Elements of Demand and Supply - Presentation Transcript ELEMENTS OF DEMAND AND SUPPLY Prepared by: GREGAR DONAVEN E.

VALDEHUEZA, MBA Lou rdes College Instructor Chapter 3 ECONOMICS: its concepts and principles By: BKG Gabay RM Remotin, Jr. EAM Uy DEMAND Refers to the number or amount of goods and services desired by the consumers. Quantity demanded The amount of goods and services consumers are willing and able to buy/purchase at a given price, place, and at a given period of time. Determinants of Demand Price of goods itself As the price of certain goods and services increases, the demand for these goods and services decreases or vice versa. Consumers income A change in income will cause a change in demand. Consumers tend to buy more goo ds and acquire more services when their income increases and vice versa. The dir ection in which the demand will shift in response to a change in income depends on the type of goods. Normal goods refers to a good for which quantity demand at every price increases when income rises. Inferior goods refers to a good for which quantity demand falls when income rise s. Consumers expectation of future prices The quantity of a good demanded within any period depends not only on prices in that period but also on prices expected in future periods. Prices of related commodities/goods The quantity demanded of any particular good will be affected by changes in the prices of related goods. Substitute goods are goods that can be used in place of other goods. Complementary goods are goods that go together. Consumers tastes and preferences An increase in the preference and taste for a certain good will certainly increa se the demand for that particular good. Population An increase in the population means more demand for goods and services and vice versa. Demand Schedule The relationship between the quantity of a good demanded and the price of that g ood. other factors that may affect the quantity demanded, such as prices of other goo ds, are held constant (ceteris paribus) in drawing up the demand schedule. Example of a Demand Schedule 200 5 400 4 600 3 800 2 1000 1 Quantity Demanded Pr ice (Php 000) Demand Curve Shows graphically the relationship between the quantity of a good demanded and i ts corresponding price, with other variables held constant. The demand curve is typically downward-sloping Example of a Demand Curve Law of Demand States that as price increases, quantity demanded decreases; and as price decrea ses, quantity demanded increases, if other factors remain constant. The law of demand is only true if the assumption of ceteris paribus is applied o r other determinants remain constant. Justification for the Law of Demand Income effect When the price of goods decreases, the consumer can afford to buy more of it or vice versa. Substitution effect It is expected that consumers tend to buy goods with a lower price. Changes Involving Demand

Change in Quantity Demanded Movement along a demand curve which indicates movement from one point to another point of the same demand curve. Due to a change in the price of goods and services. Change in Demand Shifting from one demand curve to another demand curve. Brought by the changes in all determinants of demand except price. SUPPLY Maximum units/quantity of goods or services producers can offer. Determinants of Supply Change in technology State of the art technology that uses high-tech machines increases the quantity supply of goods which causes the reduction of cost of production. Cost of inputs used An increase in the price of an input or the cost of production decreases the qua ntity supplied because the profitability of certain business decreases. Expectation of future price When producers expect higher prices in the future commodities, the tendency is t o keep their goods and release them when the price rises. Change in the price of related goods Changes in the price of goods have a significant effect in the supply of such go ods. Government regulation and taxes It is expected that taxes imposed by the government increases cost of production which in turn discourages production because it reduces producers earnings. Government subsidies Subsidies or the financial aids/assistance given by the government reduces cost of production which encourages more supply. Number of firms in the market An increase in the number of firms in the market leads to an increase in supply of goods and services. Supply Schedule The relationship between the quantity of a good supplied and its price. Other factors that may affect the quantity supplied, such as the prices of input s and available production techniques, are held constant (ceteris paribus) in dr awing up the supply schedule. Example of a Supply Schedule 1000 5 800 4 600 3 400 2 200 1 Quantity Supplied Pr ice (Php 000) Supply Curve Shows graphically the quantity of a good supplied at each price, with other fact ors that affect quantity supplied held constant. The supply curve is typically upward-sloping Example of a Supply Curve Law of Supply States that as price increases, quantity supplied also increases; and as price d ecreases, quantity supplied also decreases if other factors remain constant. The law of supply is only true if the assumption of ceteris paribus is applied o r other determinants remain constant. Changes Involving Supply Change in Quantity Supplied Movement along the supply curve which shows the movement from one point to anoth er point on the same supply curve. Due to a change in the price of goods and services. Change in Supply Shifting from one supply curve to another supply curve. Brought by the changes in all determinants of supply except price. Determination of Market Equilibrium Law of demand and supply stipulate that when demand is greater than supply, pric e increases; when supply is greater than demand, price decreases; and when deman d is equal to supply, price remain constant.

It is noted that there is contradiction between the two parties. The consumer di slikes high price while the producer likes high price. Law of demand infers that consumers are willing and able to buy/purchase goods and services at a lower pr ice while law of supply infers that producers are willing and able to offer or s ell more goods and services at higher price. This force in the market place creates equilibrium price and equilibrium quantit y, or the market equilibrium. Market Equilibrium Is a state which implies a balance between the opposing forces, a situation in w hich quantity demanded and quantity supplied are equal. The market equilibrium is determined by the intersection of the demand and suppl y curves. In other words, the quantity that consumers will buy is equal to the a mount or quantity the producers are able and willing to offer. Demand and Supply Schedules Downward Surplus (800) 1000 200 5 E Downward Surplus (400) 800 400 4 D Neutral/ Equal Equilibrium (0) 600 600 3 C Upward Shortage (400) 400 800 2 B Upward Shortage (-800) 200 1000 1 A Pressure on Price State of Market Quantity Supplied Quantity Demanded Price (Php 000) Points - E N D Questions? Clarifications? Reactions? HAVE A NICE DAY!!! ;-)