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ELEMENTS OFDEMAND AND SUPPLY
Prepared by:GREGAR DONAVEN E. VALDEHUEZA, MBA
Lourdes College Instructor
Chapter 3ECONOMICS: its concepts and principlesBy: BKG Gabay
RM Remotin, Jr.
EAM Uy
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DEMAND
Refers to the number or amount of goods andservices desired by the consumers.
Quantity demandedThe amount of goods and services consumers are
willing and able to buy/purchase at a given price,place, and at a given period of time.
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Determinants of Demand
Price of goods itselfAs the price of certain goods and services increases,
the demand for these goods and services decreases orvice versa.
Consumers incomeA change in income will cause a change in demand.
Consumers tend to buy more goods and acquire moreservices when their income increases and vice versa.The direction in which the demand will shift in
response to a change in income depends on the typeof goods. Normal goods refers to a good for which quantity demand
at every price increases when income rises.
Inferior goods refers to a good for which quantity demandfalls when income rises.
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Consumers expectation of future prices The quantity of a good demanded within any period depends not
only on prices in that period but also on prices expected in future
periods.
Prices of related commodities/goods The quantity demanded of any particular good will be affected by
changes in the prices of related goods.
Substitute goods are goods that can be used in place of othergoods.
Complementary goods are goods that go together.
Consumers tastes and preferencesAn increase in the preference and taste for a certain good will
certainly increase the demand for that particular good.
PopulationAn increase in the population means more demand for goods and
services and vice versa.
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Demand Schedule
The relationship between the quantityof a good demanded and the price ofthat good.
other factors that may affect the quantitydemanded, such as prices of other goods, areheld constant (ceteris paribus) in drawing up
the demand schedule.
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Example of a Demand Schedule
Price (Php 000) Quantity Demanded
1 1000
2 800
3 600
4 400
5 200
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Demand Curve
Shows graphically the relationship between thequantity of a good demanded and its
corresponding price, with other variables heldconstant.
The demand curve is typically downward-sloping
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Example of a Demand Curve
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Law of Demand
States that as price increases, quantitydemanded decreases; and as price decreases,quantity demanded increases, if other factors
remain constant.
The law of demand is only true if theassumption of ceteris paribus is applied or
other determinants remain constant.
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Justification for the Law of Demand
Income effectWhen the price of goods decreases, the consumer
can afford to buy more of it or vice versa.
Substitution effect
It is expected that consumers tend to buy goodswith a lower price.
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Changes Involving Demand
Change in Quantity DemandedMovement along a demand curve which indicates
movement from one point to another point of thesame demand curve.
Due to a change in the price of goods and services.
Change in DemandShifting from one demand curve to another
demand curve.
Brought by the changes in all determinants ofdemand except price.
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SUPPLY
Maximum units/quantity of goods or services
producers can offer.
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Determinants of Supply
Change in technologyState of the art technology that uses high-tech
machines increases the quantity supply of goodswhich causes the reduction of cost of production.
Cost of inputs usedAn increase in the price of an input or the cost of
production decreases the quantity supplied becausethe profitability of certain business decreases.
Expectation of future priceWhen producers expect higher prices in the future
commodities, the tendency is to keep their goods andrelease them when the price rises.
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Change in the price of related goodsChanges in the price of goods have a significant effect
in the supply of such goods.
Government regulation and taxes It is expected that taxes imposed by the government
increases cost of production which in turn discouragesproduction because it reduces producers earnings.
Government subsidiesSubsidies or the financial aids/assistance given by the
government reduces cost of production whichencourages more supply.
Number of firms in the marketAn increase in the number of firms in the market leads
to an increase in supply of goods and services.
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Supply Schedule
The relationship between the quantityof a good supplied and its price.
Other factors that may affect the quantity
supplied, such as the prices of inputs and
available production techniques, are heldconstant (ceteris paribus) in drawing up the
supply schedule.
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Example of a Supply Schedule
Price (Php 000) Quantity Supplied
1 200
2 400
3 600
4 800
5 1000
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Supply Curve
Shows graphically the quantity of a goodsupplied at each price, with other factors that
affect quantity supplied held constant.
The supply curve is typically upward-sloping
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Example of a Supply Curve
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Law of Supply
States that as price increases, quantitysupplied also increases; and as pricedecreases, quantity supplied also decreases if
other factors remain constant.
The law of supply is only true if theassumption of ceteris paribus is applied or
other determinants remain constant.
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Changes Involving Supply
Change in Quantity SuppliedMovement along the supply curve which shows the
movement from one point to another point on the
same supply curve. Due to a change in the price of goods and services.
Change in SupplyShifting from one supply curve to another supply
curve.
Brought by the changes in all determinants of supplyexcept price.
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Determination of Market Equilibrium
Law of demand and supply stipulate that when demand isgreater than supply, price increases; when supply is greaterthan demand, price decreases; and when demand is equalto supply, price remain constant.
It is noted that there is contradiction between the twoparties. The consumer dislikes high price while theproducer likes high price. Law of demand infers thatconsumers are willing and able to buy/purchase goods andservices at a lower price while law of supply infers that
producers are willing and able to offer or sell more goodsand services at higher price.
This force in the market place creates equilibrium price andequilibrium quantity, or the market equilibrium.
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Market Equilibrium
Is a state which implies a balance betweenthe opposing forces, a situation in whichquantity demanded and quantity supplied are
equal.
The market equilibrium is determined by the
intersection of the demand and supply curves. In
other words, the quantity that consumers will buy isequal to the amount or quantity the producers are
able and willing to offer.
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Demand and Supply Schedules
Points Price
(Php 000)
QuantityDemanded
QuantitySupplied
State ofMarket
Pressureon Price
A 1 1000 200 Shortage(-800)
Upward
B 2 800 400 Shortage(-400)
Upward
C 3 600 600 Equilibrium(0)
Neutral/
Equal
D 4 400 800 Surplus(400)
Downward
E 5 200 1000 Surplus(800)
Downward
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