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Intro Polytechnic 1 Group university of Gillian Alyssa a. ducti Leader: Buena-agua, the on to Members: Philippines micr Alejandro, Rachel ann T. Nicolas, jedideah oeco Sabas, jonalyn nomi Samarita, gineva Santos, krizelle Camille c theo Prof. Eleonor de jesus ry and prac tice
CHAPTER II DEMAND AND SUPPLY DEMAND

In economics, demand is the desire to own anything, the ability to pay for it, and the willingness to pay. The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time. Other Definitions of Demand The demand for a product is defined as the quantity of the product demanded by a consumer or an aggregate of consumers at any given price. An economic principle that describes a consumers desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa. The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. Think of demand as your willingness to go out and buy a certain product. For example, market demand is the total of what everybody in the market wants. The demand curve is usually downward sloping, since consumers will want to buy more as price decreases. Demand for a good or service is determined by many different factors other than price, such as the price of substitute goods and complementary goods. In extreme cases, demand may be completely unrelated to price, or nearly infinite at a given price. Along with supply, demand is one of the two key determinants of the market price. Businesses often spend a considerable amount of money in order to determine the amount of demand that the public has for its products and services. Incorrect
ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE 2
estimations will either result in money left on the table if its underestimated or losses if its overestimated. Demand is a relationship between two variables, price and quantity demanded, with all other factors that could affect demand being held constant. Demand Schedule and Demand Curve A table which contains values for the price of a good and the quantity that would be demanded at that price is called a demand schedule. If the data from the table is charted, it is known as a demand curve. Demand Schedule A demand schedule is typically used in conjunction with a supply schedule showing the quantity of a good that would be supplied to the market at given price levels. It is a table listing showing the number of units of a single type of good (or service) that potential purchasers would offer to buy at each of a number of varying prices during some particular time period. Demand schedules may be drawn up to reflect the behavioral propensities of a single unique individual, household, or firm -- or, more frequently encountered in microeconomic analysis, composite demand schedules for the particular good may be derived by adding up all the demand schedules of the large number of individuals, households or firms that are active or potentially active as purchasers in the market under consideration.
Example of a Demand Schedule Price of Sugar (per kilo) P 45 Quantity Demanded 100
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ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE
40 35 30 25 Demand Curve
150 200 250 300
The demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together. Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price and the equilibrium quantity of that market. According to convention, the demand curve is drawn with price on the vertical axis and quantity on the horizontal axis. The function actually plotted is the inverse demand function. The demand curve usually slopes downwards from left to right; that is, it has a negative association. The negative slope is often referred to as the "law of demand", which means people will buy more of a service, product, or resource as its price falls. The demand curve is related to the marginal utility curve, since the price one is willing to pay depends on the utility. However, the demand directly depends on the income of an individual while the utility does not. Example of a Demand Curve
THE LAW OF DEMAND

In economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases .The greater the amount to be sold, the smaller the price at which it is offered must be, in order for it to find purchasers. Law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumers demand for the good will move opposite to the movement in the price of the good. Assumptions Every law will have limitation or exceptions. While expressing the law of demand, the assumptions that other conditions of demand were unchanged. If remain constant, the inverse relation may not hold well. In other words, it is assumed that the income and tastes of consumers and the prices of other commodities are constant. This law operates when the commoditys price changes and all other prices and conditions do not change. The main assumptions are: Habits, tastes and fashions remain constant. Money, income of the consumer does not change. Prices of other goods remain constant. The commodity in question has no substitute or is not competed by other. The commodity is a normal good and has no prestige or status value. People do not expect changes in the prices.
Exceptions to the law of demand Generally, the amount demanded of good increases with a decrease in price of the good and vice versa. In some cases, however, this may not be true. Such situations are explained below.
Giffen goods As noted earlier, if there is an inferior good of which the positive income effect is greater than the negative substitution effect, the law of demand would not hold. For example, when the price of potatoes (which is the staple food of some poor families) decreases significantly, then a particular household may like to buy superior goods out of the savings which they can have now due to superior goods like cereals, fruits etc., not only from these savings but also by reducing the consumption of potatoes. Thus, a decrease in price of potatoes results in decrease in consumption of potatoes. Such basic good items (like bajra, barley, grain etc.) consumed in bulk by the poor families, generally fall in the category of Giffen goods. It should be noted that not all inferior goods are giffen goods, but all giffen goods are inferior goods. This is similar to how all men are humans but not all humans are men. A walkman is considered an inferior good but would not be a Giffen good. Commodities which are used as status symbols Some expensive commodities like diamonds, air conditioned cars, etc., are used as status symbols to display ones wealth. The more expensive these commodities become, the higher their value as a status symbol and hence, the greater the demand for them. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price. Also known as a Veblen good. Expectation of change in the price of commodity If a household expects the price of a commodity to increase, it may start purchasing greater amount of the commodity even at the presently increased price.
Similarly, if the household expects the price of the commodity to decrease, it may postpone its purchases. Thus, law of demand is violated in such cases. In the above circumstances, the demand curve does not slope down from left to right instead it presents a backward sloping from top right to down left as shown in diagram. This curve is known as exceptional demand curve.
Changes in Quantity Demanded and Movements along the Demand Curve There is movement along a demand curve when a change in price causes the quantity demanded to change. It is important to distinguish between movement along a demand curve, and a shift in a demand curve. Movements along a demand curve happen only when the price of the good changes. When a non-price determinant of demand changes the curve shifts. These "other variables" are part of the demand function. They are "merely lumped into intercept term of a simple linear demand function." Thus a change in a non-price determinant of demand is reflected in a change in the x-intercept causing the curve to shift along the x axis. After having understood the nature of demand and law of demand, it is easy to ascertain the determinants of demand. We have mentioned above that an individual demand for a commodity depends on desire for the commodity and the capability to purchase it. The desire to purchase is revealed by tastes and preferences of the individuals. The capability to purchase depends upon his purchasing power, which in turn depends upon his income and price of the commodity. Since an individual purchases a number of commodities, the quantity of a particular commodity he chooses to purchase depends on the price of that particular commodity and prices of the other commodities, as well as the relative amount of his income, or purchasing power. Innumerable factors and circumstances could affect a buyer's willingness or ability to buy a good. Some of the more common factors are:
Prices of related commodities

When a change in price of the other commodity leaves the amount demanded of the commodity under consideration unchanged, we say that the two commodities are unrelated, otherwise these are related. The related commodities are of two types substitutes and complements. For substitutes if price of one will increase the demand of other will increase and for compliments if the price of one will increase the demand for other will decrease.
Income of the individual

The amount demanded of a commodity also depends upon the income of an individual. With an increase in income, there will be increased amount of most of the commodities in his consumption bundle, though the extent of the increase may differ between commodities.
Tastes and preferences

It is quite well that the change in tastes and preferences of consumers in favour of a commodity results in smaller demand for the commodity. Modern business firms, which sell product with different brand names, rely a great deal on influencing tastes and preferences of households in favour of their products (with the help of advertisements, etc.) in order to bring about increase in demand of their products. The amount demanded also depends on consumers taste. Tastes include fashion, habit, customs, etc. A consumers taste is also affected by advertisement. If the taste for a commodity goes up, its amount demanded is more even at the same price and vice-versa.
Wealth
The amount demanded of a commodity is also affected by the amount of wealth as well as its distribution. The wealthier are the people, higher is the demand for
normal commodities. If wealth is more equally distributed, the demand for necessaries and comforts is more. On the other hand, if some people are rich, while the majority is poor, the demand for luxuries is generally less.
Expectations regarding the future

If consumers expect changes in price of a commodity in future, they will change the demand at present even when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near future, they may increase the demand for a commodity just now.
Climate and weather

The climate of an area and the weather prevailing there has a decisive effect on consumers demand. In cold areas, woollen cloth is demanded. During hot summer days, ice is very much in demand. On a rainy day, ice is not so much demanded.
State of business
The level of demand for different commodities also depends upon the business conditions in the country. If the country is passing through boom conditions, there will be a marked increase in demand. On the other hand, the level of demand goes down during depression. Ceteris Paribus Latin phrase that translates approximately to "holding other things constant" and is usually in English as "all other things being equal". In economics and finance, the term is used as a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable. For example, when discussing the laws of supply and demand, one could say that if
demand for a given product outweighs supply, ceteris paribus, prices will rise. Here, the use of "ceteris paribus" is simply saying that as long as all other factors that could affect the outcome (such as the existence of a substitute product) remain constant, prices will increase in this situation. Contrasts with "mutatis mutandis". One of the disciplines in which ceteris paribus clauses are most widely used is economics, in which they are employed to simplify the formulation and description of economic outcomes. When using ceteris paribus in economics, assume all other variables except those under immediate consideration are held constant. For example, it can be predicted that if the price of beef increasesceteris paribusthe quantity of beef demanded by buyers will decrease. In this example, the clause is used to operationally describe everything surrounding the relationship between both the price and the quantity demanded of an ordinary good. This operational description intentionally ignores both known and unknown factors that may also influence the relationship between price and quantity demanded, and thus to assume ceteris paribus is to assume away any interference with the given example. Such factors that would be intentionally ignored include: the relative change in price of substitute goods, (e.g., the price of beef vs pork or lamb); the level of risk aversion among buyers (e.g., fear of mad cow disease); and the level of overall demand for a good regardless of its current price level (e.g., a societal shift toward vegetarianism).The clause is often loosely translated as "holding all else constant." Characterization given by Alfred Marshall The clause is used to consider the effect of some causes in isolation, by assuming that other influences are absent. Alfred Marshall expressed the use of the clause as follows: The element of time is a chief cause of those difficulties in economic investigations which make it necessary for man with his limited powers to go step by step; breaking up a complex question, studying one bit at a time, and at last combining his partial solutions
into a more or less complete solution of the whole riddle. In breaking it up, he segregates those disturbing causes, whose wanderings happen to be inconvenient, for the time in a pound called Ceteris Paribus. The study of some group of tendencies is isolated by the assumption other things being equal: the existence of other tendencies is not denied, but their disturbing effect is neglected for a time. The more the issue is thus narrowed, the more exactly can it be handled: but also the less closely does it correspond to real life. Each exact and firm handling of a narrow issue, however, helps towards treating broader issues, in which that narrow issue is contained, more exactly than would otherwise have been possible. With each step more things can be let out of the pound; exact discussions can be made less abstract, realistic discussions can be made less inexact than was possible at an earlier stage. Two uses The above passage by Marshall highlights two ways in which the ceteris paribus clause may be used: The one is hypothetical, in the sense that some factor is assumed fixed in order to analyze the influence of another factor in isolation. This would be hypothetical isolation. An example would be the hypothetical separation of the income effect and the substitution effect of a price change, which actually go together. The other use of the ceteris paribus clause is to see it as a means for obtaining an approximate solution. Here it would yield a substantive isolation. Substantive isolation has two aspects: Temporal and causal. Temporal isolation requires the factors fixed under the ceteris paribus clause to actually move so slowly relative to the other influence that they can be taken as practically constant at any point in time. So, if vegetarianism spreads very slowly, inducing a slow decline in the demand for beef, and the market for beef clears comparatively quickly, we can determine the price of beef at any instant by the intersection of supply and demand, and the changing demand for beef will account for the price changes over time (Temporary Equilibrium Method).
The other aspect of substantive isolation is causal isolation: Those factors frozen under a ceteris paribus clause should not significantly be affected by the processes under study. If a change in government policies induces changes in consumers' behavior on the same time scale, the assumption that consumer behavior remains unchanged while policy changes is inadmissible as a substantive isolation (Lucas critique). Changes in Demand and Shifts in the Demand Curve The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the samein other words, the things whose changes might cause a consumer to buy more or less of a good even if the good's own price remained unchanged. Some of the more important factors are the prices of related goods (both substitutes and complements), income, population, and expectations. However, demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances; so, any circumstance that affects the consumer's willingness or ability to buy the good or service in question can be a non-price determinant of demand. As an example, weather could be a factor in the demand for beer at a baseball game. When income rises, the demand curve for normal goods shifts outward as more will be demanded at all prices, while the demand curve for inferior shifts inward due to the increased attainability of superior substitutes. With respect to related goods, when the price of a good (e.g. a hamburger) rises, the demand curve for substitute goods (e.g. chicken) shifts out, while the demand curve for complementary goods (e.g. tomato sauce) shifts in (i.e. there is more demand for substitute goods as they become more attractive in terms of value for money, while demand for complementary goods contracts in response to the contraction of quantity demanded of the underlying good).
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Demand shifters Changes in disposable income Changes in tastes and preferences - tastes and preferences are assumed to be fixed in the short-run. This assumption of fixed preferences is a necessary condition for aggregation of individual demand curves to derive market demand. Changes in expectations. Changes in the prices of related goods (substitutes and complements) Population size and composition Changes that increase demand Some circumstances which can cause the demand curve to shift out include: increase in price of a substitute decrease in price of complement increase in income if good is a normal good decrease in income if good is an inferior good Changes that decrease demand Some circumstances which can cause the demand curve to shift in include: decrease in price of a substitute increase in price of a complement decrease in income if good is normal good increase in income if good is inferior good Factors affecting market demand Market or aggregate demand is the summation of individual demand curves. In addition to The factors which can affect individual demand there are three factors that can affect market demand (cause the market demand curve to shift): a change in the number of consumers, a change in the distribution of tastes among consumers,
a change in the distribution of income among consumers with different tastes.
SUPPLY
What Supply Is: Economists have a very precise definition of supply. Economists describe supply as the relationship between the quantity of a good or service consumers will offer for sale and the price charged for that good. More precisely and formally supply can be thought of as "the total quantity of a good or service that is available for purchase at a given price." What Supply Is Not: Supply is not simply the number of an item a shopkeeper has on the shelf, such as '5 oranges' or '17 pairs of boots', because supply represents the entire relationship between the quantity available for sale and all possible prices charged for that good. The specific quantity desired to sell of a good at a given price is known as the quantity supplied. Typically a time period is also given when describing quantity supplied.
Supply schedule A supply schedule is a table which shows how much one or more firms will be willing to supply at particular prices. The supply schedule shows the quantity of goods that a supplier would be willing and able to sell at specific prices under the existing circumstances. Some of the more important factors affecting supply are the goods own price, the price of related goods, production costs, technology and expectations of sellers. Factors affecting supply
Innumerable factors and circumstances could affect a seller's willingness or ability to produce and sell a good. Some of the more common factors are:
Goods own price: The basic supply relationship is between the price of a good
and the quantity supplied. Although there is no "Law of Supply", generally, the relationship is positive or direct meaning that an increase in price will induce and increase in the quantity supplied.
Price of related goods: For purposes of supply analysis related goods refer to
goods from which inputs are derived to be used in the production of the primary good. For example, Spam is made from pork shoulders and ham. Both are derived from Pigs. Therefore pigs would be considered a related good to Spam. In this case the relationship would be negative or inverse. If the price of pigs goes up the supply of Spam would decrease (supply curve shifts up or in) because the cost of production would have increased. A related good may also be a good that can be produced with the firm's existing factors of production. For example, a firm produces leather belts. The firm's managers learn that leather pouches for Smart phones are more profitable than belts. The firm might reduce its production of belts and begin production of cell phone pouches based on this information. Finally, a change in the price of a joint product will affect supply. For example beef products and leather are joint products. If a company runs both a beef processing operation and a tannery an increase in the price of steaks would mean that more cattle are processed which would increase the supply of leather.
Conditions of Production. The most significant factor here is the state
of technology. If there is a technological advancement in one's good's production, the supply increases. Other variables may also affect production conditions. For instance, for agricultural goods, weather is crucial for it may affect the
production outputs.
Expectations: Sellers expectations concerning future market condition can
directly affect supply. If the seller believes that the demand for his product will sharply increase in the foreseeable future the firm owner may immediately increase production in anticipation of future price increases. The supply curve would shift out. Note that the outward shift of the supply curve may create the exact condition the seller anticipated, excess demand.
Price of inputs: Inputs include land, labor, energy and raw materials. If the
price of inputs increases the supply curve will shift in as sellers are less willing or able to sell goods at existing prices. For example, if the price of electricity increased a seller may reduce his supply because of the increased costs of production. The seller is likely to raise the price the seller charges for each unit of output. Number of suppliers - the market supply curve is the horizontal summation of the individual supply curves. As more firms enter the industry the market supply curve will shift out driving down prices.
Government policies and regulations: Government intervention can have
a significant effect on supply. Government intervention can take many forms including environmental and health regulations, hour and wage laws, taxes, electrical and natural gas rates and zoning and land use regulations.
Supply function and equation The supply function is the mathematical expression of the relationship between supply and those factors that affect the willingness and ability of a supplier to offer goods for sale. For example, Qs = f(P, | Prg S) is a supply function where
P equals price of the good Prg equals the price of related goods and S equals the number of producers. The vertical bar means that the variables to the right are being held constant. The supply equation is the explicit mathematical expression of the functional relationship. For example, Qs = 325 + P 30Prg + 20S. 325 is y-intercept it is the repository of all non-specified factors that affect supply for the product. P is the price of the own good. The coefficient is positive following the general rule that price and quantity supplied are directly related. Prg is the price of a related good. Typically the relationship is positive because the good is an input or a source of inputs. Supply curve The relationship of price and quantity supplied can be exhibited graphically as the supply curve. The curve is generally positively sloped. The curve depicts the relationship between two variables only; price and quantity supplied. All other factors affecting supply are held constant. However, these factors are part of the supply curve and are present in the intercept or constant term.
Movements versus shifts Movements along the curve occur only if there is a change in quantity supplied caused by a change in the goods own price. A shift in the supply curve, referred to as a change in supply, occurs only if a non price determinant of supply changes. For example, if the price of an ingredient used to produce the good, a related good, were to increase, the supply curve would shift in. Inverse Supply Equation
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By convention economists graph the dependent variable on the y axis and the independent variable on the x axis. This means that the equation depicted is the inverse equation. The form of the inverse supply equation is Ps = f(Q). An example of an inverse supply equation would be Marginal costs and short-run supply curve A firm's short-run firm supply curve is the marginal cost curve above the shutdown point (the SRMC above the minimum average variable costs). The portion of the SRMC below the shutdown point is not part of the supply curve because the firm is not producing any output. The firm's long run supply curve is that portion of the long run marginal cost curve above the minimum of the long run average cost curve. Shape of the short-run supply curve The Law of Diminishing Marginal Returns (LDMR) shapes the SRMC curve. The LDMR states that as production increases eventually a point (the point of diminishing marginal returns) will be reached after which additional units of output will be successively smaller. The mathematical relationship is where w is the wage rate and MPL. Beyond the point of diminishing marginal returns the marginal product of labor will continually decrease. As MPL decreases with a constant wage rate MC will increase. .
THE LAW OF SUPPLY

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases
revenue.
A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on. Time and Supply Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent. Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be
expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand. Supply and Demand Relationship Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price. Imagine that a special edition CD of your favorite band is released for $20. Because he record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied. If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high. Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries)
is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
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As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply. Disequilibrium Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.
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At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.
2. Excess Demand Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.
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In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.
Shifts vs. Movement For economics, the movements and shifts in relation to the supply and demand curves represent very different market phenomena: 1. Movements A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In
other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.
Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.
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2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.
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Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.
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MARKET EQUILIBRIUM
-Is a condition where quantity supplied equals quantity demanded. -Introduced by Alfred Marshall, a British economist. -A kind of pricing scheme combining the law of demand and the law of supply.
Price Equilibrium -Is the price level that both buyers and sellers agree to have a transaction in the market.
Quantity Equilibrium -Refers to the quantity of products that buyers and sellers are willing to transact at a specified price. If the interaction of demand and supply is put into a graphic representation, the intersection of price and quantity s called the point of equilibrium.
The Dynamics of Demand and Supply

The equilibrium price and quantity in a market are determined by the intersection of demand and supply curves. At the point of intersection, quantity demanded equals quantity supplied, and the market clears. Since the location of the demand and supply curves is determined by the five determinants of demand and the five determinants of supply, a change in any one of these 10 variables will result in a new equilibrium point.
Change in Demand While Supply is Constant When demand increases and supply remains constant, price and quantity sold both rise. A decrease in demand, supply constant, causes both price and quantity sold to fall.
A. Increase in Demand
B. Decrease in Demand
QQ P0 PP s Ru 11 D0 0D I 1 Ca En
t i t y
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Change in Supply While the Demand Is Constant When supply increases and demand remains constant, price falls and quantity sold rises. A decrease in supply, demand constant, causes price to rise and quantity sold to fall. A.
B. Decrease in Supply
C. Increase in Supply
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SP D0 Q1 P0 1 Quant
P 0
R 1 ity I C E
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Simultaneous Change of Supply and Demand A. Increase in Demand and Decrease in Supply
Violations of the Law of Supply and Demand One law that Congress Indeed cannot repeal, nor by a dictator is that of Supply and Demand. But it has been violated on several occasions.A common way of attempting to go against the law is the use of price controls. Republic Act 7581, which is known as the Price Act was approved to help the government in the implementation of price control on basic commodities. The National Price Coordinating Council was formed to support the Price Act. Its main objective and function is to guard and monitor the prices after the announcement of a price ceiling. Price Ceiling refers to the highest price or maximum price declared by the government for a particular product. The government is doing this to help and protect the consumers against the abuses of businessmen and sellers. Basic commodities like rice, sugar, milk, oil, soap, fish, chicken, pork and other products are under price control during calamities and state of emergencies. The price declared is lower than the equilibrium price in the market. It is the governments way to make the basic commodities affordable to everybody. Another possible violation which works in the reverse is the setting of price support or floor price. Floor price refers to the lowest price in buying the products of producers. Price support s implemented to help the producers
recover their production cost and gain some profit. Price support is higher than the equilibrium price in the market. Producers assume that the equilibrium price is not enough to support their production cost and their needs. Effect of Price Ceiling and Floor Price
SURPLUS SHORTAGE DE QE PQuant P R ity I C E
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Government regulations will create surpluses and shortages in the market. When a price ceiling is set, there will be a shortage. Price is set below the equilibrium price, thus suppliers would feel bad and lose interest in supplying more in the market. The supply decreases and consumers, because of low price, would tend to increase demand. At this point, there is shortage of supply in the market. The government, in order to make the price control effective and attain the goal of helping the consumers in times of need, would assume the role of a supplier to solve the problem brought by price control. On the other hand, when there is a price floor, there will be a surplus. Price is set above the equilibrium price, as a result, producers are motivated to supply more in the market. The supply increases but the new price of goods is too high for the
consumer so they would decrease their demand. supply in the market.
At this point, there is surplus of
The government will act as a consumer in order to make the price support effective. If the market price is above the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus. Market price will fall. If the market price is below the equilibrium price, quantity supplied is less than quantity demanded, creating a shortage. The market is not clear. It is in shortage. Market price will rise because of this shortage. If a surplus exists, price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. If a shortage exists, price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated.
CHAPTER III ELASTICITY OF DEMAND AND SUPPLY

PRICE ELASTICITY OF DEMAND Elasticity is the measurement of how changing one economic variable affects others. It measures the degree of responsiveness of demand/supply to a change in its determinants. Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to
a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Thus,
Types of Price Elasticity
1. Perfectly inelastic demand (ep = 0) This describes a situation in which demand shows no response to a change in price. In other words, whatever be the price the quantity demanded remains the same. It can be depicted by means of the alongside diagram. The vertical straight line demand curve as shown alongside reveals that with a change in price (from OP to Op1) the demand remains same at OQ. Thus,
demand does not at all respond to a change in price. Thus ep = O. Hence, perfectly inelastic demand. Fig a 2. Inelastic (less elastic) demand (e < 1) In this case the proportionate change in demand is smaller than in price. The alongside figure shows this type. In the alongside figure percentage change in demand is smaller than that in price. It means the demand is relatively c less responsive to the change in price. This is referred to as an inelastic demand. Fig e 3. Unitary elasticity demand (e = 1) When the percentage change in price produces equivalent percentage change in demand, we have a case of unit elasticity. The rectangular hyperbola as shown in the figure demonstrates this type of elasticity. In this case percentage change in demand is equal to percentage change in price, hence e = 1. Fig c 4. Elastic (more elastic) demand (e > 1) In case of certain commodities the demand is relatively more responsive to the change in price. It means a small change in price induces a significant change in, demand. This can be understood by means of the alongside figure. It can be noticed that in the above example the percentage change in demand is greater than that in price. Hence, the elastic demand (e>1) Fig d 5. Perfectly elastic demand (e = ) This is experienced when the demand is extremely sensitive to the changes in price. In this case an insignificant change in price produces tremendous change in demand. The demand curve showing perfectly elastic demand is a horizontal straight line. Fig b It can be noticed that at a given price an infinite quantity is demanded. A small change in price produces infinite change in demand. A perfectly competitive firm faces this type of demand.
Arc Elasticity Arc elasticity is the elasticity of one variable with respect to another between two given points. The P arc elasticity of Q is calculated as
The percentage is calculated differently from the normal manner of percent change. This percent change uses the average (or midpoint) of the points, in lieu of the original point as the base. Suppose that you know of two points on a demand curve (Q1,P1) and (Q2,P2). (Nothing else might be known about the demand curve.) Then you obtain the arc elasticity (a measure of the price elasticity of demand and an estimate of the elasticity of a differentiable curve at a single point) using the formula
Suppose we measure the demand for hot dogs at a football game. Let's say that after halftime we lower the price, and quantity demanded changes from 80 units to 120 units. The percent change, measured against the average, would be (120-80)/ ((120+80)/2))=40%. Normally, a percent change is measured against the initial value. In this case, this gives (12-8)/8= 50%. The percent change for the opposite trend, 120 units to 80 units, would be -33.3%. The midpoint formula has the benefit that a movement from A to B is the same as a movement from B to A in absolute value. (In this case, it would be -40%.)
Suppose that the change in the price of hot dogs was from $3 to $1. The percent change in price measured against the midpoint would be -100%, so the price elasticity of demand is (40%/-100%) or -40%. It is common to use the absolute value of price elasticity, since for a normal (decreasing) demand curve they are always negative. Thus the demand of the football fans for hot dogs has 40% elasticity, and is therefore inelastic. Point Elasticity When we measure Arc Elasticity, we are measuring the price elasticity of demand between two points on the demand curve. We can also measure the elasticity of any one point on the curve. The formula, because we are measuring only one point on the demand curve, does not have to take account of P1 or P2 or of Q1 or Q2. The elasticity of demand on a particular point of demand curve can be mathematically calculated as below:
Point Elasticity will be different at each point of the demand curve. How is it calculated? How is there even a "very small change in Price" or a "very small change in Quantity" if we are measuring at a given point. Depending on the scaling of your graph, each point is, by definition, the sum of many other small points on the curve. Hence, when examining the elasticity of a point, you could establish a microscopic difference in the width of the point. Price Elasticity and Total Revenue The more essential a good is to the consumer, the more inelastic will be the demand for the good.the less the necessity a good is, the more elastic is the demand for it. Generally any change in price will have two effects:
The price effect: For inelastic goods, an increase in unit price will tend to increase revenue, while a decrease in price will tend to decrease revenue. (The effect is reversed for elastic goods.) the quantity effect : an increase in unit price will tend to lead to fewer units sold, while a decrease in unit price will tend to lead to more units sold. For inelastic goods, because of the inverse nature of the relationship between price and quantity demanded (i.e., the law of demand), the two effects affect total revenue in opposite directions. But in determining whether to increase or decrease prices, a firm needs to know what the net effect will be. Elasticity provides the answer: The percentage change in total revenue is approximately equal to the percentage change in quantity demanded plus the percentage change in price. (One change will be positive, the other negative. The percentage change in quantity is related to the percentage change in price by elasticity: hence the percentage change in revenue can be calculated by knowing the elasticity and the percentage change in price alone. As a result, the relationship between PED and total revenue can be described for any good:
When the price elasticity of demand for a good is perfectly inelastic (Ed = 0), changes in the price do not affect the quantity demanded for the good; raising prices will cause total revenue to increase. When the price elasticity of demand for a good is relatively inelastic (-1 < Ed < 0), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue rises, and vice versa. When the price elasticity of demand for a good is unit (or unitary) elastic (Ed = -1), the percentage change in quantity is equal to that in price, so a change in price will not affect total revenue. When the price elasticity of demand for a good is relatively elastic ( - < Ed < -1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue falls, and vice versa. When the price elasticity of demand for a good is perfectly elastic (Ed is ), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue falls to zero.
Hence, as the accompanying diagram shows, total revenue is maximized at the combination of price and quantity demanded where the elasticity of demand is unitary. It is important to realize that price-elasticity of demand is not necessarily constant over all price ranges. The linear demand curve in the accompanying diagram illustrates that changes in price also change the elasticity: the price elasticity is different at every point on the curve. Substitution and Price Elasticity of Demand Price elasticity of demand refers to the way prices change in relationship to the demand, or the way demand changes in relationship to pricing. Price elasticity can also reference the amount of money each individual consumer is willing to pay for something. People with lower incomes tend to have lower price elasticity, because they have less money to spend. A person with a higher income is thought to have higher price elasticity, since he can afford to spend more. In both cases, ability to pay is negotiated by the intrinsic value of what is being sold. If the thing being sold is in high demand, even a consumer with low price elasticity is usually willing to pay higher prices. Elasticity implies stretch and flexibility. The flexibility or the price elasticity of demand will change based on each item. Changing nature of both price and demand are affected by a number of factors. Generally, goods or services offered at a lower price lead to a demand for greater quantity. If you can get socks on sale you might buy several pairs or several packages, instead of just a pair. This means that though the seller offers the socks at a lower price, he usually ends up making more money, because demand for the product has increased. However if the price is set too low, the retailer may lose money by selling too many pairs of socks at a reduced rate.
41
The degree of substitution between a product and related products determines its price elasticity of demand. The extent of substitution depends on the substitution effect. One factor of substitution is the number of competing products. More of these means more market shares for a product to gain or lose when its price decreases or increases, respectively. Thus, a seller invites more exodus of demand when he underprices more rivals in the market where products are homogeneous in type and quality. This kind of competition is evident among adjacent retail outlets for the same product brands of more or less the same size like supermarkets, department stores, bookstores, and the like. In these examples, demand is said to be price elastic. Another factor of substitution is the desirability of a product relative to its substitutes due to quality. It would be difficult for a product to lose its market share when its price increases if quality were its primary selling point. One example is San Miguel Beer which is the disputed leader in the beer market despite its higher price because of exquisite taste that is unequalled by any other brand. Normally, its demand is said to be price inelastic as price increases. On the other hand, the absence of substitutes makes the demand for a product highly price inelastic since it is only income effect that is behind price-demand relationship. Such is the case of a certain kind of drug that is produced under only one brand. Since a sickness cannot be postponed, consumers in need will buy the product even at a much higher price. Finally, the relative importance of consumers needs determines the degree of substitution between the commodity items in the consumption basket e.g. essentials and nonessentials. A decrease in price would increase earnings if demand were price elastic enough to stretch Qd and revenue in order to offset the increase in cost with more quantity produced.
42
Likewise, an increase in price due to higher production cost or cost of business would increase earnings if demand were price inelastic enough to stretch price and revenue in order to offset the said increase in cost. The price inelasticity of demand to maximize revenue and earnings is also true even without a change in cost. Increasing Qd without changing price highlights the effect of decreasing price and increasing Qd with a very elastic demand on revenue and earnings. Conversely, increasing price without changing Qd highlights the effect of increasing price and decreasing Qd with a very inelastic demand on revenue and earnings. Thus, revenue increases as price decreases when the increase in Qd offsets the decrease in price with an elasticity coefficient of more than one (elastic). The opposite is true when price increases with an inelastic demand. To drive home the point, the seller can increase earnings with a decrease in price if the product were substitutable enough to wrest considerable demand from rival products to maximize elasticity and earnings. An example is when retailers of the same rice variety under price one another in the public market for bigger market shares. On the other hand, a seller can increase earnings with an increase in price if the product were exclusive enough to be sold even at a higher price to maximize earnings. An example is the only grocery in a subdivision which can increase prices without suffering a decrease in sales volume in the absence of competitors in the area. Thus, a change in price and quantity demanded can increase revenue and earnings depending on the substitutionality of the product. The Tax Burden When a good is sold, a sales tax has to be paid to the government o the sale of that commodity. The question on who between the buyer and the seller shoulders the burden is dependent mostly on the degree of elasticity of the demand for that good. Let us take as example, a bottle of soft drinks on which the government levies a 100% sales tax. IF the price per bottle is P5.00, the consumer has to pay P10.00 on
account of the tax. However, that consumer does not always have to shoulders the entire tax burden by himself. The tax of P5.00 was shared equally between the buyer and the seller, with an equal tax share of P2.50. However, it is also possible for a buyer to shoulder a bigger portion of the tax burden. This happens when the buyer cannot do away with the consumption of a good and thus considers it essential. Therefore, in spite of a tax levy that could jack up the price of the good, he would still be willing to buy it and the producer can afford to pass on a bigger portion of the tax to the buyer.
Deadweight Loss of Taxation We saw earlier how taxes on goods and services of businesses can change the demand by citizens, supply, and equilibrium price and quantity. Taxes provide revenues to the government and are usually paid by both buyers and sellers. To see the welfare effect of taxes, we need to compare the revenue received by the government, and the dead weight loss (also known as "excess burden" or "distortionary cost") to the consumers and producers. Recall that in a competitive market, a given tax surcharge added to the price of each unit of a particular good (gasoline tax, food tax, federal tax) will:
lower the price received by the seller and; increase the price paid by the buyer.
This allows us to use supply and demand diagram to analyze the effects of a tax on total surplus. We see that the tax places a wedge between the gross price and net prices, and the equilibrium quantity will fall as a result of the tax. What are the gains and losses as a result of a tax? The government receives tax revenue of T x Q, where T is the amount of tax per unit, and Q is the quantity sold. This is a benefit to those on whom the government spends the tax revenue.
To see the welfare losses, consider the total surplus before and after the tax. Deadweight loss, also known as "excess burden", is a pure loss to society. It represents lost value to consumers and producers due to the reduction in the sales of the good, but not captured by government revenue. In other words, the loss to consumers and producers from the tax is larger than the size of the tax revenue. Determinants of Deadweight Loss How large will the deadweight loss be from a particular tax? It depends on how much a given tax reduces the amount that:
consumers are willing to purchase and; Producers are willing to supply.
What determines how much the market will shrink? Reduction in quantity supplied as a result of a tax depends on the elasticity of supply. Generally, the more inelastic the supply, the smaller the reduction in quantity, and the smaller the deadweight loss. Reduction in quantity demanded depends on the elasticity of demand. Generally, the more elastic the demand, the more quantity demanded decreases and the greater the deadweight loss. In general, the smaller the decrease in quantity, the smaller the deadweight loss. This occurs since the main cost of a tax is that it shrinks the size of a market below its optimum level. Overall, the more elastic the supply and demand, the larger the dead weight loss of a tax. Deadweight Loss and Tax Revenue For the most part, tax revenue will first increase as we raise taxes but as the gross price keeps rising, the quantity decreases more and more. Eventually, the tax revenue will also begin to decrease. the more inelastic the demand, the slower the tax revenue
falls. This helps to explain why governments often put taxes on goods in inelastic demand like tobacco and gasoline. Overall, taxes on specific items will:
1. Influence peoples behavior by inducing them away from the goods that are
taxed. 2. Raise revenue for the government to spend, making those who receive the expenditures better off. 3. Create a dead weight loss.
INCOME ELASTICITY OF DEMAND The coefficient of income elasticity of demands measures a products percentage as the ratio of the percentage change in income which caused the shift in the demand curve. EY is given as = Change in Demand ( D) Percentage Change in Demand (% D) Demand (D) OR Percentage Change in Income ( % Y) Change in Income ( Y) Income (Y) The absolute value of the coefficient of the income elasticity is also a measure of how responsive the demand is to change in income. As income increases, the coefficient of: - Greater than 1 means demand is elastic and the good is superior; - Less than 1 means demand is inelastic and the good is inferior; and - Equal to 1 means demand is unitary and the good is normal.
A study of income elasticity for food was made by Ernest Engel. The findings of his study are depicted in what is now accepted as ENGELS LAW. According to Engel,
when income increases, the percentage that is spent for food tends to decrease. The resulting coefficient is less than one because the food is a necessity. When income increases, the increase goes mostly to the purchase of luxury items, education, travel and leisure. An analysis of income elasticity figure is shown in table below: Income Elasticity 2 1.5 .75 .50 .30 .22 Degree of Demand Elasticity Elastic Elastic Inelastic Inelastic Inelastic Inelastic Type of Good Normal luxury Normal luxury Normal necessity Normal necessity Inferior Inferior
However, an elasticity greater than 1 means that the product gains more importance in the allocation of incremental income and therefore, in the allocation of total income. On the other hand, some products some products lose importance because others do otherwise as income increases. A product of such nature is inferior as its elasticity is less than 1 and its share in the allocation of incremental and therefore, in the allocation of total income diminishes instead. The Consumption Line The figure below presents a hierarchy of budget lines and indifferent curves which determine different levels of consumption through the point of tangency represents the consumption of the two commodities at varying levels of income, otherwise known as the CONSUMPTION LINE. Consumption line
The consumption line is upward sloping from the point of origin of the graph. The increase in consumption of goods in (Y-axis) accelerates for every unit increase in the consumption of the goods in (X-axis). It should already be clear at this point that as income increases, some products gains importance (superior goods) while some do otherwise (inferior goods) in the consumption basket. Moreover, superior goods will eventually become inferior as income continues to increase to give way to new superior goods. There are two underlying reasons for the change in the relative importance of the commodity items as income continues to increase. One is the gradual satisfaction of the consumers hierarchy of needs from the basic to non basic. Thus, the consumer shifts the emphasis of consumption towards shelter at a certain level of income after satisfying up to some degree, the need for clothing and good. This makes shelter a superior good and the others, inferior goods at the said level of income. On the other hand, a smaller budget can constrain a consumer from consuming goods of better quality due to high prices and the consumption of which is only possible at a higher level of income. Thus, those who belong to the higher income groups can afford to buy imported shoes and clothing making these products superior over their local counterparts in their expenditure basket. Finally, the theory of diminishing marginal utility is the cornerstone of the concept of income elasticity of demand. The shift in consumption from inferior goods to superior goods as income increases implies that the marginal utility of the latter is greater than of the former. Marginal spending shifts to those commodity items with higher marginal utilities due to the relative scarcity, thus making them superior as substitutes to their inferior goods. However, these commodity items will eventually lose their superiority as income continues to increase due to the law of diminishing marginal utility and their individual elasticity decrease at most to zero. This is the point of maximum satisfaction and incremental spending shifts instead to the consumption of new and relative scarce goods.
48
CROSS ELASTICITY OF THE DEMAND The coefficient of cross elasticity of demand measures the percentage change in the demand of good X which is the shift of the demand curve, in response to a percentage change in price of good Y, thus:
Ec =
Qx Qx Py Py OR
% %
Qx Py
EC may also have a coefficient of greater than 1, less than 1 or equal to one, indicating a demand sensitivity. Good X and Good Y may be related in two ways, first as substitutes, and second as complements. If the coefficient EC is positive, this means commodities X and Y are substitutes. An increase in Py will cause the consumer to purchase more of Good X, the substitute goods, thus causing Qx to increase. On the other hand, if EC is negative, Good X and Y are complements and are thus, used together. If the price of Y increases, the demand for Y and, hence, the demand for X decreases. Thus, the coefficient of the cross elasticity of demand practically measures the degree of substitution between products. Demand curves and elasticity
49
As a result of the different degree of elasticity, there are different ways of presenting the demand curve. D1 is relatively elastic, a change in price leads to a significant change in quantity demanded. P
D1
Qd
D2 is relatively inelastic, a change in price leads to a very slight change in the quantity demanded.
D2
Qd
D3 is perfectly elastic. At a given price, quantity demanded can change infinitely.
D3
50
Qd
D4 is perfectly inelastic. At any price, the quantity demanded will remain the same. Qd is equal to Zero. P D4
Qd
Price elasticity of supply If demand varies in response to a change in its determinants, so does supply. The coefficient of the price elasticity of supply measures the percentage change in the quantity supplied of a commodity compared to a percentage change in the price of such commodity. The difficulty or ease of increasing or decreasing the supply of goods determines its elasticity. Goods which are relatively easy to manufacture tend to have elastic supplies; whereas goods which are difficult to produce have inelastic supplies. Just as in the demand curve, the supply curve is elastic if es is greater than 1, inelastic if es is less than 1 and unitary elastic when es is equal to 1. Normally, the coefficient of es is positive, because of the direct relationship between price and quantity supplied. As a result of varying degrees of elasticity of supply, the following supply curves are also possible:
S1 is relatively elastic: a change in price results in a significant change in quantity supplied. P S1
Qs S2 is relatively inelastic: a change in price results in a slight change in quantity supplied. P S2
Qs
S3 is perfectly inelastic: at a given price, quantity supplied may change infinitely. P
S3
Qs S4 is perfectly inelastic: At a given price, quantity supplied remains constant or Qs is equal to zero.
S4
Qs
Projecting the future Important decisions about what and how many goods to produce depend very much on the entrepreneurs estimate of future demand. If the entrepreneur produces much more than what is demanded, he would have an inventory on hand. If this inventory is much more than what is necessary, this becomes an added cost in the form of money tied up with too much inventory in addition to storage and spoilage costs. However, if the entrepreneur produces much less than what is demanded, he would be missing out on what could have been an additional profits earned. Thus it is very important that the entrepreneur knows some forecasting techniques. There are different methods of making a forecast. Let us just use the two methods. The simplest way is the use of the average arithmetical method called regression analysis or the least squares regression method. The Average Arithmetic of Growth Rate Method The computation of this method is carried out by getting the percentage change between two values which is simply the ratio of the change between two years expressed in percentage form. The average growth rate is then computed by getting the sum of the percentage changes divided by the period covered. The trend line using Least squares regression method
This method uses statistical tools and is the most commonly used method of computing the long-term trend of time series. The least square method, as the name implies, fits a trend line to the date in a manner such that sum of the squared deviations of actual data from estimated or trend data at a minimum. On these grounds, the resulting trend line can be characterized as a line of the best fit since the sum of the squared deviations is at a minimum. The trend values, thus, best approximates the actual values. The equation for the straight line trend is Y= a + bx where x is the independent variable. Since their values must be determined for each of the series analyzed, a and b are referred to as unknowns. They are also called constants because once their values are determined, they do not change.
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E C O N 2 0 2 3

CHAPTER II DEMAND AND SUPPLY DEMAND

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

150 200 250 300

THE LAW OF DEMAND

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

Prices of related commodities

Income of the individual

Tastes and preferences

Expectations regarding the future

Climate and weather

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

a change in the distribution of income among consumers with different tastes.

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

THE LAW OF SUPPLY

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

The Dynamics of Demand and Supply

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

consumer so they would decrease their demand. supply in the market.

At this point, there is surplus of

CHAPTER III ELASTICITY OF DEMAND AND SUPPLY

Types of Price Elasticity

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

consumers are willing to purchase and; Producers are willing to supply.

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

D3 is perfectly elastic. At a given price, quantity demanded can change infinitely.

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

S1 is relatively elastic: a change in price results in a significant change in quantity supplied. P S1

Qs S2 is relatively inelastic: a change in price results in a slight change in quantity supplied. P S2

S3 is perfectly inelastic: at a given price, quantity supplied may change infinitely. P

ECON 2023 INTRODUCTION TO MICROECONOMIC THEORY AND PRACTICE

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