Lesson 4 Demand and Supply Functions

Demand and Supply
Functions
Prepared By: EEE

Demand Function
A demand function is a mathematical equation which expresses the

demand of a product or service as a function of the price and other
factors such as the prices of the substitutes and complementary goods,
level of income, taste and preferences, population, etc.
Demand function, when expressed as a mathematical function, can be
shown as:
Qd = f(price, income of consumers, price of related goods, taste, etc.)
We can come up with the demand equation as:
Qd = a - bP
Where: Qd = quantity demanded at a particular price

a = intercept of the demand curve (the value of the Qd
when the Price is equal to zero)
b = slope of the demand curve (the rate of change between
the variables of Price and Qd)
P = price of the good at a particular time period
Qd = a - bP
Where: Qd = quantity demanded at a particular price

a = intercept of the demand curve (the value of the Qd when the Price is equal to zero)
b = slope of the demand curve (the rate of change between the variables of Price and Qd)
P = price of the good at a particular time period
To illustrate the demand function using a hypothetical example, assuming that the current price of
commodity A is P10.00. The intercept of the demand curve is 50 while the slope is 2.5. To determine how
much of commodity A will be demanded by consumer X, we can simply substitute the given values to our
equation, thus:
Qd = 50 – 2.5(10)
= 50 – 25
Qd = 25
Suppose that the price of commodity A will increase to P14.00, what will now be the new quantity
demanded by consumer X? Again, substituting the given values to the equation, we can now solve for the
new quantity demand as follows:
Qd = 50 – 2.5 (14)
= 50 – 35
Qd = 15
Supply Function
A supply function is a form of mathematical
notation linking the dependent variable, quantity
supplied (Qs), with various independent
variables which determine quantity supplied like
price of the product, number of sellers,
technology, price expectations, taxes etc.
Supply function can therefore transform the statement in a
mathematical function as follows:
Qs = f(price, number of sellers, technology, price

expectations, taxes, etc.)
Given the supply function, the supply equation can be

derived as:
Qs = a + bP
where: Qs = quantity supplied at a particular price

a = intercept of the supply curve
b = slope of the supply curve
P = price of the good sold
Example:
Qs = a + bP
Using a hypothetical example, the supply equation can now be

illustrated. Supposed that the price of commodity A is P10.00. The
intercept of the supply curve is 50 while the slope is 2.5. To
determine how much of commodity A will be supplied by sellers, we
can simply substitute the given values to our equation, thus:
Qs = a + bP
= 50 + 2.5(10)
= 50 + 25
Qs = 75
Example 2:
Suppose that the price of commodity A will increase to

P14.00, what will now be the new quantity supplied by
sellers? Again, substituting the given values to the
equation, we can now solve for the new quantity
supplied as follows:
Qs = a + bP
= 50 + 2.5(14)
= 50 + 35
Qs = 85
Market Equilibrium
When the quantity demanded equals
the quantity supplied- when buyers’ and
sellers’ plans are in balance.
Market equilibrium
Equilibrium Price
-the price at which the quantity demanded equals the quantity
supplied.
Equilibrium Quantity
-the quantity that is bought and sold at the equilibrium price.
Market equilibrium
 Price : A Market’s Automatic Regulator
Law of Market Forces

‘ When there is a shortage, the price rises; and when there is
a surplus, the price falls.’
• Shortage or excess demand- a situation in which the quantity demanded

exceeds the quantity supplied.
• Surplus or excess supply- a situation in which the quantity supplied
exceeds the quantity demanded.
Price Controls, Floor Price and
Price Ceiling
When market disequilibrium happens, a situation where supply
exceeds demand (surplus) resulting to a possible lose for
producers; or demand exceeds supply (shortage) where the
likelihood that consumers will be abused – such situations
warrant the intervention of the government especially if the
market disequilibrium persists at longer period of time. The
government may intervene by imposing price controls.
Price controls
The specification by the government of minimum or maximum prices

for certain goods and services when it considers the prices to be
disadvantageous to the producer or consumer is known as price
control.
Price controls are classified into two types
Ceiling price
A ceiling price on the A floor price is the legal
other hand is the legal minimum price set by the
maximum price imposed government on certain
by the government, which commodities. A price at or
is usually below the above the price floor is
equilibrium price. This legal but a price below it is
move by the government not.
Floor price
is undertaken if there is a
persistent shortage of
goods in the economy
SUMMARY
SUMMARY
The interaction between demand and

supply results to either increase or Supply schedule on the other hand refers
decrease in the price of a commodity. to the tabular presentation of supply while
Demand schedule is the tabular supply curve is its graphical representation.
presentation of demand while demand The supply curve is an upward-sloping curve,
curve is its graphical representation. The this is so because of the type of relationship
demand curve is a downward-sloping between price and quantity supply which is a
curve which is explained by the inverse direct type of relationship. This means that as
relationship between the price and the price is increasing, there is a
quantity demand. This situation reflects corresponding increase in quantity supply.
the Law of Demand which states that an This situation is reflective of the law of Supply
increase in price results to a decrease in
quantity demanded while a decrease in
price results to an increase in quantity
demanded, ceteris paribus.
SUMMARY
Changes in quantity demand as well as quantity supply are brought about by changes in the
price of a commodity. Graphically, the change in price will result to a movement from one
point to another point on a constant demand or supply curve.
Changes in demand or supply are a result of the effects of the various factors affecting
them (demand and supply). Graphically, any of the said factors may bring about a shift of
the demand curve or the supply curve either rightward (indicating an increase) or leftward
(indicating a decrease).
To address the persistent market disequilibrium, the government may impose price
controls where it specifies minimum or maximum prices for certain goods and services;
hence, floor price or ceiling price may be imposed.

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Demand and Supply

Prepared By: EEE

A demand function is a mathematical equation which expresses the

Qd = f(price, income of consumers, price of related goods, taste, etc.)

We can come up with the demand equation as:

Where: Qd = quantity demanded at a particular price

Where: Qd = quantity demanded at a particular price

Qs = f(price, number of sellers, technology, price

Given the supply function, the supply equation can be

where: Qs = quantity supplied at a particular price

Using a hypothetical example, the supply equation can now be

Suppose that the price of commodity A will increase to

Law of Market Forces

• Shortage or excess demand- a situation in which the quantity demanded

The specification by the government of minimum or maximum prices

The interaction between demand and

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