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TOPIC 3: DEMAND AND

SUPPLY

MARKET
A

market is any place people come together to


trade.
Market has two sides: buyers and sellers.
Buyers

determine demand.
Sellers determine supply.

DEMAND
Demand

refers to the willingness and ability


of buyers to purchase different quantities of a
good at different price during specific time
period.

schedule is a table that shows the


relationship between the price of the good and
the quantity demanded.
Demand curve is a graphical presentation of the
relationship between the price of the product and
the quantity demanded.
Demand

AN INDIVIDUAL BUYERS
DEMAND FOR CORN
Price per Bushel
$5
$4
$3
$2
$1

10
20
35
55
80

Quantity Demanded

LAW OF DEMAND
The Law of Demand: As the price of a good falls,
the quantity demanded of the good rises and as
the price of a good rises the quantity demanded
of the good falls, ceteris paribus.
The demand curve is downward sloping.
Explain the Law of demand

People

substitute lower priced goods for higher priced

goods.
Law of diminishing marginal utility: the additional
satisfaction gained by consuming a good declines as
more unit of the good is consumed.

MARKET DEMAND
Price per

Quantity demanded

bushel

$5
$4
$3
$2
$1

Buyer 1

10
20
35
55
80

12
23
39
60
87

Buyer 2

8
17
26
39
54

Total quantity
Buyer 3

30
60
100
154
221

demanded

MARKET DEMAND
An individual demand curve represents the
relationship between price and quantity
demanded of a particular good for a single buyer.
Market demand refers to the sum of all
individual demands for a particular good.
Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.

DEMAND AND QUANTITY


DEMANDED
Demand

is represented by the entire demand

curve.
Quantity demanded is the number of units of
a good that buyers are willing and able to
purchase at a particular price.
Quantity

demanded refers to a point on the


demand curve.

DEMAND AND QUANTITY


DEMANDED

A change in quantity demanded is a movement


from one point to another point along the same
demand curve.
It

is caused by change in the price of the good.

A change in demand is a shift of the whole demand


curve.
Increase in demand: demand curve shifts to the right.
Decrease in demand: demand curve shifts to the left.
A change in demand is caused by a change in one or
more of the determinants of demand.

DETERMINANTS OF DEMAND

Determinants of demand are factors that cause


the demand curve to shift. They are:
Consumers

income
The prices of related goods
Consumers tastes and preferences
Expectation of future prices
Number of buyers

INCOME

Normal good: a good for which demand varies


directly with income.
If

income increases (decrease) then the demand for a


normal good will increase (decrease).

Inferior good: a good for which demand varies


inversely with income.
If

income increases (decrease) then the demand for


an inferior good will decrease (increase).

Neutral good: a good for which demand does not


change as income changes.

PRICES OF RELATED GOODS

Substitute goods are those goods that are similar


to one another and can be consumed in place of
one another.
When

the price of a good falls (rises), the demand


for its substitute good decreases (increases).

Complementary goods are those goods that are


used jointly in consumption.
When

the price of a good falls (rises), the demand


for its complementary good increases (decreases).

SUPPLY
Supply

refers to the willingness and ability of


sellers to produce and supply different
quantities of a good at different prices during
a specific time period.

schedule is a table that shows the


relationship between the price of the good and
the quantity supplied.
Supply curve is a graphical presentation of the
relationship between the price of the product and
the quantity supplied.
Supply

AN INDIVIDUAL PRODUCERS
SUPPLY OF CORN
Price per bushel
$5
$4
$3
$2
$1

60
50
35
20
5

Quantity Supplied

LAW OF SUPPLY
The Law of Supply: As the price of a good rises,
the quantity supplied of the good rises and as the
price of a good falls, the quantity supplied of the
good falls, ceteris paribus.
The supply curve is upward sloping.

MARKET SUPPLY
An individual supply curve represents the
relationship between price and quantity supplied
of a particular good for a single seller.
Market supply refers to the sum of all individual
supplies for a particular good.
Graphically, the market supply curve is obtained
by adding up horizontally the supply curves of all
individual sellers.

SUPPLY AND QUANTITY


SUPPLIED
Supply

is represented by the entire supply

curve.
Quantity supplied is the number of units of a
good that sellers are willing and able to
supply at a particular price.
Quantity

supplied refers to a point on the


supply curve.

SUPPLY AND QUANTITY


SUPPLIED

A change in quantity supplied is a movement


from one point to another point along the same
supply curve.
It

is caused by change in the price of the good.

A change in supply is a shift of the whole supply


curve.

Increase in supply: supply curve shifts to the right.


Decrease in supply: supply curve shifts to the left.
A change in supply is caused by a change in one or more
of the determinants of supply.

DETERMINANTS OF SUPPLY

Determinants of supply are factors that cause the


supply curve to shift. They are:
Resource

prices
Technology
Prices of other goods
Expectations of future prices
Number of sellers
Taxes and subsidies
Government restrictions

DETERMINANTS OF SUPPLY

Resource prices
If

prices of inputs increase, costs of production


increase, profits decrease supply decreases.
If prices of inputs decrease, costs of production
decrease, profits increase supply increases.

Technology
Advance

in technology lowers costs of production,


profits increase supply increases.

Prices of other goods


If

price of rice increases then supply of wheat


decreases.

DETERMINANTS OF SUPPLY

Expectation about future price


If

sellers expect higher price of a good in the future


then supply of the good decreases.
If sellers expect lower price of a good in the future
then supply of the good increases.

Taxes and subsidies


Taxes

increase costs of production, profit falls


supply decreases

Subsidies

lowers costs of production, profit rises


supply increases.

Government restrictions
Government

policy to control supply.

MARKET EQUILIBRIUM
Market equilibrium refers to a situation in which
the price has reached the level where quantity
supplied equals quantity demanded.
Market equilibrium determines equilibrium price
and equilibrium quantity.

Equilibrium

price: The price that balances quantity


supplied and quantity demanded.
Equilibrium quantity: the quantity at which the
amount of the good that buyers are willing and able
to buy equals the amount that sellers are willing and
able to sell.

MARKET SHORTAGE AND SURPLUS

Surpluses
When

price > equilibrium price, then quantity


supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales,
thereby moving toward equilibrium.

Shortages
When

price < equilibrium price, then quantity


demanded > the quantity supplied.

There is excess demand or a shortage.


Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.

MARKET EQUILIBRIUM IN TERMS OF


CONSUMER SURPLUS AND PRODUCER
SURPLUS

Consumer surplus (CS) is the difference between the maximum


price a buyer is willing and able to pay for a good and the price
actually paid.
CS = Maximum buying price Actual price

In a diagram, consumer surplus is measured by the area which is


above the price and below the demand curve.

Producer surplus (PS) is the difference between the price that a


seller actually receives and the minimum price for which he/she
is willing to sell the good.
PS = Actual price Minimum selling price

In a diagram, producer surplus is measured by the area which is


above the supply curve and below the price.

Total surplus is the sum of consumer surplus and producer


surplus.
TS = CS + PS

CHANGES IN MARKET
EQUILIBRIUM

The market equilibrium will change when there


is a change in demand, supply or both.
Changes

in demand
Changes in supply
Complex cases: Changes in both supply and
demand