the basic analysis of demand and supply

7/29/2019 The Basic Analysis of Demand and Supply

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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

the basic analysis of demand and supply

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