MARKET

Is a place where any type of trade takes place. Is dependent on two major participants the buyers & the sellers.

DEMAND
-

Is the quantity of a good that buyers are willing to buy for a particular product. is the desire to own anything, the ability to pay for it, and the willingness to pay.

LAW OF DEMAND
-

As the price of a commodity decreases, all other things held constant, quantity demanded increases. As the price of a commodity increases, and again all other things held constant, quantity demanded decreases.

FACTORS THAT INFLUENCE DEMAND A demand schedule shows various quantities of goods and services buyers are willing and able to purchase at different market prices. Determined by factors such as:
1. Income When income increases, people are able to buy more. 2. Population As the population grows, demand for goods and services increases. 3. Taste and Preference Assuming prices are constant, people go more for the goods

they prefer as shaped by their tastes and biases. 4. Price Expectation When people anicipate price increase, demand for its product increases. 5. Price of Related Goods When the products price increases, people shift to its substitutes, thus known as goods. Hypothetical Market Demand Schedule for Meat Per Day in National Capital Region (Manila) Price of Meat Per Kg. 45 50 55 60 65 70 75 Quantity Demanded in Kgs. 90,000.00 85,000.00 80,000.00 75,000.00 70,000.00 65,000.00 60,000.00

1 |Page

Hypothetical Market Demand Schedule for Meat Per Day in Manila

NOTE: An excess demand or a supply shortage exists when the quantity demanded exceeds the quantity supplied SHIFT IN THE DEMAND CURVE THROUGH THE CHANGES OF DIFFERENT FACTORS THAT DETERMINE DEMAND 1. Income in income demand curve shifts to the left in income demand curve shifts to the right 2. Population demand curve shifts to the right 3. Taste and Preference in taste and preference demand curve shifts to the left in taste and preference demand curve shifts to the right 4. Price Expectation if the people expect that the price of a product will decrease next week, demand curve shifts to the left if the people expect that the price of a product will increase next week, demand curve shifts to right 5. Price of Related Goods An increase in a price of a commodity can cause a shift in the demand curve for another product. PRICE DETERMINANTS BASED ON THE CLASSIFICATION OF GOODS THAT AFFECT DEMAND CURVE FOR INCOME.
-

Normal Goods - are any goods for which demand increases when income increases and falls when income decreases but price remains constant

2 |Page

Inferior Goods - is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed. Substitute Goods - is a good with a negative cross elasticity of demand. Complementary Goods - is a good with a positive cross elasticity of demand. ILLUSTRATION Income shift the demand curve to right for superior goods, and left for inferior goods. shift the demand curve to left for superior goods and right for inferior goods.

Income

PRICE OF RELATED GOODS

-

An increase in a price of a commodity can cause a shift in the demand curve for another product. ILLUSTRATION In the price of W Shift the demand curve for X to the right. The W and X are substitutes. In the price of Y Shift the demand curve for Z to the left. The Y and Z are complementary/

SUPPLY
-

Are quantity of goods that sellers are willing to sell at a given price.

LAW OF SUPPLY
-

As the price of a commodity decreases, quantity supplied also decreases. As the price of a commodity increases, quantity supplied also increases. Ceteris Paribus or assuming others things are equal.

SUPPLY DETERMINANTS:
1. Price of Goods The increase in price of goods especially raw material decreases the

2. 3.

4. 5. 6. 7. 8.

supply of finished goods in the market. An increase in the prices of goods increases the cost of producing further goods. Cost of Production The higher the cost of raw materials and other factors of production, the lesser the supply of produced goods in the market. Availability of Resources The supply of goods in the market depends on the availability of resources, More economic market resources that offer production means more supply of goods in the market. Conversely, less supply, less goods. Number of Producers and Sellers the more the producers and sellers, the more likehood of a bigger supply. The fewer these players, the lesser the goods supply. Technological Advancement The more improved and advance technology is used in a production of goods, the more supply there is the market. Taxes The higher the taxes imposed by Government, the lesser the production and thus, less supply of goods in the market. Subsidies Government determines what industries to promote by, among others, providing subsidies to favored business. Weather Climate affects a products level of supply particularly those of agricultural goods. Drought expectedly decreases rice supply.

3 |Page

Hypothetical Market Supply Schedule for Meat Per Day in National Capital Region (Manila) Price of Meat Per Kg. 45 50 55 60 65 70 75 Quantity Supplied in Kgs. 60,000.00 65,000.00 70,000.00 75,000.00 80,000.00 85,000.00 90,000.00

Hypothetical Market Supply Curve for Meat Per Day in Manila

NOTE: A low demand or a supply surplus exists when the quantity supplied exceeds the quantity demanded SHIFT IN THE SUPPLY CURVE THROUGH THE CHANGES OF DIFFERENT FACTORS THAT DETERMINE SUPPLY 1. Price of Goods in income supply curve shifts to the right in income supply curve shifts to the left 2. Cost of Production in cost of production supply curve shifts to the right in cost of production supply curve shifts to the left 3. Availability of Resources

4 |Page

in availability of resources supply curve shifts to the left in availability of resources supply curve shifts to the right 4. Technology presence of modern technology - supply curve shifts to the right absence of modern technology supply curve shifts to the left

5. Number of Producers in number of producers supply curve shifts to the left in number of producers supply curve shifts to the right 6. Taxes in taxes supply curve shifts to the right in taxes supply curve shifts to the left 7. Subsidies in subsidies supply curve shifts to the left in subsidies supply curve shifts to the right 8. Weather Good weather - supply curve shifts to the right Bad weather supply curve shifts to the left

MARKET EQUILIBRIUM
-

Means a state of market supply and demand balance each other and, as a result, prices become stable. Equilibrium price is where the supply of goods matches demand. Hypothetical Market Demand & Supply Schedule for Meat Per Day in National Capital Region (Manila) Price of Meat Per Quantity Demanded Quantity Supplied in Kg. in Kgs. Kgs. 45 50 55 60 65 70 75 90,000.00 85,000.00 80,000.00 75,000.00 70,000.00 65,000.00 60,000.00 60,000.00 65,000.00 70,000.00 75,000.00 80,000.00 85,000.00 90,000.00

5 |Page

Hypothetical Market Demand & Supply Schedule for Meat Per Day in National Capital Region (Manila)

Excess Supply (Surplus) If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. Excess Demand (Shortage) Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. ELASTICITY OF DEMAND AND SUPPLY The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life. To determine the elasticity of the supply or demand curves, we can use this simple equation: Elasticity = (% change in quantity / % change in price) If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic. As we mentioned previously, the demand curve is a negative slope, and if there is a large decrease in the quantity demanded with a small increase in price, the demand curve looks flatter, or more horizontal. This flatter curve means that the good or service in question is elastic.
6 |Page

Meanwhile, inelastic demand is represented with a much more upright curve as quantity changes little with a large movement in price.

Elasticity of supply works similarly. If a change in price results in a big change in the amount supplied, the supply curve appears flatter and is considered elastic. Elasticity in this case would be greater than or equal to one.

On the other hand, if a big change in price only results in a minor change in the quantity supplied, the supply curve is steeper and its elasticity would be less than one.

7 |Page

FACTORS AFFECTING DEMAND ELASTICITY:

1. The availability of substitutes - This is probably the most important factor influencing

the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be. For example, if the price of a cup of coffee went up by $0.25, consumers could replace their morning caffeine with a cup of tea. This means that coffee is an elastic good because a raise in price will cause a large decrease in demand as consumers start buying more tea instead of coffee. 2. Amount of income available to spend on the good - This factor affecting demand elasticity refers to the total a person can spend on a particular good or service. Thus, if the price of a can of Coke goes up from $0.50 to $1 and income stays the same, the income that is available to spend on coke, which is $2, is now enough for only two rather than four cans of Coke. In other words, the consumer is forced to reduce his or her demand of Coke. Thus if there is an increase in price and no change in the amount of income available to spend on the good, there will be an elastic reaction in demand; demand will be sensitive to a change in price if there is no change in income. 3. Time - The third influential factor is time. If the price of cigarettes goes up $2 per pack, a smoker with very few available substitutes will most likely continue buying his or her daily cigarettes. This means that tobacco is inelastic because the change in price will not have a significant influence on the quantity demanded. INCOME ELASTICITY OF DEMAND: In the second factor outlined above, we saw that if price increases while income stays the same, demand will decrease. It follows, then, that if there is an increase in income, demand tends to increase as well. The degree to which an increase in income will cause an increase in demand is called income elasticity of demand, which can be expressed in the following equation:

If EDy is greater than one, demand for the item is considered to have a high income elasticity. If however EDy is less than one, demand is considered to be income inelastic. Luxury items usually have higher income elasticity because when people have a higher income, they don't have to forfeit as much to buy these luxury items.

8 |Page

NATIONAL INCOME
-

is a measure of the total flow of earnings of the factor-owners through the production of goods & services. it is the total amount of income earned by the citizens of a nation. reflects the level of aggregate output.

GROSS NATIONAL PRODUCT ( GNP )

-

is a measure of the total market value of all final goods & services currently produced by all the citizens of a nation within a period, usually a year.

GROSS DOMESTIC PRODUCT ( GDP )

-

is an aggregate measure of the total value of net output produced within the domestic boundary of an economy in a specific period, say a year.

MEASUREMENT OF NATIONAL INCOME The Circular Flow of Economic Activities Expenditures ($) Product Market $ Output Households Firms

Income by production

Factor Costs

Note: The 3 arrows in the diagram show the overall level of economic activities. OUTPUT OR VALUE - ADDED APPROACH
-

The total value of all final goods & services ( i.e. outputs ) can be found by adding up the total values of outputs produced at different stages of production. This method is to avoid the so-called double-counting or an over-estimation of GNP. However, there are difficulties in the collection and calculation of data obtained.

EXPENDITURE APPROACH
-

The amount of expenditures refers to all those spending on currently-produced final goods & services only. In an economy, there are 3 main agencies which buy goods & services. They are the households, firms and the government.

In economics, we have the following terms: C = Private Consumption Expenditure ( of all households ) I = Investment Expenditure ( of all firms) G = Government Consumption Expenditure ( of the local government )

9 |Page

The expenditure approach is to measure the GNP. We could not buy all our outputs because some are exported to overseas. Similarly, our consumption expenditures may include the purchases of some imports. In order to find the GNP, the value of exports must be added to C, I & G whereas the value of imports must be deducted from the above amount. Finally, we have : G N P at market prices = C + I + G + X - M G N P = G D P + Net Income from abroad INCOME APPROACH The income approach tries to measure the total flows of income earned by the factorowners in the provision of final goods & services in a current period. There are 4 types of factors of production and 4 types of factor incomes accordingly. National Income = Wages + Interest Income + Rental Income + Profit
-

The term profit can be further sub-divided into : Profit Tax ; Dividend to all those shareholders ; & Retained Profit ( or retained earnings ). RELEVANT CONCEPTS OF NATIONAL INCOME NET NATIONAL PRODUCT ( NNP )
-

The investment expenditure of the firms is made up of 2 parts. One part is to buy new capital goods & machinery for production. It is called net investment because the production capacity of the firms can be expanded.

Depreciation
-

refers to all those expenses to replace physical capital due to wear and tear, obsolscence, destruction and accidential loss etc.

The sum of these 2 amounts is called Gross Investment in economics. Gross Investment = Net Investment + Depreciation Net investment will increase the production capacity and output of a nation, but not by depreciation expenditure. So we have, N N P = G N P - Depreciation NOMINAL GNP ( GNP AT CURRENT MARKET PRICES )
-

is a measure based on market prices which are expressed in terms of money. In reality, market prices change all the time. The same amount of outputs may have different total market values provided that prices change.

In order to isolate the effect of price changes on the value of GNP, economists have developed the concept and technique of constant market prices.

EXAMPLE:
10 | P a g e

T-shirt Watch Soft-drink

Nation A with a population of 5 million 1990 1995 2000 Price Quantity Price Quantity Price Quantity (million) (million) (million) 1 6 1 6 2 6 2 4 2 6 2 5 2 2 3 4 4 5

G N P at the base year ( 1990 ) = 1 x 6 + 2 x 4 + 2 x 2 m. = 18 million G N P at current market prices in 1995 = 1 x 6 + 2 x 6 + 3 x 4 m. = 30 million G N P at current market prices in 2000 The 2 values of GNP at current market prices in 1995 & 2000 are calculated by using the money prices in that year. They are also called nominal GNP. Nominal growth rate of GNP refers to the change in the value of nominal GNP between any 2 years, e.g. the nominal growth rate is 66.67 % between 1990 to 2000. REAL GNP The value of real GNP is based on the prices of the base year. However, there are too many different values of prices on goods & services. To make the calculation of GNP easier, economists use a price index to find the real GNP. A price index is a number showing the changes in the overall level of prices. It shows a change in the general price level of an economy. With the value of the price index, the real GNP of anyone year can by found: Real GNP = Nominal GNP * (Price index at base year / Price index at current year)
-

FACTORS AFFECTING NATIONAL INCOME 1. FACTORS OF PRODUCTION Normally the more efficient and richer the resources, the higher the level of national income or GNP will be. a) Land - resources like coal, iron & timber are essential for heavy industries so that they must be available and accessible. In other words, the geographical location of these natural resources affect the level of GNP. b) Capital - is greatly determined by investment. Investment in turn depends on other factors like profitability, political stability etc. c) Labour & Entrepreneur -the quality or productivity of human resources is more important than quantity. Manpower planning and education affect the productivity and production capacity of an economy. 2. TECHNOLOGY This factor is more important for nations with little natural resources. The development in technology is affected by the level of invention and innovation on production. 3. GOVERNMENT can help to provide a favourable business environment for investment. It provides laws and order, regulations that affect exchanges. 4. POLITICAL STABILITY A stable economic and political system helps the allocation of resources. Wars, strikes and social unrests will discourage investment and business activities.

11 | P a g e