THE BASIC ANALYSIS OF DEMAND AND SUPPLY

Presented By: GROUP 1

Introduction: Demand is generally affected by the behavior of consumers, while supply is usually affected by the conduct of producers. The interplay between these two in the foundation of economic activity.

Market
A market is where buyers and sellers meet. It is the place where they both trade or exchange goods or service

WET

DRY

In economic parlance
The term market does not necessarily refer to a tangible area where buyers and sellers could be seen transacting. It can represent an intangible domain where goods and services are traded, such as the stock market, real estate market, or labor market- where workers offer their services, and employers look for work to hire.

Demand
Pertains as to the quantity of a good or service that people are ready to buy at given prices within a given time period, when other factors besides price are held constant.

Demand implies 3 things:

Desire to posses a thing; The ability to pay for it or means of purchasing it; and Willingness in utilizing it.

Law of Demand

The Law of Demand states that if price goes UP, the quantity demanded will go DOWN. Conversely, if price goes DOWN, the quantity demanded will go UP ceteris paribus. The reason for this is because consumers always tend to MAXIMIZE SATISFACTION.

Demand Schedule
Is a table that shows the relationship of prices and the specific quantities demanded at each of these prices. The information provided by a demand schedule can be used to construct a demand curve showing the price-quantity demanded relationship in graphical form.

Hypothetical Demand Schedule for Rice Per Month

Situation
A B C D E

Price(P)
5 4 3 2 1

Quantity(Q)
8 13 20 30 45

Demand curve
It is a graphical representation showing the relationship between price and quantities demanded per time period.

Demand Curve

A demand curve has a negative slope thus it slopes downward from left to right.
The downward slope indicates inverse relationship between price and quantity demanded.

Why downward?
As the price of the product falls, consumers will tend to substitute this(now relatively cheaper) product for others in their purchases; As the price of the product falls, this serves as to increase their real income allowing them to buy more products

Demand Function
Shows the relationship between demand for a commodity and the factors that determine or influence this demand.

Factors that determine demand:

Price of the commodity itself

Prices of other related commodities

Consumers level of incomes Taste and preference Size and composition of level of population

Distribution of income

Demand Function is expressed as:

QD = f (own price, income, price of related goods, etc.)

Change in quantity Demanded

Change in Quantity Demanded vs. Change in Demand

There is change in quantity demanded if the movement is along the same demand curve. A change in quantity demanded is brought about by an increase (decrease) in the products price. The direction of the movement however is inverse considering the Law of Demand.

Change in Quantity Demanded

Change in Demand

There is a change in demand if the entire demand curve shift to right side resulting to an increase in demand.

Conversely demand decreases or falls if the entire demand curve shifts downward or to the left. At the same price, less amounts of a good or service are demanded by consumers.

 Increase (decrease) in demand is brought by factors other than the price of the good itself such as tastes and preferences, price of substitute goods, etc. resulting to shift of the entire demand curve either upward or downward.

Forces that causes the demand curve to change:

Taste or Preference - Pertain to the personal likes and dislikes of consumers for certain goods and services. If tastes or preferences change so that people want to buy more of a commodity at a given price, then an increase in demand will result or vice versa.

 Changing Incomes
- Increasing incomes of households raise the demand for certain goods or services or vice versa.

 Occasional or seasonal products - The various events or seasons in a given year also result to a movement of the demand curve with reference to particular goods

 Population change - An increasing population leads to an increase in the demand for some types of good or services, viceversa. More people simply means that more goods or services are to be demanded. In particular, increase in population generally results to an increase in demand for basic goods, such as food and medicines. On the other hand, a decrease in population results in a decline in demand.

 Substitute goods

- Substitute goods are goods that are interchanged with another good. In a situation where the price of a particular good increases a consumer will tend to look for closely related commodities. Substitute goods are generally offered at a cheaper price, consequently making it more attractive for buyers to purchase

 Expectations of future prices

- If buyers expect the price of a good or service to rise (fall) in the future, it may cause the current demand to increase (decrease). Also, expectations about the future may alter demand foor specific commodity.

Supply(Firms/Sellers side)
Supply is the quantity of goods or services that forms are ready and willing to sell at a given price within a period of time, other factors being held constant.

Law of Supply The law of supply states that if the price of a good or service goes up, the quantity supplied for such good service will also go up; if the price goes down the quality supplid also goes down, ceteris paribus.

Supply Schedule

A supply schedule is schedule listing the various prices of a product and the specific quantities supplied at each of these prices. Generally, the information provided by a supply schedule can be used to construct a supply curve showing the price/quantity supplied schedule for rice per month.

Hypothetical Supply Schedule for Rice Per Month

Situation A
B C D E

Price(P) 5
4 3 2 1

Quantity(Q) 48
41 30 17 5

Supply Curve

It is a graphical representation showing the relationship between the price of the product or factor of production and the quantity supplied per time period.

Supply Curve
The typical market supply curve for a product slopes upward from left to right indicating that as price rises (falls) more (less) is supplied.
The upward slopes indicates the positive relationship between price and quantity supplied.

Supply Function
A supply function is aform of mathematical notation that links the dependent variable, quantity supplied (Qs), with various independent variables which determine quantity supplied. QS = f (own price, number of sellers, price of factor inputs, technology, etc.)

Change in Quantity Supplied vs. Change in Supply

Change in Quantity Supplied There is a change in quantity supplied if the movement is along the same supply curve. A change in quantity supplied is brought about by an increase (decrease) in the products own price. The direction of the movement however is positive considering Law of Supply.

Change in Supply
- There is change in supply when the entire supply curve shifts rightward or leftward. At the same price, therefore, more amounts of a good or service are supplied by producers or sellers.

Forces that cause the supply curve to change

Optimization in the use of factors production Technological change Future expectations

Number of sellers
Weather conditions Government policy

Market Equilibrium

The meeting of supply and demand results to what is refferd to as market equilibrium State of balance

Equilibrium
Pertains to a balance that exists when quantity demanded equals quantity supplied. Equilibrium is the general agreement of the buyer and the seller at a particular price and at a particular quantity. At equilibrium point, there are always two sides of the story, the side of the buyer and that of the seller.

Equilibrium Market price Equilibrium market price is the price agreed by the seller to offer its good or service for sale and for the buyer to pay for it. It is the price at which quantity demanded of a good is exactly equal to the quantity supplied.

What happens when there is market disequilibrium?

Surplus
- Is a condition in the market where the quantity supplied is more the quantity demanded.

Shortage
- Is a condition in the market in which quantity demanded is higher than supplied.

Price Controls:

Floor price- it is the legal minimum price imposed by the government. This move is resorted in order to prevent bigger losses on the part of producers

Price ceiling- it is the legal maximum price imposed by the government. It is generally imposed by the government to protect consumers from abusive producers or sellers who take adventage of situation.

End of Report