BASIC ANALYSIS OF

DEMAND AND
SUPPLY
SSE 107 – 2018 (Microeconomics)

Prepared by:

Bleake Edmund L. De Guzman, MEcon

MARKET
• A market is a group of
buyers and sellers of a
good or service. The buyers
determine the demand for
the product, and the
sellers determine the
supply of the product.
MARKET
• Markets take many forms.
Some are highly organized.
In the markets for wheat
and corn, buyers and
sellers meet at a specific
time and place, knowing how
much of these agricultural
commodities they are
willing to buy and sell at
various prices.
MARKET
• More often, markets are less
organized than that. For
example, consider the market
for ice cream in a particular
town. Ice-cream buyers do not
all meet at any one time or
place. The sellers are in
several locations and offer
somewhat different toppings
and flavors.
COMPETITION
• The ice-cream market, like many
markets in the economy, is highly
competitive. Buyers know that
there are several sellers from
which to choose, and sellers are
aware that each of their products
is like those offered by others.
COMPETITION
• Economists use the term
competitive market to describe a
market in which there are so many
buyers and sellers that each has
little effect on the market
price.
COMPETITION
For this discussion:
Let’s assume that markets are
perfectly competitive. In this ideal
form of competition, a market has two
characteristics: (1) The goods
offered for sale are all the same,
and (2) the buyers and sellers are so
numerous that no single buyer or
seller has any influence over the
market price.
COMPETITION
For this discussion:
Because buyers and sellers in
perfectly competitive markets must
accept the price the market
determines, they are said to be
price takers. At the market price,
buyers can buy all they want, and
sellers can sell all they want.
 • Demand refers to the amount of
some good or service consumers
are willing and able to
purchase at each price.

• What a buyer pays for a unit

of the specific good or
service is called price.

DEMAND
 • The total number of units
that consumers would
purchase at that price is
called the quantity
demanded.

QUANTITY
DEMANDED
DEMAND (EXAMPLE)

If the price of ice cream rose to Php 20.00 per scoop, most people
would buy less. They might buy frozen yogurt instead. If the price
of ice cream fell to Php 5.00 per scoop, they might buy more.

This relationship between price and quantity demanded is true for

most goods.
LAW OF DEMAND
Other things being equal (ceteris paribus), when the
price of a good rises, the quantity demanded falls, and
when the price falls, the quantity demanded rises.

Note: Law of Demand shows inverse relationship.

 INDIVIDUAL DEMAND (EXAMPLE)
The line relating
price and quantity
demanded is the
demand curve.

By convention, the price of ice cream is on the vertical axis, and the quantity demanded is on the horizontal
axis.
MARKET DEMAND
• The market demand curve traces out combinations of (a) market price and
(b) quantities that all consumers in a market are together willing and
able to buy at that price.
• Hence, the market demand curve can be derived by adding together the
quantity demanded by each individual consumer at each price.
MARKET DEMAND (EXAMPLE)
SHIFTS IN
DEMAND
CURVE
• Because the market demand curve
holds other things constant, it
need not be stable over time.
If something happens to alter
the quantity demanded at any
given price, the demand curve
shifts.
SHIFTS IN DEMAND CURVE
1. Income. What would happen to your demand for ice cream if you lost your
job one summer? It would most likely fall because you have less money
to spend on things like ice cream. If the demand for something falls
when income falls, that good is called a normal good.
NORMAL GOOD EXAMPLES
INFERIOR GOOD
SHIFTS IN DEMAND CURVE
2. Price of Related Goods. When a fall in the price of one good, reduces the demand
for another good, the two goods are called substitutes. Substitutes are often pairs
of goods that are used in place of each other.

When a fall in the price of one good, raises the demand for another good, like ice
cream, the two goods are called complements. Complements are often pairs of goods
that are used together.
SUBSTITUTE
COMPLEMENTS
 SHIFTS IN
DEMAND CURVE
3. Taste. While individual tastes,
are critically important for
explaining demand, economists
typically don’t try to explain
them. This is because they are
unique to every person
(subjective), though affected by
historical and psychological
forces. Economists do, however,
examine what happens when tastes
change.
SHIFTS IN
DEMAND
CURVE
4. Expectations. A consumer’s
views about the future may
affect their demand for
something today. If they
expect a higher income next
month, they may choose to
save less now and spend more
on ice cream today.
SHIFTS IN
DEMAND CURVE
5. Number of Buyers. In addition
to the factors that influence
the behavior of individual
buyers, market demand depends on
how many of these buyers there
are.
SHIFT IN THE
DEMAND
CURVE VS.
MOVEMENT
ALONG THE
DEMAND
CURVE
SUPPLY
• The quantity supplied of any
good or service is the
amount that sellers are
willing and able to sell.
• Supply is a fundamental
economic concept that
describes the total amount
of a specific good or
service that is available to
consumers.
SUPPLY (EXAMPLE)

When the price of ice cream is high, selling ice cream is very
profitable, so the quantity supplied is large. Sellers work long
hours, buy many ice-cream machines, and hire many workers.

By contrast, when the price is low, the business is less

profitable, so sellers produce less. Some sellers may even shut
down, reducing their quantity supplied to zero.
LAW OF SUPPLY
Other things being equal (ceteris paribus), when the
price of a good rises, the quantity supplied also
rises, and when the price falls, the quantity supplied
falls as well.

Note: Law of Supply shows direct relationship.

INDIVIDUAL SUPPLY (EXAMPLE) The curve
relating price,
and the quantity
supplied is the
supply curve.
MARKET SUPPLY
• Just as market demand is the sum of the demands of al buyers, market supply is
the sum of the supplies of all sellers.

• The market supply curve shows how the total quantity supplied varies as the price
varies, holding constant all other factors that influence producers’ decisions
about how much to sell.
MARKET SUPPLY (EXAMPLE)
 SHIFTS IN
SUPPLY
CURVE
Because a market supply curve holds
constant al the variables other than
price that affect quantity supplied,
it can move over time. When one
variable changes, the quantity that
producers want to sell at any price
changes, and the supply curve
shifts.
SHIFTS IN SUPPLY
CURVE
1. Input Prices. When the
price of one or more of
inputs rises, producing a
particular good becomes
less profitable, and firms
supply less.
SHIFTS IN SUPPLY
CURVE
2. Technology. The technology
for turning inputs into
output is another determinant
of supply. The invention of
mechanized ice-cream
machines, for example,
reduced the labor needed to
make ice cream. By reducing
producers’ costs, this
advance in technology
increased the supply.
SHIFTS IN SUPPLY
CURVE
3. Expectations. The amount of goods
that supplier make may depend on
their expectations about the future.

Example:
If suppliers expect the price to
rise, they may put some of their
current production into storage and
supply less to the market today.
 SHIFTS IN SUPPLY
CURVE
4. Number of Sellers. In addition to
the factors that influence the
behavior of individual sellers,
market supply depends on how many
sellers there are in the market.
 SUPPLY AND
DEMAND
• Equilibrium. A situation in which the
market price has reached the level at
which the quantity supplied equals the
quantity demanded.

• Equilibrium Price. The price that

balances the quantity supplied and the
quantity demanded

• Equilibrium Quantity. The quantity

supplied and the quantity demanded at
the equilibrium price
SURPLUS
Producers are unable to sell all they
want at the going price. A surplus is
sometimes called a situation of
excess supply.
SHORTAGE
Consumers are unable to buy all
they want at the going price. A
shortage is sometimes called a
situation of excess demand.
LAW OF SUPPLY AND DEMAND
The price of any good adjusts to bring the quantity
supplied and the quantity demanded into balance.
PRICE CONTROLS
Laws that governments enact to regulate
prices are called price controls.

Price Ceiling. A legal maximum on the price

at which a good can be sold.

Price Floor. a legal minimum on the price at

which a good can be sold.
PRICE CEILING
• A government imposes price ceilings to keep the price of some necessary good or
service affordable.

• If the government imposes a price ceiling above the equilibrium price, in this
case, because the price that balances supply and demand is below the ceiling, the
price ceiling is not binding.

• If the equilibrium price is above the price ceiling, the ceiling is a binding
constraint on the market.
PRICE CEILING
PRICE
CEILING
EXAMPLE
PRICE FLOOR
• While a price ceiling places a legal maximum on prices, a price floor places a
legal minimum.

• If the floor is lower than the equilibrium price, nothing happens. Because the
equilibrium price is above the floor, the price floor is not binding.

• When the government imposes a price floor which is higher than the equilibrium
price, in this case, the price floor is a binding constraint on the market.
PRICE FLOOR
 PRICE FLOOR
EXAMPLE

Republic Act No. 11900

Section 22. Floor Price. — The BIR is mandated to

issue revenue regulations prescribing the floor
price or the minimum price of Vaporized Nicotine and
Non-Nicotine Products or Novel Tobacco Products,
taking into account the sum of their excise tax,
value-added tax, and a reasonable production cost.