BASIC

MICROECONOMICS

BACORE 1
 ●Studied Bachelor of Science in
Business Administration major in
Economics
●Finished Master in Economics in
2018, Bicol University
●Currently taking up Doctor of
Philosophy in Public Administration
●Licensed Teacher
●Social Science Coordinator
●Started 2012 @ DWCL

CHONA S. BERNARDO, MEcon, LPT

 CLASS RULES AND POLICIES during
Google Meet:

1.Dress appropriately.
2.Turn on your phones in silent mode.
3.Turn on your camera during Gmeet.
4.Turn off your microphone at all times unless
you have something to ask or clarify.
5.If you want to say something, you can a
send a message in the chat box.
6.Avoid getting out and in of the session.
 SCHOOL OF
ARTS AND

Course Requirements SCIENCES

1. Submission of activities
2. Quizzes
3. Passing all the major exams

© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation

●
 SCHOOL OF
ARTS AND
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Course Description

This course deals with microeconomic

theory, the importance, principles and
applications of the theory of supply and
demand, consumer, production and cost
theories, Likewise, consumer behavior theory
and analysis, the analysis of each market
structures are included.

© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation
GENERAL OBJECTIVES:

At the end of the semester, the students are expected to:

1. To present the basic fundamentals of price theory

2. Illustrate how the fundamentals of pricing can be applied

to decision making problems that affect students, consumers, and
firms.

3. To equip and apply by students the knowledge of analyzing

the microeconomic activities.
Course Content:

I. Introduction to Economic Theory

-Economic Activity
-Scientific Approach to Economics
-The Circular Flow of Economic Activity
-Basic Economic Problems
-Types of Economic System
II. The Law of Demand and Supply
-Demand and Law of Demand
-Supply and Law of Supply
-Market Equilibrium
Course Content:

III. Theory of Consumer Behavior

-Theory of Utility
-Consumption
-Other Concepts of Consumption
-Utility of Demand

IV. Elasticity of Demand and Supply

-Price Elasticity of -Demand
-Income Elasticity of Demand
-Cross Elasticity of demand
-Price Elasticity of Supply
Course Content:

V. Theory of Production
-Production Function
-Production Isoquant
-Productivity and Returns to Scale Productivity

VI. The theory of Cost and Profit

-Cost Concept
-Profit Concept
VII. Pricing Output
-Pure Competition
Course Content:

V. Theory of Production
-Production Function
-Production Isoquant
-Productivity and Returns to Scale Productivity

VI. The theory of Cost and Profit

-Cost Concept
-Profit Concept
VII. Pricing Output
-Pure Competition
 Course Content:

VIII. Monopoly
-Profit Maximation: Total Curve
-Price Discrimination
-Regulation of Monopoly
-Welfare Effects of Monopoly

IX. Monopolistic Competition

-Product Differentiation
-Monopolistic Competition, Monopoly. And Pure
Competition: A Comparison
Course Content:

X. Oligopoly
-Perfect Collusion
-Imperfect Collusion
-The Kinked Demand Curve Barriers to
Entry
-The Welfare Effects of Oligopoly
GRADING SYSTEM: SCHOOL OF
OF ARTS AND
SCIENCES

Includes oral and written exams which are

divided as follows:

Class Standing: 40%

Average quizzes: 20%
Major Examination: 40%
Total: 100%

© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation
 SCHOOL
OF ARTS

References AND
SCIENCES

● Cristobal Pagoso et. al Introductory

Microecnomics, Rex Book Store, 1988.
● Angel Q. Yoingco, et. al. Economic Analysis,
GIC Enterprise & Co. Inc. 1966 ed.
● Neil Cathly Bermudez, Principles of
Economics
INTRODUCTION TO
ECONOMICS
 SCHOOL OF
ARTS AND
SCIENCES

Learning Objectives:
☻ Understand and explain the basic concepts and
principles in Economics

☻ Categorize given economic condition using

positive and normative economic analysis.

☻ Construct and interpret graphs that show

movement of worksheet operations.

© Chona S. Bernardo (2015) Basic Economics

 What is Economics?

◼ It comes from “ the Greek word “oikonomia” meaning

“household management”
What is Economics?

or
What is Economics?

The efficient allocation of scarce

means of production toward the
satisfaction of human wants.
Focus Activity #2
● Why we ___________ students are
studying economics?
__________________________
__________________________
It is important to know about
__________________________
__________________________
__________________________
__________________________
WHY WE STUDY ECONOMICS?
WHY WE STUDY ECONOMICS?
WHY WE STUDY ECONOMICS?
8 GOALS IN ECONOMICS
BRANCHES
SCHOOL OF
ARTS AND
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SCHOOL OF
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SCHOOL
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AND
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POSITIVE OR NORMATIVE

● Statement

“Government should provide basic

healthcare to all citizens”.
Answer
● Normative

● There is no way to prove whether

government "should" provide
healthcare; this statement is based
on opinions about the role of
government in individuals' lives, the
importance of healthcare and who
should pay for it.
POSITIVE OR NORMATIVE

● Statement

“Government provided healthcare

increases public expenditures”.
Answer
● Positive

● it can be proved or disproved by

examining healthcare spending data
in countries like Canada and Britain
where the government provides
healthcare.
Activity #3

● A fall in incomes will lead to a rise in

demand for own-label supermarket
foods.
● If the government raises the tax on
beer, this will lead to a fall in profits
of the brewers.
● Resources are best allocated by
allowing the market mechanism to
work freely.
 Positive or Normative?

● The government should enforce

minimum prices for beers and lagers
sold in supermarkets and off-licences
in a bid to control alcohol
consumption.
● The rising price of crude oil on world
markets will lead to an increase in
cycling to work.
 Positive or Normative?

● A reduction in income tax will improve

the incentives of the unemployed to
find work.
● The government is right to introduce
a ban on smoking in public places.
● The retirement age should be raised
to 70 to combat the effects of our
ageing population.
 Positive or Normative?

● A rise in average temperatures will

increase the demand for sun screen
products.
● Higher interest rates will reduce
house prices.
● Cut-price alcohol has increased the
demand for alcohol among teenagers
● A car scrappage scheme will lead to
fall in the price of second hand cars.
 Positive or Normative?

● Pollution is the most serious economic

problem.
● Unemployment is more harmful than
inflation.
● The congestion charge for drivers
of petrol-guzzling cars should
increase to P25.
● The government should increase the
minimum wage to P30 per hour to
reduce poverty.
 DIVISIONS

● PRODUCTION – This
refers to the process of
producing or creating
goods needed by the
households to satisfy
their needs. The
factors of production
are called input and
the goods and services
that have been created
are called outputs of
production.
DIVISIONS

DISTRIBUTION – This
refers to the marketing
of goods and services to
different economic
outlets for allocation to
individual consumers. In
monetary terms, this is
the allocation of income
among persons or
household
 DIVISION

CONSUMPTION – This refers

to the proper utilization of
economic goods.
DIVISION
EXCHANGE – this is a
process of transferring
goods and services to
a person or persons in
return for something.
At present, the
medium of exchange
used in the market is
money. This means,
we exchange our
money with goods and
services.
SCHOOL OF
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ARTS AND
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© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation

●
 SCHOOL OF
ARTS AND
SCIENCES

© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation

●
 SCHOOL OF
ARTS AND
SCIENCES

© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation

●
 SCHOOL OF
ARTS AND
SCIENCES

© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation

●
 SCHOOL OF
ARTS AND
SCIENCES

© Chona S. Bernardo (2015) Basic Economics with Land Reform and Taxation

●
SCHOOL OF
ARTS AND
SCIENCES
SCHOOL OF
ARTS AND
SCIENCES
SCHOOL OF
ARTS AND
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SCHOOL OF
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SCHOOL OF
ARTS AND
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The Circular-Flow Diagram
 Transactions: The Circular-Flow
Diagram
●Tradetakes the form of barter when
people directly exchange goods or
services that they have for goods or
services that they want.

●The circular-flow diagram is a model

that represents the transactions in an
economy by flows around a circle.
 Circular-Flow of Economic
Activities
●Ahousehold is a person or a group of people that
share their income.

●Afirm is an organization that produces goods and

services for sale.

●Firms
sell goods and services that they produce to
households in markets for goods and services.

●Firms
buy the resources they need to
produce—factors of production—in factor markets.
Economic Systems
 Economic Systems

● An economic system describes how

a country’s economy is organized

● Because of the problem of scarcity,

every country needs a system to
determine how to use its productive
resources

● An economic system must answer

● 3 basic questions…
 Economic Systems

● WHAT TO PRODUCE? (What kinds of goods

and services should be produced?)
● HOW TO PRODUCE? (What productive
resources are used to produce goods and
services?)
● FOR WHOM TO PRODUCE? (Who gets to have
the goods and services?

The way a society answers these

questions determines its economic system.
 Four Types of Economic
Systems:
● 1. Traditional Economy

● 2. Command Economy

● 3. Market Economy

● 4. Mixed Economy (Market +

Command)
 Traditional Economy
● An economic system in which
economic decisions are based on
customs and beliefs
● People will make what they always
made & will do the same work their
parents did
● Exchange of goods is done through
Bartering: trading without using
money
Traditional Economy
● Who decides what to produce?
● People follow their customs and make
what their ancestors made
● Who decides how to produce
goods & services?
● People grow & make things the same
way that their ancestors did
● Who are the goods & services
produced for?
● People in the village who need them
 Traditional Economy

● Examples:
● Villages in Africa and South America; the
native tribes in Canada; the caste system
in parts of rural India
 Command System

● Government makes all economic

decisions & owns most of the property
● Governmental planning groups
determine such things as the prices of
goods/services & the wages of workers
● This system has not been very
successful & more and more countries
are abandoning it
 Command Economy
● Who decides what to produce?
● Government makes all economic
decisions
● Who decides how to produce goods
and services?
● Government decides how to make
goods/services
● Who are the goods and services
produced for?
● Whoever the government decides to give
them to
 Command System

● Countries with communist governments

have Command economies
● Examples: Cuba and North Korea

*Germany and Russia have moved

away from having a Command economy
since 1991. Now they have a Mixed
economy.
 Market Economy

● An economic system in which economic decisions are

guided by the changes in prices that occur as
individual buyers and sellers interact in the market
place.
● Most of the resources are owned by private citizens
● Economic decisions are based on Free Enterprise
(competition between companies)

● Important economic questions are not answered

by the government but by individuals.
● Gov. does not tell a business what goods to
produce or what price to charge.
 Market Economy

● Who decides what to produce?

● Businesses base decisions on supply and
demand and free enterprise (PRICE)
● Who decides how to produce
goods and services?
● Businesses decide how to produce goods
● Who are the goods and services
produced for?
● consumers
 Market Economy

● There are no truly pure Market

economies, but the United States is
close.
 Mixed Economy
● Market + Command = Mixed
● There are no pure command or market
economies. To some degree, all modern
economies exhibit characteristics of both
systems and are often referred to as mixed
economies.
● Most economies are closer to one type of
economic system than another
● Businesses own most resources and determine
what and how to produce, but the Government
regulates certain industries
 Mixed Economy

● Who decides what to produce?

● businesses
● Who decides how to produce goods
and services?
● Businesses, but the government
regulates certain industries
● Who are the goods and services
produced for?
● consumers
 Mixed Economy

● Most democratic countries fall in this

category (there are no truly pure
Market or Command economies).
● Examples: Brazil, Mexico, Canada,
UK, etc.
 Which Economic System Is
Best?
● Market system has proven to be best
because it promotes the goals of growth,
freedom, & efficiency
● Citizens are free to own their own property
and use it in the most efficient and profitable
way
● Command and Traditional systems
sometimes offer more security, but are
not nearly as strong in efficiency, growth,
freedom, and environmental quality
 Question

● What economic system you think is

better?
Demand, Supply, and Market Equilibrium
INTRODUCTION TO ECONOMICS

3
Demand, Supply, and
CHAPTER
Market Equilibrium Firms and Households:
OUTLINE
Decision-Making Units
The Basic

Input Markets and Output Markets: The

Circular Flow
Demand in Product/Output Markets
Changes in Quantity Demanded versus
Changes in Demand
Price and Quantity Demanded: The Law of
Demand
Other Determinants of Household Demand
Shift of Demand versus Movement Along the
Demand Curve
From Household Demand to Market Demand
Supply in Product/Output Markets
Price and Quantity Supplied: The Law of Supply
Other Determinants of Supply
Shift of Supply versus Movement Along the
Supply Curve
From Individual Supply to Market Supply
Market Equilibrium
Excess Demand
Excess Supply
Changes in Equilibrium
Demand and Supply in Product Markets: A
Review
Looking Ahead: Markets and the
Allocation of Resources

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Firms and Households: The Basic Decision-Making Units

firm An organization that transforms resources

(inputs) into products (outputs). Firms are the
primary producing units in a market economy.

entrepreneur A person who organizes, manages,

and assumes the risks of a firm, taking a new idea
or a new product and turning it into a successful
business.

households The consuming units in an economy.

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Input Markets and Output Markets: The Circular Flow

product or output markets The markets in which

goods and services are exchanged.

input or factor markets The markets in which the

resources used to produce products are
exchanged.

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Diagrams like this one show the
circular flow of economic activity, hence
the name circular flow diagram. Here
goods and services flow clockwise:
Labor services supplied by households
flow to firms, and goods and services
produced by firms flow to households.
Payment (usually money) flows in the
opposite (counterclockwise) direction:
Payment for goods and services flows
from households to firms, and payment
for labor services flows from firms to
households.
Note: Color Guide—In Figure 3.1 households
are depicted in blue and firms are depicted in
red. From now on all diagrams relating to the
behavior of households will be blue or shades
of blue and all diagrams relating to the
behavior of firms will be red or shades of red.
Activity
 FIGURE 1 The Circular Flow of Economic
Input Markets and Output Markets: The Circular Flow
Input Markets and Output Markets: The Circular Flow

labor market The input/factor market in which

households supply work for wages to firms that
demand labor.

capital market The input/factor market in which

households supply their savings, for interest or for
claims to future profits, to firms that demand funds
to buy capital goods.

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Input Markets and Output Markets: The Circular Flow

land market The input/factor market in which

households supply land or other real property in
exchange for rent.

factors of production The inputs into the

production process. Land, labor, and capital are
the three key factors of production.

Input and output markets are connected through the behavior of

both firms and households. Firms determine the quantities and
character of outputs produced and the types and quantities of
inputs demanded. Households determine the types and quantities
of products demanded and the quantities and types of inputs
supplied.

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Demand in Product/Output Markets

A household’s decision about what quantity of a

particular output, or product, to demand depends
on a number of factors, including:

▪ The price of the product in question.

▪ The income available to the household.
▪ The household’s amount of accumulated
wealth.
▪ The prices of other products available to the
household.
▪ The household’s tastes and preferences.
▪ The household’s expectations about future
income, wealth, and prices.

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Demand in Product/Output Markets

quantity demanded The amount (number of units)

of a product that a household would buy in a given
period if it could buy all it wanted at the current
market price.

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Demand in Product/Output Markets

Changes in Quantity Demanded versus Changes in Demand

The most important relationship in individual

markets is that between market price and quantity
demanded.

Changes in the price of a product affect the quantity demanded

per period. Changes in any other factor, such as income or
preferences, affect demand. Thus, we say that an increase in the
price of Coca-Cola is likely to cause a decrease in the quantity of
Coca-Cola demanded. However, we say that an increase in
income is likely to cause an increase in the demand for most
goods.

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Demand in Product/Output Markets

Price and Quantity Demanded: The Law of Demand

demand schedule A table showing how much of a

given product a household would be willing to buy
at different prices.

demand curve A graph illustrating how much of a

given product a household would be willing to buy
at different prices.

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The relationship between price (P) and quantity
demanded (q) presented graphically is called a
demand curve. Demand curves have a negative
slope, indicating that lower prices cause quantity
demanded to increase. Note that Chloe’s demand
curve is blue; demand in product markets is
determined by household choice.
 FIGURE 3.2 Chloe’s Demand Curve
0 15.00
1 10.00
3 7.00
7 3.50
25 .50
30 0
(Calls Per Month) (Per Call)
Quantity Demanded Price
for Telephone Calls
TABLE 3.1 Chloe’s Demand Schedule
Price and Quantity Demanded: The Law of Demand
Demand in Product/Output Markets
Demand in Product/Output Markets

Price and Quantity Demanded: The Law of Demand

Demand Curves Slope Downward

law of demand The negative relationship between

price and quantity demanded: As price rises,
quantity demanded decreases; as price falls,
quantity demanded increases.

It is reasonable to expect quantity demanded to fall when price

rises, ceteris paribus, and to expect quantity demanded to rise
when price falls, ceteris paribus. Demand curves have a negative
slope.

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Demand in Product/Output Markets

Price and Quantity Demanded: The Law of Demand

Other Properties of Demand Curves

Two additional things are notable about Chloe’s demand curve.

As long as households have limited incomes and wealth, all demand
curves will intersect the price axis. For any commodity, there is
always a price above which a household will not or cannot pay. Even
if the good or service is very important, all households are ultimately
constrained, or limited, by income and wealth.
That demand curves intersect the quantity axis is a matter of
common sense. Demand in a given period of time is limited, if only
by time, even at a zero price.

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Demand in Product/Output Markets

Price and Quantity Demanded: The Law of Demand

Other Properties of Demand Curves

To summarize what we know about the shape of demand
curves:
1. They have a negative slope. An increase in price is likely
to lead to a decrease in quantity demanded, and a
decrease in price is likely to lead to an increase in
quantity demanded.
2. They intersect the quantity (X-) axis, a result of time
limitations and diminishing marginal utility.
3. They intersect the price (Y-) axis, a result of limited
incomes and wealth.

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Demand in Product/Output Markets

Other Determinants of Household Demand

Income And Wealth

income The sum of all a household’s wages,
salaries, profits, interest payments, rents, and
other forms of earnings in a given period of time. It
is a flow measure.

wealth or net worth The total value of what a

household owns minus what it owes. It is a stock
measure.

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Demand in Product/Output Markets

Other Determinants of Household Demand

Income And Wealth

normal goods Goods for which demand goes up
when income is higher and for which demand goes
down when income is lower.

inferior goods Goods for which demand tends to

fall when income rises.

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Demand in Product/Output Markets

Other Determinants of Household Demand

Prices of Other Goods and Services

substitutes Goods that can serve as replacements
for one another; when the price of one increases,
demand for the other decreases.

perfect substitutes Identical products.

complements, complementary goods Goods that

“go together”; a decrease in the price of one
results in an increase in demand for the other and
vice versa.

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Demand in Product/Output Markets

Other Determinants of Household Demand

Tastes and Preferences

Income, wealth, and prices of goods available are
the three factors that determine the combinations
of goods and services that a household is able to
buy.

Changes in preferences can and do manifest

themselves in market behavior.

Within the constraints of prices and incomes,

preference shapes the demand curve, but it is
difficult to generalize about tastes and
preferences. First, they are volatile. Second,
tastes are idiosyncratic.

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Demand in Product/Output Markets

Other Determinants of Household Demand

Expectations
What you decide to buy today certainly depends
on today’s prices and your current income and
wealth.
There are many examples of the ways
expectations affect demand.
Increasingly, economic theory has come to
recognize the importance of expectations.
It is important to understand that demand depends
on more than just current incomes, prices, and
tastes.

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Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve

TABLE 3.2 Shift of Chloe’s Demand Schedule

Due to increase in Income
Schedule D0 Schedule D1

Quantity Demanded Quantity Demanded

Price (Calls Per Month at an (Calls Per Month at
(Per Call) Income of Php 300 Per an Income of Php
Month) 600 Per Month)
0.00 30 35
0.50 25 33
3.50 7 18
7.00 3 12
10.00 1 7
15.00 0 2
20.00 0 0
 FIGURE 3.3 Shift of a Demand
Curve Following a Rise in Income
curve, in this case from D0 to D1. Telephone calls are normal goods.
between price and quantity is different; there is a shift of the demand
changes (income, tastes, and so on), the relationship
When any other factor that influences demand
along the demand curve for that good.
When the price of a good changes, we move

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 Demand in Product/Output Markets

Shift of Demand versus Movement Along a Demand Curve

shift of a demand curve The change that takes place in a demand curve
corresponding to a new relationship between quantity demanded of a good and
price of that good. The shift is brought about by a change in the original
conditions.

movement along a demand curve The change in quantity demanded brought

about by a change in price.
Change in price of a good or service leads to
Change in quantity demanded (movement
along the demand curve).
Change in income, preferences, or prices of other
goods or services leads to
Change in demand (shift of the demand
curve).

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Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve

 FIGURE 3.4 Shifts versus Movement Along a Demand Curve

and the demand for normal goods shifts to the right.
a. When income increases, the demand for inferior goods shifts to the left

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103 of 49
b. If the price of hamburger rises, the quantity of hamburger demanded declines— his
is a movement along the demand curve.
The same price rise for hamburger would shift the demand for chicken (a substitute for
hamburger) to the right and the demand for ketchup (a complement to hamburger) to
the left.
 FIGURE 3.4 Shifts versus Movement Along a Demand Curve (continued)
Shift of Demand versus Movement Along a Demand Curve
Demand in Product/Output Markets
Demand in Product/Output Markets

From Household Demand To Market Demand

market demand The sum of all the quantities of a

good or service demanded per period by all the
households buying in the market for that good or
service.

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105 of 49
Total demand in the marketplace is simply the sum
of the demands of all the households shopping in a
particular market. It is the sum of all the individual
demand curves—that is, the sum of all the
individual quantities demanded at each price.
from Individual Demand Curves
 FIGURE 3.5 Deriving Market Demand
From Household Demand To Market Demand
Demand in Product/Output Markets
Supply in Product/Output Markets

Successful firms make profits because they are

able to sell their products for more than it costs to
produce them.

Profit - The difference between revenues and

costs.

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Supply in Product/Output Markets

Price and Quantity Supplied: The Law of Supply

quantity supplied The amount of a particular

product that a firm would be willing and able to
offer for sale at a particular price during a given
time period.

supply schedule A table showing how much of a

product firms will sell at different prices.

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Supply in Product/Output Markets

Price and Quantity Supplied: The Law of Supply

law of supply The positive relationship between

price and quantity of a good supplied: An increase
in market price will lead to an increase in quantity
supplied, and a decrease in market price will lead
to a decrease in quantity supplied.

supply curve A graph illustrating how much of a

product a firm will sell at different prices.

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Supply in Product/Output Markets

Price and Quantity Supplied: The Law of Supply

TABLE 3.3 Chloe’s Supply Schedule for

soybeans
Quantity Supplied(per
Price bushels produced)
P1.50 0
1.75 10,000
2.25 20,000
3.00 30,000
4.00 45,000
5.00 45,000

 FIGURE 3.6 Chloe’s Individual Supply Curve

made by firms.
Supply is determined by choices
Note that the supply curve is red:
slope of a supply curve is positive.
the price of output is higher. The
A producer will supply more when

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Supply in Product/Output Markets

Other Determinants Of Supply

The Cost Of Production

In order for a firm to make a profit, its revenue
must exceed its costs.

Cost of production depends on a number of

factors, including the available technologies and
the prices and quantities of the inputs needed by
the firm (labor, land, capital, energy, and so on).

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Supply in Product/Output Markets

Other Determinants Of Supply

The Prices of Related Products

Assuming that its objective is to maximize profits, a firm’s decision

about what quantity of output, or product, to supply depends on:
1. The price of the good or service.
2. The cost of producing the product, which in turn depends
on:
■ The price of required inputs (labor, capital, and land).
■ The technologies that can be used to produce the
product.
3. The prices of related products.

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Supply in Product/Output Markets

Shift of Supply versus Movement Along a Supply Curve

movement along a supply curve The change in

quantity supplied brought about by a change in
price.

shift of a supply curve The change that takes place

in a supply curve corresponding to a new
relationship between quantity supplied of a good
and the price of that good. The shift is brought
about by a change in the original conditions.

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 Supply in Product/Output Markets

Shift of Supply versus Movement Along a Supply Curve

TABLE 3.4 Shift of Supply Schedule for Soybeans

Following Development of a New
Disease-Resistant Seed Strain
SCHEDULE D0 SCHEDULE D1

Quantity Supplied Quantity Supplied

Price (Bushels per Year (Bushels per Year
(per Bushel) Using Old Seed) Using New Seed)
$1.50 0 5,000
1.75 10,000 23,000
2.25 20,000 33,000
3.00 30,000 40,000
4.00 45,000 54,000
5.00 45,000 54,000
 FIGURE 3.7 Shift of the Supply Curve or Soybeans
Following Development of a New Seed Strain
the supply curve shifts.
When any other factor affecting supply changes,
supplied rises or falls.
along the supply curve for that product; the quantity
When the price of a product changes, we move

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Supply in Product/Output Markets

Shift of Supply versus Movement Along a Supply Curve

As with demand, it is very important to distinguish

between movements along supply curves
(changes in quantity supplied) and shifts in supply
curves (changes in supply):

Change in price of a good or service leads to

Change in quantity supplied (movement
along a supply curve).
Change in income, preferences, or prices of other
goods or services leads to
Change in supply (shift of a supply curve).

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Supply in Product/Output Markets

From Individual Supply to Market Supply

market supply The sum of all that is supplied each

period by all producers of a single product.

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Total supply in the marketplace is the sum of all
the amounts supplied by all the firms selling in
the market. It is the sum of all the individual
quantities supplied at each price.
from Individual Firm Supply Curves
 FIGURE 3.8 Deriving Market Supply
From Individual Supply to Market Supply
Supply in Product/Output Markets
Market Equilibrium

equilibrium The condition that exists when quantity

supplied and quantity demanded are equal. At
equilibrium, there is no tendency for price to change.

Excess Demand

excess demand or shortage The condition that

exists when quantity demanded exceeds quantity
supplied at the current price.

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which quantity demanded and quantity supplied are equal.
and quantity supplied rises until an equilibrium is reached at
to rise. When the price in a market rises, quantity demanded falls
When quantity demanded exceeds quantity supplied, price tends
At a price of $1.75 per
bushel, quantity demanded
exceeds quantity supplied.
When excess demand
exists, there is a tendency
for price to rise.
When quantity demanded
equals quantity supplied,
excess demand is
eliminated and the market is
in equilibrium. Here the
equilibrium price is $2.50
and the equilibrium quantity
is 35,000 bushels.
Demand, or Shortage
 FIGURE 3.9 Excess
Excess Demand
Market Equilibrium
Market Equilibrium

Excess Supply

excess supply or surplus The condition that exists

when quantity supplied exceeds quantity
demanded at the current price.

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Market Equilibrium

Excess Supply

 FIGURE 3.10 Excess

Supply, or Surplus
cause the price to fall.
This excess supply will
bushels.
demanded by 20,000
supplied exceeds quantity
At a price of $3.00, quantity

When quantity supplied exceeds quantity demanded at the

current price, the price tends to fall. When price falls, quantity
supplied is likely to decrease and quantity demanded is likely to
increase until an equilibrium price is reached where quantity
supplied and quantity demanded are equal.

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Before the freeze, the coffee
market was in equilibrium at
a price of P1.20 per pound.
At that price, quantity
demanded equaled quantity
supplied.
The freeze shifted the
supply curve to the left (from
S0 to S1), increasing the
equilibrium price to P2.40.
Subsequent Price Adjustment
Market: A Shift of Supply and
 FIGURE 3.11 The Coffee
price and quantity change.
When supply and demand curves shift, the equilibrium
Changes In Equilibrium
Market Equilibrium
Market Equilibrium

Changes In Equilibrium

 FIGURE 3.12 Examples of

Supply and Demand Shifts for
Product X

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123 of 49
Orange Juice Prices Could
Skyrocket After Freeze Destroys
Most of California Output
City News
Juice Fanatics
Bad News for Orange
Changes In Equilibrium
Market Equilibrium
 Demand and Supply in Product Markets: A Review

Here are some important points to remember about the mechanics of

supply and demand in product markets:

1. A demand curve shows how much of a product a

household would buy if it could buy all it wanted at the
given price. A supply curve shows how much of a
product a firm would supply if it could sell all it wanted
at the given price.
2. Quantity demanded and quantity supplied are always
per time period—that is, per day, per month, or per
year.
3. The demand for a good is determined by price,
household income and wealth, prices of other goods
and services, tastes and preferences, and
expectations.

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 Demand and Supply in Product Markets: A Review

Here are some important points to remember about the mechanics of supply and
demand in product markets:

4. The supply of a good is determined by price, costs of production, and prices

of related products. Costs of production are determined by available
technologies of production and input prices.
5. Be careful to distinguish between movements along supply and demand
curves and shifts of these curves. When the price of a good changes, the
quantity of that good demanded or supplied changes—that is, a movement
occurs along the curve. When any other factor changes, the curve shifts, or
changes position.
6. Market equilibrium exists only when quantity supplied equals quantity
demanded at the current price.

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In 2006, the average price for a daily edition of Manila
Bulletin newspaper was P0.50. In 2007, the average price
had risen to P0.75.
Newspapers Rise?
Why Do the Prices of
Demand and Supply in Product Markets: A Review
Looking Ahead: Markets and the Allocation of Resources

You can already begin to see how markets answer the basic
economic questions of what is produced, how it is produced, and
who gets what is produced.

▪ Demand curves reflect what people are willing and able to

pay for products; demand curves are influenced by
incomes, wealth, preferences, prices of other goods, and
expectations.
▪ Firms in business to make a profit have a good reason to
choose the best available technology—lower costs mean
higher profits.
▪ When a good is in short supply, price rises. As it does,
those who are willing and able to continue buying do so;
others stop buying.

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 REVIEW TERMS AND CONCEPTS

capital market law of demand

complements, complementary law of supply
goods market demand
demand curve market supply
demand schedule movement along a demand curve
entrepreneur movement along a supply curve
equilibrium normal goods
excess demand or shortage perfect substitutes
excess supply or surplus product or output markets
factors of production profit
firm quantity demanded
households quantity supplied
income shift of a demand curve
inferior goods shift of a supply curve
input or factor markets substitutes
labor market supply curve
land market supply schedule
wealth or net worth
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