The Law of

Demand and
Supply and the
Market
MODULE 3:
 Prices of basic commodities
WHAT IS COMMODITY?

• Commodity- as used in the economics pertains to a

homogenous good that commands a price.

• It is characterized by its uniformity across the market.

• Commodities are often used as raw materials or inputs

to produce another good (secondary product).

• Its price is dictated by the quantity available in the

market, taken as a whole.
 ( 1.) THE G OOD I S NOT AVAI L AB LE
LOC ALLY

Three
main
( 2.) THE COS T OF I M P ORT I NG I S
C HEAP ER THAN PR OC UR I NG THE
S AM E G OOD LOCALLY, AND
reasons
for ( 3.) THE QUALI T Y OF THE
I M PORT ED G OOD I S B ETT ER T HAN A

importing S I M I L AR G OOD S OLD LOC ALLY.

goods
Demand

Resource Constraint
are limitations or restrictions on the availability of
resources needed for a project or business operation.
The Law of
Demand
Consumer Utility
refers to a person’s willingness and ability to consume a good in reaction to
price changes.
It also forms the basis of the law of demand.
The Law of Demand
states that as the price of a good goes up, the quantity demanded of that
good goes down, all other things remaining constant (ceteris paribus).

Demand curve
illustrates the linear attribute of the law of demand.
 Take a look at figure 3.1.
Assume that this is the
demand curve for apples. At
point A where the price of
apple is P30.00 per piece,
quantity demanded is 1. At
point B where the price of
apple is P10.00 per piece,
quantity demanded is 3
pieces. Given the ceteris
paribus assumption, which
means there are no changes
in other factors, the law of
demand asserts that you will
be willing to buy more apples
Downward-sloping demand curve
is the inverse relationship between price and
quantity demanded

Inverse
refers to the direction of change for the two
variables--price and quantity.
The determinants
of demand
are the factors that influence how
much of a good or service consumers
are willing and able to buy at a given
price.
Income
Disposable Income
refers to the net amount after taxes and other mandatory contributions have been
deducted. . This additional money is what drives consumer’s desire to buy or
purchase more of a good.
Normal goods
goods that display income effect. Typically as consumers’ income rises (↑),
quantity demanded of goods also increases (↑). This us known as the income
effect.
Engel curve
Convention of graphing consumer income and quantity demanded. Which was
named after Ernst Engel, a German statistician from the 19th century (1821- 1896)
Inferior Goods
Goods that exhibit a decline ( ) in quantity demanded as consumer income
rises (↑).
Elasticity
Is a measure of responsiveness of one variable to a change in another
variable. In this case income elasticity elates to the change in quantity
demanded in response to an adjustment in income.
Lux ury G ood s
are products and services that are deemed highly desirable. Exhibit an increase in
demand more than the proportionate increase in income. Expensive designer
bags and one-of-a-kind jewelry are examples of luxury goods.
Necessity G ood s
on the other hand, show an increase in demand that is less than the proportionate
increase in income. Food staples such as rice or bread and utilities such as
electricity are examples of necessity goods.
Veblen goods
named after Thorstein Veblen, an American economist who came up
with the idea.
— One contradiction to the law of demand.
Veblen effect
is the propensity of a good, identified as Veblen good, to increase in
demand when its price soars to the point of being extremely
overpriced.
Substitutes
Goods that meet the same requirements or fulfill the same needs as
another good.

When a good becomes more expensive, its alternatives become

relatively cheaper and generally more appealing. This is known as the
substitution effect.
Complementary Goods
are generally consumed or used
together. There is interdependence
between the two goods. Examples of
complementary goods coffee and
creamer. When coffee becomes more
expensive, there will be less demand for
coffee. It follows that demand for
creamer will also drop, since creamer is
not ordinarily consumed on its own.
Consumer Expectations
When consumers anticipate the price of a particular product to
rise, they will tend to buy more of that product now before the
perceived or scheduled price increase.

Anticipation of the Price Increase

When consumers expect a price increase, they tend to buy more
of the product now to avoid paying higher prices, later.

Anticipation of the Price Decrease

When consumers expect a price drop, they might delay their
purchase, hoping to buy at a lower price.
Taste and preferences
Other considerations such as increased popularity, taste, and
personal preference influence the demand for a specific good. This
is more evident in the case of branded products. Some consumers
will be inclined to buy a certain brand because of the perceived
status of owning it.

Consumer
Is an individual or group who purchases goods and services for
personal use or consumption. They are the end users of the
products, making choices based in their needs, wants and
preference.
 Supply
The law of demand and supply
States that an increase in price causes an increase in quantity
supplied. Conversely, a fall in price causes a drop in quantity supplied.

The law of supply helps explain how producers respond to changes in

market prices. It’s a fundamental principle in economics that helps us
understand the dynamics of supply and demand and how they interact
to determine market outcomes.
Supply Curve
Figure 3.10 represents a supply curve, which illustrates the
relationship between the price of a good and the quantity supplied by
producers.
Upward Slope
the curve stopes upward, indicating a positive relationship between
price and quantity supplies. this means that as the price of the
good increases, producers are willing to supply more of it .

Points A and B
points A and B on the cure represent specific price - quantity
combination. For instance, at point A, the price is P 120.00 , and the
quantity supplied is 10 barrels. at point B, the price is P 160.00, and
the quantity supplied is 15 barrels.
Determinants of Supply
Goods that meet the same requirements or fulfill
the same needs as another good.
When a good becomes more expensive, its
alternatives become relatively cheaper and
generally more appealing. This is known as the
substitution effect.
Technology
Firms nowadays have to keep abreast of the latest innovation in
order to compete and stay one step ahead of their competitors.
Input Prices
Recall the factors of production discussed at the beginning of
this unit: land, labor, capital, and entrepreneurship. The
efficient allocation of these resources results in more profit
from the supplier’s point of view. Firms have to determine the
right balance of inputs to achieve maximum returns. An
increase in input prices drives up costs. Higher costs lead to a
decrease in quantity supplied.
Prices of Other Goods
Manufacturers often produce several products in the same of
related line. Consider a manufacturer that produces two
goods, A and B. As the price of good A rises, the quantity of
supplied of good A also increases.
Producer expectations
Producers who anticipate a surge in factor prices tend to
increase production before the higher input prices become in
effect. This leads to an increase in quantity supplied.
Government policy
Taxes, subsidies, and import quotas imposed by the government
impact quantity supplied of a good but in different ways.

Excise tax is a tax imposed on a manufactured good. Excise tax

is applicable to producers and sellers as opposed to value-
added tax (VAT) that is paid only by consumers or end users.
Excise tax increase input prices and cost of production, which
ultimately leads to a decrease in output or quality supplied.
 Subsidy
is monetary assistance by the government in support of target
industries or sectors of the economy. The government is in the
business of ensuring that all sectors of the economy are doing
well. A subsidy results in lower costs for recipient producers
because the government pays a portion of the costs.
Import Quota
is a limit to the volume that local producers can bring into the
country. Import quotas are particularly restrictive to manufacturers
that rely heavily on imported raw materials for their production.
The limit on raw materials leads to lower quantity supplied. This
effect applies to either a new imposition of quota (i.e., from no
quota to a quota of 5 tons) or a decrease in existing quota (i.e.,
reducing the maximum import from 5 tons to 3 tons).
 Movement along the Supply Curve
versus Shift of the Supply Curve
Equation 3.4 gives the formula for the supply curve. Like the demand curve, it is a
linear equation, which means its slope is the same at all points of the curve. In
this linear equation, c is the constant and it stands for the factors that are
assumed to not change. The positive slope of the supply curve is represented by
d.

Graphically, a change in price signifies a movement along the supply

curve. However, changes in the variable c or the other determinants of
supply will cause a shift in the supply curve.