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Demand, Supply

and Market
Equilibrium

Demand
the schedule of various quantities of goods
and services which buyers are willing and able
to purchase at a given price, time and place,
all other factors are held constant (ceteris
paribus).

Law
statesof
thatDemand
as the price increases, the
quantity demanded decreases; and as the
price decreases, the quantity demanded
increases, ceteris paribus.

1. Price of factors
the product
Various
affecting demand:
2. Income of the buyers
3. Quality of the product
4. Season
5. Price expectation
6. Number of consumers/Population
7. Tastes and preferences
8. Promotion and advertisement
9. Religion
10.Price of related products
11.Fashion/Fad
12.Customs and traditions

Demand
Schedule
the listing of the
different quantities of goods and
services that buyers will purchase given the various
alternative prices
Example:
Table 1. Demand Schedule For Commodity X
Price of X
(Px)

Quantity demanded for commodity


X (Qdx)

10

20

30

40

50

60

70

80

Demand Curve
a plotted demand schedule
Example:
Quantity Demanded
Figure 2: Demand Curve
Price
10
0
80
60

Deman
d

40
20
0 0

1
9

2
10

Demand Function
is expressed in this form:

Qdx = f (Px)

Where: Qdx quantity demanded for commodity X


Px price of commodity X

Demand Equation
is presented as follows:

Qdx = a - bPx

Where: a intercept
b - slope ( the formula :
Example: Qdx = 20 0.4Px

Q/ P )

Interpretation of the intercept


and the slope
a = 20

The intercept means that if the price of


commodity X is zero, the buyer will
purchase20 units of commodity.
b = - 0.4 The slope means that for every one unit
change (either an increase or decrease) in
the price of X, the quantity demanded will
change by 0.4 unit.
The negative sign indicates a negative
(inverse) relationship between the price of X
and the quantity demanded.

Example:

Calculate the quantity demanded assuming the


following prices:
1. P = 20
2. P = 30
3. P = 40
Answer:
1. If P = 20, then
2. If P = 30, then
Qx = 20 0.4 (20)
Qx = 20 0.4 (30)
= 12
=8
3. If P = 40, then
Qx = 20 0.4 (40)
=4

Plot the demand curve:


Price

Qd

20

12

30

40

40

35

Quantity Demanded
Figure 3: Demand Curve

Price
45

30

Deman
d

25
20
15
10
5
0

0
12

4
14

10

Movement
a given
demand
to the shift inalong
the quantity
demand
schedule due to the changes in the price of
the product when all other factors are held
constant
Price
P2

Deman
d
A

P1
Q1

Q2

Figure 4:
Movement
along a given
demand

Change
Demand
to the shiftin
in the
entire demand schedule
due to the changes in some factors that were
held constant like income, price of related
products, and others.
Price

Qd 1

Qd 2

18

34

10

16

32

15

14

28

20

12

24

25

10

20

30

16

35

12

40

Table 2:
Demand
Schedule

Quantity Demanded
Figure 5: Change in Demand Curve

Price
45
40
35
30
25
20
15
10

D1

5
0

4
36

8
40

12

16

D2
20

24

28

30

Market Demand Curve


the total demand obtained by taking the
horizontal summation of all individual demand
curves of the consumers in the market
Prices

Consumer
A

Consumer
B

Consumer
C

Total
Demand

15

10

17

14

13

25

13

11

16

33

12

14

19

41

11

17

22

10

49

10

20

25

12

57

Table 3: Demand Schedule

Price

Quantity Demanded
Figure 6: Total Demand Curve

16
15
14
13
12

Tota
l

11
10

0
50

10
60

20

30

40

Supply
the schedule of various quantities of goods
and services which sellers are willing and able
to sell at a given price, time and place, all
other factors are held constant (ceteris
paribus).

Law
statesof
thatSupply
as the price increases, the
quantity supplied also increases; and as the
price decreases, the quantity supplied also
decreases, ceteris paribus.

Some factors affecting supply:


1.
2.
3.
4.
5.
6.
7.
8.

Price of the product


Cost of the product
Availability of raw product
Technology
Number of sellers
Price expectation
Taxes and subsidies
Prices of other products

Supply
Schedule
the listing of
the different quantities of goods and
services that seller will sell given the various
alternative prices
Example:
Table 4. Supply Schedule For Commodity X
Price of X
(Px)

Quantity demanded for commodity


X (Qsx)

10

20

30

40

50

60

70

80

Supply Curve
a plotted supply schedule
Example:
Quantity Supplied
Figure 7: Supply Curve

Price
90

Supply

80
70
60
50
40
30
20
10
0

1
9

Supply Function
is expressed in this form:

Qsx = f (Px)

Where: Qsx quantity supplied for commodity X


Px price of commodity X

Supply Equation
is presented as follows:

Qsx = a + bPx

Where: a intercept
b - slope ( the formula :
Example: Qsx = -10 + 0.6Px

Q/ P )

Interpretation of the intercept and the


slope
a = -10

The intercept means that if the price of


commodity X is zero, the seller will
sell -10 units of commodity. A negative quantity is
nothing. This only emphasizes that if there is no
price, the seller will sell nothing.
b = 0.6 The slope means that for every one unit
change in the price of X, the quantity supplied
will change by 0.6 unit.
The positive sign indicates a positive
relationship between the price of X
quantity supplied.

and the

Example:

Calculate the quantity supplied assuming the


following prices:
1. P = 20
2. P = 30
3. P = 40
Answer:
1. If P = 20, then
2. If P = 30, then
Qx = -10 + 0.6 (20)
Qx = -10 + 0.6 (30)
=2
=8
3. If P = 40, then
Qx = -10 + 0.6 (40)
= 14

Plot the supply curve:


Price

Qs

20

30

40

40

14

35

Quantity Supplied
Figure 8: Supply Curve

Prize
45

30

Supply

25
20
15
10
5
0

2
14

4
16

10

12

Movement along a given supply


change in the quantity supply schedule due
to the changes in the price of the product
when all other factors are held constant
Price

Supply
B

P2
P1

Q1

Q2

Figure 9:
Movement
along a given
supply

Quantity

Change in Supply
shift in the entire supply schedule due to
the changes in some factors that were held
constant like the cost of product, availability
of raw materials, and others.

Table 5: Supply
Schedule

Price

Qs 1

Qs 2

10

12

14

12

16

16

18

20

10

20

24

12

22

28

14

24

32

16

Quantity Supplied
Figure 10: Change in Supply Curve
Price
28

S2

24

S1

20
16
12
8
4
0

0
20

2
22

4
24

10

12

14

16

18

Market Supply Curve


the horizontal summation of all individual
supply of the sellers in the market
Prices

Seller A

Seller B

Seller C

Total
Supply

11

17

15

28

19

14

40

23

18

10

51

27

22

13

62

31

27

16

74

Table 6: Supply Schedule

Quantity Supplied
Figure 11: Total Supply
Price
7
6

Tota
l

4
3
2
1
0

0
70

10
80

20

30

40

50

60

Market Equilibrium
the condition when quantity demanded is
equal to quantity supplied (Qd = Qs)

Equilibrium
Price

Figure 12:
Market
Equilibrium

Equilibrium
Quantity

No
Equilibrium
there
is no balance between the demand
and supply

Shortage
condition when the quantity demanded
exceeds the quantity supplied. This happens
when the price gets lower than the
equilibrium price.

Surplus
condition when the quantity supplied is
greater than the quantity demanded. This
occurs when the price is above the
equilibrium price.

Numerical Example:
Price of X
(Px)

Quantity
Demanded for
commodity X (Qdx)

Quantity Supplied for


commodity X (Qsx)

10

20

30

40

50

60

70

80

Table 7: Demand and Supply


Schedule

Quantity
Figure 13: Market Equilibrium
Price
90
80

Supply

70
60
50
40
30

Demand

20
10
0

1
9

2
10

Marketthe
Equilibrium
in Mathematical
Assume
previous demand
and supplyLanguage
equations:
Demand:
Qdx = 20 0.4Px
Supply: Qsx = -10 + 0.6Px
Find the equilibrium price and quantity.
Demand = Supply
Qdx = Qsx
20 0.4Px = -10 + 0.6Px
20 + 10 = 0.6Px + 0.4Px
30 = 1Px
30 = Px

the
equilibrium
price is P30.00.

Market Equilibrium in Mathematical Language


The equilibrium quantity can be obtained using
either the demand or supply equations.
Demand:
Qdx = 20 0.4Px
= 20 0.4(30)
=8

Supply:
Qsx = -10 + 0.6Px
= -10 + 0.6(30)
=8

Therefore, the equilibrium quantity is 8 units.

Prepared By:

Aldea H. Zuiga