As

signmenti
nAppl
iedEc
onomi
cs
 Submi
itt
edby
:

RI
VERA,
Leonor
aP.

Submi
itt
edt
o:

Mr
.Jer
winS.
Sena

CONCEPTOFLAWOFDEMANDANDSUPPLY

Supplyanddemandisperhapsoneofthemostfundament
alconceptsofec
onomicsandi
tisthe
backboneofamarketeconomy.Demandref
erst
ohowmuc h(quanti
ty)ofaproduc
torser
vic
eis
desi
redbybuy ers
.Thequant i
tydemandedistheamountofapr oduc tpeoplearewil
li
ngt obuyat
acertainpri
ce;therelationshipbetweenpri
ceandquant i
tydemandedi sknownast hedemand
rel
ationshi
p.Supplyrepresentshowmuc hthemarketcanoffer
.Thequant it
ys uppl
iedref
erstothe
amountofac ertaingoodpr oducersar
ewill
ingtosupplywhenreceivingacertainpri
ce.The
corr
elati
onbet weenpr i
ceandhowmuc hofagoodors er
vic
ei ssuppli
edt othemarketisknownas
thesupplyrel
at i
onship.Pric
e,theref
ore,i
saref
lecti
onofsupplyanddemand.

Ther el
ations
hipbetweendemandands upplyunder
liethef
orc
esbehindtheall
ocati
onof
resourc
es.Inmarketeconomytheor
ies
,demandands upplyt
heorywi
llal
locat
eresour
cesinthe
mos tef
fic
ientwaypossibl
e.How?Letust akeac l
oserl
ookatthelawofdemandandt hel
awof
supply.

A.
TheLawofDemand

Thelawofdemands tatesthat,i
fal lot
herfact or
sr emai
nequal ,thehigherthepr i
ceofagood, t
he
les
speoplewilldemandthatgood.I notherwords,t hehigherthepr i
ce,thelowerthequant i
ty
demanded.Theamountofagoodt hatbuy erspurchas eatahi gherpric
ei sl
essbec auseast he
pri
ceofagoodgoesup, s
odoest heoppor tunitycos tofbuy i
ngt hatgood.Asar esult,peoplewi
ll
natural
lyavoi
dbuy ingaproductt hatwillfor
cet hemt oforgot heconsumptionofs omethingels
e
theyvaluemore.Thechartbelowshowst hatt hec urveisadownwar dslope.

A,BandCar epoint
sont hedemandcurve.
Eac hpoi
ntonthecur
veref
lect
sadi r
ectcorr
elat
ion
betweenquanti
tydemanded(Q)andpri
ce(P).
So,atpoi
ntA,thequant
itydemandedwil
lbeQ1
andthepri
cewillbeP1,andsoon.Thedemandr el
ationshi
pc ur
veil
lustratest
henegative
rel
ati
onshi
pbetweenpriceandquanti
t ydemanded.Thehigherthepriceofagoodthelowert
he
quanti
tydemanded(A)
,andthelowerthepric
e,themor ethegoodwillbeindemand(C)
.

B.
TheLawofSuppl
y

Likethel awofdemand, thelawofs upplydemonst

ratest hequant i
tiest hatwillbesol
data
certai
npr ice.Butunli
ket helawofdemand, thesupplyrelationshi
ps howsanupwar dslope.
Thi
s
meanst hatt hehighertheprice,thehigherthequantit
ys uppli
ed.Produc er
ssupplymoreata
higherpri
c ebecausesell
ingahi gherquantityatahigherpr iceincr
eas esrevenue.

A,BandCar epointsonthesuppl
ycurve.Eachpointont hec
urveref
lectsadi
rec tcor
rel
ati
on
betweenquanti
t ys
uppli
ed(Q)andpri
ce(P).Atpoi
ntB, t
hequantit
ys uppli
edwillbeQ2andthe
pri
cewillbeP2,andsoon.(
Tolearnhoweconomicfact
orsareusedi
nc urr
encytrading,
readFor
ex
Walkthr
ough:Ec
onomics.
)

Ti
meandSuppl
y

Unl
ikethedemandr
elat
ions
hip,
however
,thes
uppl
yrel
ati
ons
hipi
safactoroft
ime.
Timeis
i
mportant tos
upplybecaus
esuppli
ersmus
t,
butcannotalways,
reac
tquickl
ytoachangeindemandorpr
ice.Soiti
simpor
tanttotryand
deter
minewhetherapri
cechanget
hatiscaus
edbydemandwillbetempor
aryorper
manent.

Let'ssayt here'sas uddenincr

easeinthedemandandpr iceforumbr el
lasinanunex pectedrai
ny
season; suppliersmays i
mplyaccommodat
edemandbyus ingtheirproductionequipmentmor e
intensively.If
, however,t
hereisacli
matec hange,andthepopul at
ionwi l
lneedumbr el
lasyear-
round,t hec hangei ndemandandpr i
cewillbeexpectedt obelongt erm;suppli
erswillhaveto
changet heirequipmentandpr oducti
onfacil
iti
esinordertomeett helong-ter
ml evelsofdemand.

C.
Suppl
yandDemandRel
ati
ons
hip

Nowt hatweknowthel
awsofs
uppl
yanddemand,
let
'st
urnt
oanex
ampl
etos
howhows
uppl
yand
demandaffec
tpri
ce.

D.
Equi
li
bri
um

Whensupplyanddemandar eequal(i
.
e. whent hesupplyfunc ti
onanddemandf unctioninter
sec
t)
theeconomyissaidt obeatequi l
ibr
ium. Atthispoint,theal l
oc ati
onofgoodsi satitsmost
eff
ici
entbecauset heamountofgoodsbei ngsuppliedisex actlythesameast heamountofgoods
beingdemanded.Thus,everyone(i
ndividuals,
fir
ms,orcount ri
es)issati
sf
iedwi t
ht hecurrent
economiccondi
tion.Att hegivenpri
c e,suppli
ersaresell
ingal lthegoodst hattheyhave
producedandconsumersareget ti
ngal lthegoodst hatt heyar edemanding.
Asyoucanseeonthechar
t,equi
libri
umoc cursatt hei
nter
secti
onofthedemandandsuppl
y
cur
ve,whi
chindi
cat
esnoall
ocativeineffi
ciency.Atthi
spoint,
thepric
eofthegoodswil
lbeP*
andthequanti
tywi
llbeQ*
.Thesef i
guresarerefer
redtoasequil
ibr
iumpri
ceandquant
ity.

I
ntherealmarketplaceequi
li
bri
umcanonl
yeverbereac
hedi
ntheory
,sothepri
cesofgoodsand
s
erv
icesar
ec onstantl
ychangingi
nrel
ati
ontofl
uctuati
onsi
ndemandandsuppl
y.

E.
Dis
equi
li
bri
um

Di
sequi
li
bri
umoc
cur
swhenevert
hepr
iceorquant
ityi
snotequalt
oP*orQ*
.

1.
Exc
essSuppl
y

Ifthepr
iceiss
ett oohigh,
exc
esss
uppl
ywi
llbec
reat
edwi
thi
ntheec
onomyandt
her
ewi
llbe
all
ocati
veinef
fi
ciency
.

Atpr i
ceP1 thequantityofgoodst hatt he
producers wishtosupplyisi
ndicat edbyQ2.
AtP1, however
,thequant it
yt hatt he
consumers wanttoc onsumeisatQ1, a
quant i
ty muchles
st hanQ2. BecauseQ2i s
greaterthanQ1,
toomuc
hisbei
ngpr
oduc
edandt
ool
itt
lei
sbeingcons
umed. Thesuppliersare
try
ingtoproducemoregoods,
whi
chtheyhopetosellt
oincr
eas
eprofi
ts,butthos
ec onsumi
ngt
he
goodswi
llf
indtheproductles
sattr
acti
veandpur
c has
eles
sbecaus
et hepri
ceistoohigh.

2.
Exc
essDemand

Exc es
s demandiscreatedwhenpric
eisset
below theequil
ibr
iumprice.Bec
ausethe
pri
c eis solow,
toomanyc ons
umerswantthe
good whil
eproducersarenotmakingenough
ofit.

Inthissi
tuat i
on,atpri
ceP1, thequantityofgoodsdemandedbyc ons
umersatt hi
spricei
sQ2.
Convers
ely,thequantityofgoodst hatproducersarewil
li
ngt opr
oduceatt hispri
ceisQ1.Thus,
ther
ear etoofewgoodsbeingpr oducedtos ati
sfythewant s(
demand)ofthec onsumers.
However,
asconsumershavet ocompetewi thoneot hertobuyt hegoodatthispric
e, thedemandwillpush
thepric
eup, maki
ngs uppl
ierswantt osupplymor eandbri
ngingthepriceclosertoitsequi
libr
ium.

F.
Shi
ftsvs
.Movement

Forec
onomics
,the"movements
"and"
shi
fts
"inr
elat
iont
othes
uppl
yanddemandc
urvesr
epr
esent
ver
ydif
fer
entmarketphenomena:

1.
Movement
s
Amovementr eferstoac hangealongac urve.Ont hedemandcurve,amovementdenot esac hange
inbot hpri
ceandquant itydemandedfromonepoi nttoanotheront hecurve.Themovement
impli
esthatt hedemandr el
ationshipr
emainsc onsist
ent.Ther
efor
e,amovemental ongt hedemand
curvewillocc
urwhent hepr i
ceoft hegoodc hangesandt hequanti
t ydemandedc hangesin
accordancetot heori
ginaldemandr el
ationship.Inotherwor
ds,amovementoc curswhenac hange
inthequant i
t ydemandediscausedonlybyac hangeinpri
ce,andviceversa.

Likeamovemental ongthedemandc ur
ve,amovementalongt hesupplycurvemeanst hatt he
supplyrel
ationshi
premainscons
ist
ent.Therefor
e,amovementalongt hesuppl
yc urvewilloccur
whent hepriceofthegoodchangesandt hequantit
ysuppliedchangesinaccordancet ot he
origi
nalsupplyrel
ati
onship.
Inotherwords,amovementoccurswhenac hangeinquant ity
suppli
edisc aus
edonlybyac hangeinprice,andvi
ceversa.

2.
Shi
fts

Ashif
t inademandors upplycurveoccurs
whena good'squant i
tydemandedors uppl
ied
changes event houghpr iceremainsthesame.
For instance,ifthepr i
ceforabot tl
eof
beerwas$2andt hequantityofbeerdemandedincreasedfromQ1t oQ2, thent herewouldbea
shi
ftint hedemandforbeer.Shif
tsinthedemandc urveimplythatt heor i
ginaldemand
rel
ationshi
phasc hanged,meaningthatquanti
tydemandi saffectedbyaf actorotherthanprice.
Ashif
ti nthedemandr el
ationshipwoul
doccurif
,forinstanc e,
beers uddenlybec amet heonlytype
ofal
coholavai
labl
eforc
ons
umpt
ion.

Conversel
y,ifthepr ic
ef orabot tl
eofbeerwas$2andt hequant i
tys uppli
eddec reasedfr
omQ1t o
Q2,thent herewoul dbeas hi
ftinthesupplyofbeer.Li
keas hif
tint hedemandc urve,ashif
ti n
thesupplyc urveimpliesthatt heori
ginals
upplyc ur
vehasc hanged,meaningt hatt hequant it
y
suppli
edisef f
ec t
edbyaf ac t
orotherthanpric
e. Ashif
tinthes upplycurvewouldoc curi
f,f
or
inst
ance,anat uraldisast
erc aus
edamas sshortageofhops;beermanuf ac
turerswoul dbeforced
to supplylessbeerforthes ameprice.