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THE BASIC ANALYSISOF DEMAND AND
SUPPLYPresented By: GROUP 1
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Introduction:
Demand is generally affected by thebehavior of consumers, while supply isusually affected by the conduct ofproducers. The interplay between thesetwo in the foundation of economicactivity.
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Market
A market is wherebuyers and sellers
meet.
It is the placewhere they both
trade or exchangegoods or service
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WET DRY
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In economic parlance
The term market does not necessarily refer to atangible area where buyers and sellers could beseen transacting. It can represent an intangibledomain where goods and services are traded,such as the stock market, real estate market,
or labor market- where workers offer theirservices, and employers look for work to hire.
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Demand
Pertains as to the quantity of a good
or service that people are ready tobuy at given prices within a giventime period, when other factors
besides price are held constant.
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Demand implies 3
things:
Desire to posses a thing;
The ability to pay for it ormeans of purchasing it; and
Willingness in utilizing it.
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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 quantitydemanded will go UP ceteris paribus. Thereason for this is because consumers always
tend to MAXIMIZE SATISFACTION.
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Demand Schedule
Is a table that shows the relationship ofprices and the specific quantities
demanded at each of these prices. Theinformation provided by a demandschedule can be used to construct a
demand curve showing the price-quantitydemanded relationship in graphical form.
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Hypothetical Demand Schedule
for Rice Per Month
Situation Price(P) Quantity(Q)
A
B
C
D
E
5
4
3
2
1
8
13
20
30
45
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Demand curve
It is a graphical representationshowing the relationship betweenprice and quantities demanded per
time period.
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Demand Curve
A demand curve hasa negative slopethus it slopes
downward from leftto right.
The downward slopeindicates inverserelationshipbetween price andquantity demanded.
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Why downward?
As the price of the product falls,consumers will tend to substitute
this(now relatively cheaper) product forothers in their purchases;
As the price of the product falls, this
serves as to increase their real incomeallowing them to buy more products
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Demand Function
Shows the relationship betweendemand for a commodity and thefactors that determine or influence
this demand.
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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
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Demand Function is expressed as:
QD = f (own price,income, price of relatedgoods, etc.)
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Change in QuantityDemanded vs. Change in
DemandChange in quantity Demanded
There is change in quantity demanded if themovement is along the same demand curve.A change in quantity demanded is broughtabout by an increase (decrease) in the
products price. The direction of themovement however is inverse consideringthe Law of Demand.
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Change in Quantity Demanded
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Change in Demand
There is a change in demand if the entire demandcurve shift to right side resulting to an increase indemand.
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Conversely demand decreases or falls if theentire demand curve shifts downward or to theleft. At the same price, less amounts of a goodor service are demanded by consumers.
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Increase (decrease) in demandis brought by factors other thanthe price of the good itself suchas tastes and preferences, priceof substitute goods, etc.resulting to shift of the entiredemand curve either upward or
downward.
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Forces that causes the demandcurve to change:
Taste or Preference
- Pertain to the personallikes and dislikes ofconsumers for certain goodsand services. If tastes orpreferences change so thatpeople want to buy more ofa commodity at a given
price, then an increase indemand will result or viceversa.
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Changing Incomes
- Increasing incomes ofhouseholds raise thedemand for certain goods orservices or vice versa.
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Occasional or seasonalproducts
- The various events orseasons in a given year alsoresult to a movement of thedemand curve withreference to particular
goods
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Population change
- An increasing populationleads to an increase in thedemand for some types ofgood or services, vice-versa. More people simplymeans that more goods or
services are to bedemanded. In particular,increase in populationgenerally results to anincrease in demand forbasic goods, such as food
and medicines. On the otherhand, a decrease inpopulation results in adecline in demand.
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Substitute goods
- Substitute goods aregoods that are interchangedwith another good. In asituation where the price of
a particular good increasesa consumer will tend to lookfor closely relatedcommodities. Substitutegoods are generally offeredat a cheaper price,
consequently making itmore attractive for buyersto purchase
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Expectations of futureprices
- If buyers expect the priceof a good or service to rise(fall) in the future, it maycause the current demandto increase (decrease).Also, expectations about the
future may alter demandfoor specific commodity.
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Supply(Firms/Sellers side)
Supply is the quantity of goods or servicesthat forms are ready and willing to sell at agiven price within a period of time, otherfactors being held constant.
Law of Supply
The law of supply states that if the price of a good orservice goes up, the quantity supplied for such goodservice will also go up; if the price goes down thequality supplid also goes down, ceteris paribus.
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Supply Schedule
A supply schedule is schedule listing the various prices
of a product and the specific quantities supplied at eachof these prices. Generally, the information provided bya supply schedule can be used to construct a supplycurve showing the price/quantity supplied schedule for
rice per month.
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Hypothetical Supply Schedule forRice Per Month
Situation Price(P) Quantity(Q)
A
B
C
D
E
5
4
3
2
1
48
41
30
17
5
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Supply Curve
It is a graphical representation showingthe relationship between the price of theproduct or factor of production and thequantity supplied per time period.
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Supply Curve
The typical marketsupply curve for aproduct slopes upwardfrom left to right
indicating that asprice rises (falls) more(less) is supplied.
The upward slopes
indicates the positiverelationship betweenprice and quantitysupplied.
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Supply Function
A supply function is aform of mathematicalnotation that links the dependent variable,quantity supplied (Qs), with variousindependent variables which determinequantity supplied.
QS = f (own price, number of sellers, priceof factor inputs, technology, etc.)
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Change in Quantity Supplied vs.Change in Supply
Change in Quantity Supplied
- There is a change in quantity supplied if the movementis along the same supply curve. A change in quantitysupplied is brought about by an increase (decrease) in
the products own price. The direction of the movementhowever is positive considering Law of Supply.
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Change in Supply
- There is change in supply when the entiresupply curve shifts rightward or leftward.
At the same price, therefore, moreamounts of a good or service are suppliedby producers or sellers.
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Forces that cause the supplycurve to change
Optimization in the use of factors production
Technological change Future expectations
Number of sellers
Weather conditions
Government policy
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Market Equilibrium
The meeting of supply and demand
results to what is refferd to as marketequilibrium
State of balance
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Equilibrium
Pertains to a balance that exists when quantitydemanded equals quantity supplied.
Equilibrium is the general agreement of thebuyer and the seller at a particular price and ata particular quantity. At equilibrium point, there
are always two sides of the story, the side ofthe buyer and that of the seller.
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Equilibrium Market price
Equilibrium market price is the priceagreed by the seller to offer its good or
service for sale and for the buyer to payfor it.
It is the price at which quantity
demanded of a good is exactly equal tothe quantity supplied.
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What happens when there ismarket disequilibrium?
Surplus
- Is a condition in the market where the quantitysupplied is more the quantity demanded.
Shortage
- Is a condition in the market in which quantitydemanded is higher than supplied.
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Price Controls:
Floor price- it is the legal minimum price imposed bythe government. This move is resorted in order toprevent bigger losses on the part of producers
Price ceiling- it is the legal maximum price imposed bythe government. It is generally imposed by the
government to protect consumers from abusiveproducers or sellers who take adventage of situation.
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End of Report