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LESSON 2:
APPLICATION
OF DEMAND
AND SUPPLY
Subject : APPLIED ECONOMICS MS. MA. JHOBELLE L. ALAYON, LPT
 APPLIED ECONOMICS 02

MARKET
is an interaction between the buyers and sellers of trading
or exchange.
it is where the consumer buys and the seller sell.

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 APPLIED ECONOMICS 03

GOODS MARKET
the most common type of market because it is where we buy consumer goods.

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 APPLIED ECONOMICS 04

LABOR MARKET
is where the workers offer services and look for jobs, and where employers look for workers to hire.

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 APPLIED ECONOMICS 05

FINANCIAL MARKET
Which includes the stock market where securities of corporations traded.
is a market in which people trade financial securities and derivatives at low transaction costs. Some of the
securities include stocks and bonds, raw materials and precious metals, which are known in the financial
markets as commodities.

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 APPLIED ECONOMICS 02

MARKET
it is important because it is where a person who has excess
goods can dispose them to those who need them.
this interaction should lead to an implicit agreement
between buyers and sellers on volume and price.
in purely competitive market, the agreed price between a
buyer and seller is also market price or price for all

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 APPLIED ECONOMICS

DEMAND
is the willingness of a consumer to buy a
commodity at a given price.

DEMAND
SCHEDULE
shows the various quantities the consumer is
willing to buy at various prices.

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DEMAND FUNCTION
a demand function shows how the quantity demanded of a good
depend on its determinants, the most important of which the price
of the good itself.

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Thynk
| Business Marketing | 09
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PRICE PER BOTTLE NUMBER OF BOTTLES

P0 6

P2 5

P4 4

P6 3

P8 2

P 10 1

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 APPLIED ECONOMICS 03
Quantity Demand (in bottles)
12

10

8
Price

0
1 2 3 4 5

Quantity Demanded
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DEMAND CURVE
is a graphical illustration of the demand schedule, with the price
measured on the vertical axis (Y) and the quantity demanded
measured on the horizontal axis (X).
The demand curve is a graphical representation of the relationship
between price and demand. The graphs show the commodity’s price
on the Y-axis and quantity on the X-axis. It follows the economics law
of demand.

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Thynk
Applied Economics 02
University

INCOME EFFECT
is felt when a change in the price of a good changes consumer's real income or
purchasing power, which is the capacity to buy with a given income. In other
words, purchasing power is the volume of goods and services one can buy
with his/her income. If a good becomes more expensive, real income
decreases and the consumer can only buy less goods and services with the
same amount of money income. The opposite holds with a decrease in the
price of a good and increase in real income.

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Applied Economics 02
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SUBSTITUTION EFFECT
is felt when a change in the price of a good changes demand due to
alternative consumption of substitute goods. For example, tower price
encourages consumption away from higher — priced substitutes on top of
buying more with the budget. Conversely, higher price of a product
encourages the consumption of its cheaper substitutes further discouraging
demand for the former already limited by less purchasing power.

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Applied Economics 02
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THE LAW OF DEMAND

After observing the behavior of price and quantity demanded we can now
state the law of demand. Using the assumption “ceteris paribus" which
means all other related variables except those that are being studied at
the moment and are held constant, there is an inverse relationship between
the price of a good and the quantity demanded for that good. As price
increases, the quantity demanded for that product decreases. The low
price of the good motivates the consumer to buy more. When price
increases, the quantity demanded for the good decreases.
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Applied Economics 02
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THE LAW OF DEMAND

The law of demand is a fundamental principle of economics that states that at a
higher price, consumers will demand a lower quantity of a good

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Applied Economics 02
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CETERIS PARIBUS

It is used in economics to rule out the possibility of 'other'

factors changing, i.e. the specific causal relation between two
variables is focused.

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Applied Economics 02
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NON-PRICE DETERMINANTS OF
DEMAND
if the ceteris paribus assumption is dropped, non-price variables that
also affect demand are now allowed to influence demand. These
non-price factors include income, taste, expectations, prices of
related goods, and population

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Applied Economics 02
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NON-PRICE DETERMINANTS OF
DEMAND
These non-price determinants can cause an upward or downward
change in the entire demand for the product and this change is referred
to as shift of the demand curve. The demand function will now read:
D = f {P, T, Y, E, PR, NC}, which states that demand for a good is a
function of Price (P), Taste (T), Income , Expectations (E), Price of
related goods (PR}, and number of consumers (NC}. Factors other than
the price of the product are the non-price factors of demand.
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Applied Economics 02
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NON-PRICE DETERMINANTS OF
DEMAND
Non-price determinants of demand are factors that impact the demand for
goods or services, not including the price point being charged.
Examples of non-price determinants of demand include:
Changes in real income
Changes in tastes/preferences
Changes in the price of related goods (substitutes and complements)
Changes in the number of consumers
Future price expectations
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Applied Economics 02
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SHIFT OF THE DEMAND CURVE

A demand curve is a graph depicting the inverse demand function,[1] a

relationship between the price of a certain commodity (the y-axis) and
the quantity of that commodity that is demanded at that price (the x-
axis). Demand curves can be used either for the price-quantity
relationship for an individual consumer (an individual demand curve), or
for all consumers in a particular market (a market demand curve).

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 Thynk
Applied Economics 02
University

SHIFT OF THE DEMAND CURVE

When a change in the price of a good causes the quantity demanded for
that good to change, this is illustrated on the same demand curve and is
simply a movement from one point to another on that Curve.

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