Meaning of Supply and Demand

Demand means the desire for a particular good backed up by

insufficient purchasing power. The term signifies the ability or the
willingness to buy a particular commodity at a given point of
time.
Potential demand – demand which is not backed up by the
ability to or no purchasing power.
Effective demand – demand which is backed up by the
ability to pay
Supply – is the quantity of a commodity that is in the market and
available for purchase at particular price . In other words, supply
is the amount of goods and services available for sale at given
prices in a given period of time and place.
 Demand and Supply Schedule
Market – is a place where buyers and sellers interact with each other
and that exchange take place among them.
Demand schedule – reflects the quantities of goods and services
demanded by a consumer or an aggregate consumers at any given
price. To understand this fully, let us analyze a hypothetical demand
schedule of beef in the market as shown in Table 1
Supply schedule – shows the different quantities that are offered for
sale at various prices. The supply schedule may reflect the individual
schedule of only one producer or the market schedule showing the
aggregate supply of a group of sellers and producers. Table 2 gives us
an idea of a supply schedule.
 Table 1 Table 2
Hypothetical Demand of Hypothetical Supply of
Beef in the Market Rice in the Market
Price of Beef (per kilo) QD in kilos Price of Rice (per Sack) QS (P50/sack)
P300 20 P600 300
250 40 500 250
200 60 400 200
150 80 300 150
100 100 200 100
50 120 100 50
In table 1, it is shown that an individual would tend to buy more when
its price is low than when the price is high. At a price of P300, quantity
demanded by the consumers is 20 kilos while a decrease of price to
P50 increases the quantity demanded of the consumers to P120 kilos.

The table 2 indicates that a seller offers a big quantity of rice supply in
the market if the price is high and likewise, sells only a few sack of rice
when the price is low.
 The Law of Demand and Supply
The law of demand maybe stated as “the quantity of a commodity which
buyers will buy at a given time and place will vary inversely with the price.” This
means that as price increases, the quantity demanded decreases, and as price
decreases, quantity demanded increases other things are constant. Such general
tendencies of consumers can be explained by two reasons:
1. Income effect – At lower prices, and individual has a greater purchasing
power. This means, he can buy more goods and services. But at higher prices,
naturally, he can buy less.
2. Substitution effect – Consumers tend to buy goods with lower prices. In
case the price of a product that they are buying increases, they look for substitutes
whose prices are lower. Thus, the demand of higher priced goods will decrease.
The law of supply states that the quantity offered for sale will vary directly with
price. This means that as price increases quantity supplied also increases; and as
price decreases, quantity supplied also decreases. This direct relationship between
price and quantity supplied is the law of supply. Producers are willing and able to
produce and offer more goods at a higher price than at a lower price.
Demand and Supply Curve
Demand Curve
 Supply Curve

The supply curve is a graphic representation

of the correlation between the cost of a good or
service and the quantity supplied for a given
period. In a typical illustration, the price will
appear on the left vertical axis, while the quantity
supplied will appear on the horizontal axis.
 Determinants of Demand
1. Income – People buy more goods and services when their income
increases, but will buy less if their income decrease, thus, affecting the
demand for goods and services. Changes of income of people will change
their demand for goods and services. An increase in income will either
increase or decrease demand depending upon the kind of commodity.
2. Population – More people means more demand for goods and services.
That is why; we can observe that there are more buyers in the city stores
than in the barrio stores. Conversely, less population means less demand
for goods and services. Obviously, business is poor in the rural areas
compared to business in the urban areas.
3. Tastes and Preferences – Demand for goods and services increases when
people like or prefer them. Such tastes or preferences are greatly
influenced by advertisement or fashion. On the other hand, if a certain
product is out of fashion, the demand for it decreases.
4. Price Expectations – When people expect the price of goods,
especially basic commodities like rice, soap, cooking oil, or sugar to
increase tomorrow or next week, they will buy more of theses goods. In
the same manner, they decrease their demand for each product if they
expect price to decline tomorrow or in the next few day. The reason for
such consumer’s behavior is to economize. This is general tendency of
buyers.
5. Prices of Related Goods – When the price of certain goods increases,
people tend to buy substitute products. For example, if the price of
Colgate increases, consumers buy less of Colgate and more of the close
substitute like Close-up or Hapee. This means, the demand for Colgate
decreases while the demand for substitutes increases. This means, if the
price of one good increases, the demand for the other good increases.
For substitute then, P and QD are directly related.
 Determinants of Supply
1. Technology – This refers to techniques or methods of production.
Modern technology which uses modern machines increases supply of
goods. In contrast, traditional technology which uses animal and people
is very slow in producing goods. In addition, technology reduces cost od
production, and this encourages the producers to increase their supply.
2. Cost of Production – Wen we speak of the cost pf production, we take
into consideration 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 factories means less supply.
4. Taxes and Subsidies – Certain taxes increase cost of production.
Higher taxes discourage production because it reduces the earnings of
businessmen. That is why the government extends tax exemptions to
some new and necessary industries to stimulate their growth. Similarly,
tax incentives are granted to foreign investors in order to increase
foreign investment in the Philippines. This will result t more goods.
5. Weather – Production of goods also depends on weather conditions.
A businessman will produce more sweaters during cold season, more
umbrella during rainy season and light clothing materials and walking
shorts during summer.
 The Ceteris Paribus Assumption
The law of demand states that as the price increases, quantity
demanded decreases, and as price decreases, quantity demanded increase.
Such theory is true if we apply the Ceteris Paribus assumption wherein it
assumes that “all other things equal or constant.” Meaning, the determinants
of demand are constant and are not considered as factors that will affect
demand in the market. Thus, the law of demand, using the Ceteris Paribus,
can be restated as “assuming that the determinants of demand are constant,
price and quantity demanded are inversely proportional to each other.”
However, if the determinants of demand are considered major factors
or greatly affects the demand in the market, then, the Ceteris Paribus
assumption is dropped.
The law of supply is only correct if we apply the assumption of ceteris
paribus. This means the law of supply is valid if the determinants of supply like
cost of production, technology, number of sellers and so forth, are held
constant.
 Changes in Demand and Supply
Changes in demand refer to the shift of demand curve which is
brought about by the changes in the determinants of demand, like
income, population, price expectation and so forth. For instance, an
increase in population also increases demands for goods and services, or
a decrease in income also reduces demand. In a graph, an increase in
demand shifts the demand curve to the right while a decrease in demand
shifts the demand curve to the left as shown in Figure 3.
Changes in Supply pertains to a shift of supply curve brought by
changes in the determinants of supply. Through graphical presentation, an
increase in supply shifts the supply curve to the right, while a decrease in
supply shifts the supply curve to the left. Figure 4 illustrates changes in
supply.
Supply schedules show us how much is being produced at a certain cost. The relationship between price
and quantity is a direct relationship, which means that if one factor increases, so does the other one. In
this specific example they are comparing pizza slice price and quantity. When the cost is only 50 cents,
suppliers are only willing to sell 2 slices of because they are making little money. When the price was
raised to 2.50 per slice, they were willing to sell 14 slices because they would be making more money.
 Changes in Quantity Demanded/Quantity Supplied
Changes in the quantity demanded indicate the movement from
one point to another point. This means, the demand curve does not
change its position like that of the demand curve in the changes in
demand. The change in quantity demanded is brought about by
changes in prices. Whenever there is a change in price, there is a
corresponding in quantity demanded. Change in quantity demanded is
graphically illustrated in Figure 5 . For example, a change in price from
P200 to P150 will correspondingly change the quantity demand from
60 to 80, and vice versa.
Change in quantity supplied show the movements from one
point to another point in a constant supply curve. Change in quantity
supplied is brought about by a change in price. For example, if the
price decreases from P400 to P300, there is a corresponding decrease
in quantity supplied supplied from 200 to 150, and vice-versa.
Demand schedules show us how much consumers buy when products are at certain cost.
This graph shows us the relationship between the cost of the product and the quantity
demanded by people. Unlike like the supply schedule graph, these two variables are
inversely related, which means that if one variable increase, the other one decreases. In
this insistence, as the price of a coffee cup decreases, the quantity in which it is
demanded, increases.
 Equilibrium of Demand and Supply
Alfred Marshall, a British economist, introduced a kind of pricing
scheme by combining the law of demand and the law of supply. With this
combination an equilibrium price and equilibrium quantity is formulated.
This is known as the market equilibrium.
In the market, supply and demand interact freely. Supply is
represented by producers or sellers while demand is represented by the
buyers. In the process of interaction between buyers and sellers, an
equilibrium price and equilibrium quantity or market equilibrium is
established. The market equilibrium comes at that price and quantity where
the supply and demand forces are in balance. This is the situation where
quantity supplied and quantity demanded are equal. This means that the
amount that buyers want to pay is just equal to the amount that sellers want
to sell. In Table 3, the equilibrium price is P8.00; the market price in which
both sellers and buyers decision are mutually consistent.
 Table 3
Supply and Demand Schedules Indicating the Equilibrium Price and Equilibrium Quantity

Quantity Supplied Price Quantity Demanded

3 P3 Shortage 24

6 6 Shortage 20

9 9 Shortage 16

12 12 12

15 15 Surplus 8

18 18 Surplus 4
 Let us work through the supply and demand schedules in Table 3 to
see how supply and demand determine market equilibrium. To find the
market price and quantity, we find a price at which the amount desired to
be bought and sold just match. If we try a price of P9.00, a producer would
like to sell 9 units while consumers want to buy 16 units. Here we see a
shortage of 7 units of supply. The quantity demanded exceeds quantity
supplied. At price P15.oo, a quick look shows that quantity supplied which
is 15 units exceed the quantity demanded which is 8 units. Accordingly,
there is a surplus of 7 items of supply.
We could try other process, but we can easily see that the
equilibrium price is P12.00. At P12.0, consumers’ desired demand of 12
units is equal with the supply which is also 12 units. This denotes that
supply and demand orders are filled, and consumers are supplies are
satisfied. Whenever there is a balance of demand and supply irrespective
of price, we can positively state that there is an equilibrium.
 Equilibrium is the state in which market supply
and demand balance each other, and as a result, prices
become stable. Generally, an over-supply of goods or
services causes prices to go down, which results in
higher demand. The balancing effect of supply and
demand results in a state of equilibrium.
 Effect of Equilibrium of a Shift in Supply and Demand
The point of equilibrium is subject to change. This is due to a
shift of either the supply curve alone, or the demand curve alone, or
both. Shifting of either the demand or supply curves are caused by
changes of their respective determinants. Let us assume that the
demand curve is constant and the supply curve shifted to the right,
which was brought about by the producer’s use of modern technology.
This is illustrated in Figure 8 where supply curve, $1 shifted to $2.
The supply curve shifts to the right to indicate increase in supply
brought about by the adoption of modern technology. Note that the
market price has been reduced from P5.00 to P4.00with demand being
constant. However, the quantity of demand increased from 8 to 10.
In like manner, a shift of he demand curve with the supply curve as
constant will cause a change in equilibrium point as shown in Figure 9.
 Price and Equilibrium Quantity
Increase in income, one of the determinants of demand,
increases demand for goods and services. Demand curve shifts to the
right to show an increase in demand. With a constant supply, an
increase in demand also increases market equilibrium price. However,
with the increase in price for a commodity, supply increased from 10 to
12.
Assuming there is an equal increase in the demand for cooking
oil and the supply of cooking oil as shown in Figure 10, what will be the
equilibrium price and equilibrium quantity.
 The Law of Demand and Supply
The law of supply and demand sates that when supply is greater
than demand, price decreases. When demand is greater than the
supply, price increases. When supply is equal to demand, price remains
constant. This is the market equilibrium.