basic analysis of demand and supply
TRANSCRIPT
Basic Analysis of Demand and SupplyChapter 2
MARKETBasic Analysis of Demand and Supply
Market
Where buyers and sellers meet
Where transactions take place
Where do transactions take place?
Market
Tangible Domain
Wet Market
Dry Market
Intangible Domain
Stock Market
Real Estate Market
Labor Market
DEMANDBasic Analysis of Demand and Supply
Demand
Demand
Desire to possess a
thing
Ability to pay for it
Willingness in utilizing
it
You cannot always buy them just by want/desire because you face constraints
Constraints
You have to pay
You lack funds
Opportunity cost
Opportunity Cost
• Every decision to buy one thing is a choice NOT to buy the other. The option not chosen is the opportunity cost.
LAW OF DEMANDBasic Analysis of Demand and Supply
Law of Demand
Price
Demand
*Ceteris Paribus
Ceteris Paribus
• Ceteris Paribus is a Latin term for all other things being equal or held constant.
Validity and Justification of Law of Demand
ProofsTo justify the Law of
Demand
Income Effect
If Price decreases, consumers can buy more.
Substitution Effect
If price increases, consumers will look for others with lower price
DETERMINANTS OF DEMANDBasic Analysis of Demand and Supply
Determinants of Demand
• Factors that actually influence the quantity of demand.
Determinants of Demand
Consumer’s Income
Expectation of Future
Prices
Price of Related Products
Occasional/Seasonal Products
Consumer Tastes
Population Change
C
E
PO
CT
PC
Consumers’ Income
INCOME PURCHASING POWER
C
E
PO
CT
PC
*changes demand depending on the types of goods
Types of Goods
Normal Good
Demand ↑ - Income ↑
Inferior Good
Demand ↓ - Income ↑
C
E
PO
CT
PC
Determinants of Demand
Consumer’s Income
Expectation of Future
Prices
Price of Related Products
Occasional/Seasonal Products
Consumer Tastes
Population Change
C
E
PO
CT
PC
Expectations of Future Prices
• Prices expected in future periods
C
E
PO
CT
PC
Determinants of Demand
Consumer’s Income
Expectation of Future
Prices
Price of Related Products
Occasional/Seasonal Products
Consumer Tastes
Population Change
C
E
PO
CT
PC
Prices of Related Products
• Changes in prices of related goods• The direction in which demand would
change depends on the relationships of products.
C
E
PO
CT
PC
Relationships of Products
Goods that can be used in place of other goods
Gasoline and LPG
Substitute ProductsGoods that go together/cannot be used without the other
Mini4WD and Accessories
Complementary Products
C
E
PO
CT
PC
Determinants of Demand
Consumer’s Income
Expectation of Future
Prices
Price of Related Products
Occasional/Seasonal Products
Consumer Tastes
Population Change
C
E
PO
CT
PC
Occasional/Seasonal Products• Demand increases in various events/seasons in a given year
C
E
PO
CT
PC
Determinants of Demand
Consumer’s Income
Expectation of Future
Prices
Price of Related Products
Occasional/Seasonal Products
Consumer Tastes
Population Change
C
E
PO
CT
PC
Consumer’s Tastes/Preferences
Religion
Culture
Age Tradition
etc
C
E
PO
CT
PC
Determinants of Demand
Consumer’s Income
Expectation of Future
Prices
Price of Related Products
Occasional/Seasonal Products
Consumer Tastes
Population Change
C
E
PO
CT
PC
Population Change
Population
Demand
C
E
PO
CT
PC
DEMAND FUNCTION, DEMAND SCHEDULE AND DEMAND CURVE
Basic Analysis of Demand and Supply
Demand Function• Formula for showing the relationship between demand and its
determinants
• Where:– PGS = Price of good/service
– I = Income– Ec = Consumer’s Expectations
– PRP = Price of Related Products
– Tc = Consumer’s Tastes
– Pop = Population
Demand Schedule• Table showing the relationship of price and demand
Points Price (Millions) Quantity Demanded
A 0 4000
B 1 3500
C 2 3000
D 3 2500
E 4 2000
F 5 1500
G 6 1000
H 7 500
Demand Curve• Graph of the price and demand ceteris paribus
0 500 1000 1500 2000 2500 3000 3500 4000 45000
1
2
3
4
5
6
7
8
Price
Quantity Demanded
SUPPLYBasic Analysis of Demand and Supply
Supply
Supply
Goods/services willing to sell
Services sold at given price to maximize
profitMaximum quantity of
goods producers are willing to offer
You cannot always sell them just to maximize profit because you face constraints
Constraints
Market Price
Cost of Production
Market Price
• It is the price that the sellers can charge their product in a competitive market.
Constraints
Market Price
Cost of Production
Cost of Production
• The costs of the production process and the prices of inputs that they have used to make the product
LAW OF SUPPLYBasic Analysis of Demand and Supply
Law of Supply
Price Supply
*Ceteris Paribus
Because ↑ Price = ↑Profit
DETERMINANTS OF SUPPLYBasic Analysis of Demand and Supply
Tech
nolo
gica
l Cha
nge
Co
st o
f In
pu
ts
Fu
ture
Pri
ce E
xpe
cta
tion
s
Pric
e of
Rel
ated
Pro
duct
s
Op
timiz
atio
n o
f Pro
du
ctio
n
Fa
cto
rs
Gov
’t R
egul
atio
n an
d Ta
xes
Gov
’t S
ubsi
dies
Wea
ther
Con
ditio
ns
Num
ber
of F
irms
Determinants of Supply
Technological Change
Production Cost
Supply
*because profit increases as supply increases
*Due to state-of-the-art machineries able to mass produce goods/services
Cost of Inputs Used
Cost of Production
Quantity supplied
*because profit decreases as supply decreases
Future Price Expectations
The future expectation of price is to go up
Keep goods till the price rises
Pric
e
Supply
Price of Related Products
• Changes in the supply of goods have significant effect in the supply of such goods.
Optimization of Production Factors
• The process/methodology of making something as fully perfect, functional, or effective as possible.
• Efficient use of resources
Gov’t Regulation and Taxes
Tax
Production Cost
Profit
Supply
Gov’t Subsidies
Government Subsidies (financial Aids/Assistance)
Production Cost
More Profit
Weather Conditions
Bad Weather
Good Weather
Number of Firms or Sellers in the Market
Dealers
Supplies
Profit
SUPPLY FUNCTION, SUPPLY SCHEDULE AND SUPPLY CURVE
Basic Analysis of Demand and Supply
Supply Function• Formula for showing the relationship between Supply and its determinants
• Where:– PGS = Price of good/service
– T = Technology– CI = Cost of Inputs
– PE = Expectation of Future Price
– PRP = Price of Related Products
– OFP = Optimization of Factors of Production
– TGR = Gov’t Regulations and Taxes
– SG = Gov’t Subsidies
– W = Weather Conditions– NF = Number of Firms in the Market
Supply Schedule• Table showing the relationship of Price and Supply
Points Price (Millions) Quantity Supplied
A 0 -2000
B 1 -1000
C 2 0
D 3 1000
E 4 2000
F 5 3000
G 6 4000
H 7 5000
Supply Curve• Graph of the price and Supply ceteris paribus
-3000 -2000 -1000 0 1000 2000 3000 4000 5000 60000
1
2
3
4
5
6
7
8
Series1; 0
1
2
3
4
5
6
7
Price
Quantity Supplied
Pri
ce (
mill
ion
s)
MARKET EQUILIBRIUMBasic Analysis of Demand and Supply
Market Equilibrium
Demand Supply
Equilibrium
Demand Supply
S
S
SD
D
D
Equilibrium Market Price
Equilibrium Market Price
Equilibrium Market Price
Buyer
Seller
Equilibrium using Demand and Supply Schedule
Points Price (millions)
Quantity Demanded
Quantity Supplied
State of Market
Pressure on Price
A 0 4000 -2000 Shortage-5000 Upward
B 1 3500 -1000 Shortage-4500 Upward
C 2 3000 0 Shortage-3000 Upward
D 3 2500 1000 Shortage-1500 Upward
E 4 2000 2000 Equilibrium0 Neutral
F 5 1500 3000 Surplus1500 Downward
G 6 1000 4000 Surplus3000 Downward
H 7 500 5000 Surplus4500 Downward
Equilibrium using Demand and Supply Curves
-3000 -2000 -1000 0 1000 2000 3000 4000 50000
1
2
3
4
5
6
7
8
DemandSupply
Quantity Demanded
Pri
ce (
Mill
ion
s)
Equilibrium Point
What happens when there is a market disequilibrium?
Market Disequilibrium
Shortage Surplus
Shortage
Quantity Demanded
Quantity Supplied
Shortage
-3000 -2000 -1000 0 1000 2000 3000 4000 50000
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7
8
DemandSupply
Quantity Demanded
Qu
an
tity
Su
pp
lied
Shortage
Prices have the tendency to go UP to restore the equilibrium(without government intervention)
Equilibrium using Demand and Supply Schedule
Points Price (millions)
Quantity Demanded
Quantity Supplied
State of Market
Pressure on Price
A 0 4000 -2000 Shortage-5000 Upward
B 1 3500 -1000 Shortage-4500 Upward
C 2 3000 0 Shortage-3000 Upward
D 3 2500 1000 Shortage-1500 Upward
E 4 2000 2000 Equilibrium0 Neutral
F 5 1500 3000 Surplus1500 Downward
G 6 1000 4000 Surplus3000 Downward
H 7 500 5000 Surplus4500 Downward
Market Disequilibrium
Shortage Surplus
Surplus
Quantity Demanded
Quantity Supplied
Surplus
-3000 -2000 -1000 0 1000 2000 3000 4000 50000
1
2
3
4
5
6
7
8
DemandSupply
Quantity Demanded
Qu
an
tity
Su
pp
lied
Surplus
Prices have the tendency to go DOWN to restore the equilibrium(without government intervention)
Equilibrium using Demand and Supply Schedule
Points Price (millions)
Quantity Demanded
Quantity Supplied
State of Market
Pressure on Price
A 0 4000 -2000 Shortage-5000 Upward
B 1 3500 -1000 Shortage-4500 Upward
C 2 3000 0 Shortage-3000 Upward
D 3 2500 1000 Shortage-1500 Upward
E 4 2000 2000 Equilibrium0 Neutral
F 5 1500 3000 Surplus1500 Downward
G 6 1000 4000 Surplus3000 Downward
H 7 500 5000 Surplus4500 Downward
MARKET INTERFERENCEBasic Analysis of Demand and Supply
Market Interference
• utilized supply and demand models are only possible in an unregulated market
• In real world situations, governments around the world try to control prices because:–Some sectors do not benefit–Some sectors take advantage of price controls
Price Control
• Specification of MINIMUM PRICE and/or MAXIMUM PRICE of goods and services by the government.
Price Control
Price Ceiling Price Floor
Price Ceiling
• Legal maximum price imposed by the government.
• Used only by the government if there is a persistent SHORTAGE OF GOODS
Price Ceiling
-3000 -2000 -1000 0 1000 2000 3000 4000 50000
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DemandSupply
Quantity Demanded
Qu
an
tity
Su
pp
lied
*to protect the consumers from the rising price of supplies
Price Control
Price Ceiling Price Floor
Price Floor
• Legal MINIMUM PRICE imposed by the government.
• Used only by the government if there is a persistent SURPLUS OF GOODS
Price Floor
-3000 -2000 -1000 0 1000 2000 3000 4000 50000
1
2
3
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7
8
DemandSupply
Quantity Demanded
Qu
an
tity
Su
pp
lied
*to protect the producers from the falling price of supplies
Humans and animals are both selfish. They virtually don’t care about others. They say clever things, make relationships where both sides use each other, and look for a way to profit
themselves while limiting the loss for the other group.