULE

Quantity Demanded - is the amount of goods and services consumers are willing to produce given a certain
price. If the price of good is low, the quantity demanded for that good is high holding constant other factors that
might affect the willingness of buyers to purchase the good.
There is inverse relationship between the price and quantity due to the fact that price decreases are
attractive to consumers, ceteris paribus. Price increases are less attractive and consumers become less interested
in the good.

To further explain, examine the quantity demanded for bread loaves in Table 2.1 wherein the demand
schedule for bread loaves is shown.
The demand schedule suggests the amount or quantity of bread a consumer is willing to buy relative to the
changes in its price, ceteris paribus.
We can observe that the consumer is willing to purchase 30 loaves of bread when its price is Php 1.00, but
will reduce its quantity to 20 loaves when price rises to Php 2.00.
If the price increases further to Php 3.00, only 10 loaves will be bought.
From this demand schedule, we can easily see the inverse relationship of price and quantity demanded.
In practical sense, as price increases, the quantity demanded or the willingness to buy the product decreases,
holding all other factors constant.
This is the Law of Demand. The law of demand can be illustrated using a demand curve. Refer to Figure 2.1,
the demand curve is downward sloping. This means the price decreases, quantity demanded increases.

GETTING THE SLOPE OF THE DEMAND CURVE

In order to compute for the slope of the demand curve, economists use the formula below:

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 Given the figures in Table 2.1 as an example, let us try to get the slope of the demand for bread. Using points
A and B, we get:

Continue solving all the points, B - C, C-D, D-E as practice.

NOTE: Negative value of the slope explains the inverse relationship of price and quantity demanded.

SHIFTS IN DEMAND AND THEIR DETERMINANTS

Quantity demanded is normally dictated by the changes in price. Other than price, there are also other
factors that influence demand. As such, there are cases where the demand curve shifts either to the right or to the
left even if the price does not change.
The changes in average income, the size of population, tastes and preferences, and consumer speculations all
contribute to the changes in demand curve.

1. Changes in average income

Purchasing power for goods and service changes as average income changes. When there is a rise in income,
a consumer will buy more goods even if their price remains constant.
In this instance, the demand curve will shift to the right parallel to the original curve.

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 Similarly, when income falls, the consumer will buy fewer goods shifting the demand curve to the left.
Looking at Figure 2.2, you can see this shift of demand from D1 to D2.

2. Changes in the size of population

Population size also influences demand. An increase in population means an increase in the size of the market
demand and a decrease in population means a decrease in demand.

3. Changes in the tastes and preferences

Tastes and preferences also affect shifts in demand. Example, since 2000, the demand for cellular phones by
Filipinos has drastically increased. The introduction of new, modern and innovative phones like the touchscreen
phones, and many more has attracted attention from buyers. As such the old phone models sold in 2000 are no
longer as marketable today.

4. Changes in consumer’s speculation

Lastly, consumer’s speculation determine changes in demand. Example, the outbreak of AH1N1 Flu Virus
caused people to purchase flu vaccines of different kinds. If the spread of this disease was abated, the demand for
vaccines would also decrease. Thus, the demand curve will shift to the left.

THE SUPPLY CURVE AND THE SUPPLY SCHEDULE

Just like demand, supply centers on the relationship between price and quantity being supplied. Early in this
chapter, we said that all things being constant, supply is the willingness of sellers to produce a good to sell at
various possible prices.
Since producers or sellers seek more profit, we can, therefore, say that in the Law of Supply, the price and
quantity have a direct relationship. This means that the higher the price of a particular good, quantity supplied, or
the amount that producers would be willing to sell will also be higher, ceteris paribus.
The supply curve and supply schedule, just like in demand, show the relationship between a good’s quantity
supplied and price.
However, since the quantity supplied is directly proportional to the price, the supply curve is represented
with an upward slope.
Please see Figure 2.3 showing upward-sloping supply curve.

GETTING THE SLOPE OF THE SUPPLY CURVE

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 The supply curve is computed as follows:

COMPUTE FOR THE SLOPE OF THE SUPPLY FROM POINT A TO POINT B USING THE DATA SHOWN IN TABLE 2.2.

OTHER FACTORS THAT INFLUENCE SUPPLY

There are also factors that can change the supply of certain goods. The number of sellers, the cost of
production, the availability of technology, and government policies affect supply.
In any changes in these factors, the supply curve responds with a shift either to the right if supply increases,
or to the left when supply decreases.

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 MARKET EQUILIBRIUM

A condition of equilibrium is reached when the quantity of supply and demand are balanced or equal at a
given price level.
This means that at one particular price, the buyers are able to purchase the quantity they are willing to buy
and sellers are also able to sell the quantity they are willing to sell.
When a market reaches equilibrium, no changes in the market price will take place. In other words, the price
is stable under the existing market conditions.
In Economics, there are three ways to illustrate equilibrium condition.

GETTING THE EQUILIBRIUM CONDITION VIA THE SCHEDULE APPROACH

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THE GRAPHICAL APPROACH

THE ALGEBRAIC EQUATIONS

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 Using the data in Table 2.3 or the values or prices and quantities found in Figure 2.4, we can solve for the
slope of the demand curve and supply curve. Below are the solutions.

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