CHAPTER 3

THE MARKET SYSTEM: DEMAND AND SUPPLY

(INSERT CARTOON 3.1)

Introduction

In this chapter we will discuss the market system as a social mechanism for answering
the basic economic problem of scarcity. In discussing the power of the market system in
allocating resources we will rely on the analysis of demand and supply. This framework in the
determining the price of goods, services and wealth is very potent not only in setting the value of
resources but more importantly in showing how the mechanism for allocation is achieved. In
addition, the simple framework of demand and supply analysis also reveals the implications
when prices deviate from the values established by the market.

Concept of Scarcity

One of the foundations of economics is the concept of scarcity. This is a reality that we
have to face not only because resources are limited but more so because these resources have
many competing uses. The competition on the use of limited resources can take place when
human wants are increasing. Thus, the never-ending desire of individuals to address their
expanding and complicated wants becomes an important element in the seriousness of the
problem of scarcity. For example, the role of education, income, taste, environment, culture, and
advertising can shape, alter, and make a simple need for food into more complicated human
wants. Thus, the more complicated the human wants become, the more resources are needed to
fulfil them and the problem of scarcity becomes intense.

Although scarcity stem from the limited resources, it is different from the concept of
shortage. Shortage is a situation wherein the supply of a particular commodity is deficient to
meet its demand at a prevailing price. However, even if there is no shortage or the price has been
adjusted to make the supply equal the demand, the problem of scarcity remains. Even if there is
no shortage, the resources used in removing the shortage remain to have competing uses. As a
consequence, some resources from other products or activities have to be sacrificed in order to
respond to this shortage. Thus, we can think of scarcity as a general characteristic of resources
because they have competing or alternative uses. In a world of competing uses of resources,
there are sacrifices that we have to take in order to have something or do something. That is the
concept of scarcity.

The Price as an Index for Scarcity

Because scarcity is an accepted social reality, over the years societies have devised
various mechanisms to address this problem. This social mechanism is called the process of
allocation. Since the problem of scarcity stems from the limitation of resources and the
expansion of human wants, the measures of allocation devised by societies have focused either
on the expansion of resources or the control of human wants.
 Because resources are limited in an economy, they can be expanded through various
means or used properly. Investment in machines, for example, is a process of directly increasing
the amount of physical resources available to the economy for production purposes. On the other
hand, the efficient or proper use of existing machines can likewise increase the capacity of these
machines to produce more goods and services and thus can enhance the satisfaction of
consumers.

The problem of scarcity can also be addressed by looking into the needs and wants of the
consumers of society. We know that the expansion of human wants contributes to the problem
of scarcity. Thus, controlling these wants can also tackle the problem of scarcity. One of the
mechanisms devised by many societies today to control peoples wants is the market system or
the price system.

The market system uses the forces of demand and supply to determine the price of a
commodity. In turn, this price becomes an indicator of scarcity. For example, if the price of a
certain commodity is increasing, it indicates that the commodity is becoming relatively scarce.
This means that there is a large demand competing for this limited commodity. As a consequence
of this increasing trend in the price of a commodity, consumers may adopt measures to limit their
use or consumption of that particular commodity. They are forced to economize and give in to
the huge competition because given their fixed income they still have to fulfil other needs and
wants.

From the point of view of the producer, an increasing price is likewise an indicator of
scarcity. As mentioned earlier, it implies that there is a huge demand for the commodity for
which producers are attracted to expand the supply of the scarce product. The high price of the
scarce product is an incentive for them to increase production to attain higher income and profits.

If on the other hand, the commodity is not relatively scarce there will be indicators in the
market that would signal this message. If the competition is not huge, the forces of demand and
supply will yield a decreasing price. A decreasing price is a signal that there is less competition
on this commodity and would encourage more consumers to buy more of the product. To the
producer, the low price means they have to lower production because there is a relative
abundance of the product in the market.

Market System: Answering the Problems of Production and Distribution

The market system is also effective in answering the basic questions of economics. For
example, the price set by the market can answer what goods to be produced. As mentioned
earlier, as the price of a certain commodity increases, this serves as important information to the
producer that the product is relatively scarce and the demand for such commodity is high. In
response to this information, the producer will expand the production of the commodity. On the
other hand, a declining price means that there is little consumer demand for the product. Because
of the small demand, the producer will have to reduce the production of that certain commodity.

As regards the questions on who will participate in the production process and how it
shall it be done, the price system can also be basis for making decisions. More labor will be used
or a labor-intensive technique will be used if the price of labor is relatively cheaper than the price
of capital. The prices of these factor inputs will also have to be evaluated relative to their
productivities or contributions to production.

The price system is not only useful in answering the problems of production but can also
answer the problem of distribution. Who will have access to a greater amount of goods and
services produced by the economy? Usually, those with higher income can purchase more goods
and services than those with lower income. However, the purchasing power of the consumers
will depend on the abundance of their resources being used as productive inputs and the
productivity of their resources. Thus, those with factor inputs with higher productivities will
receive higher returns or compensation for the use of their resources compared with those with
factor inputs with lower productivities. Since the factor productivities are linked with returns or
factor prices, the distribution of goods and services are ultimately determined by prices. The high
purchasing power of individuals derived from receiving higher income is a reflection of high
productivity of the resources that they own as well as the high returns that they receive as factor
inputs.

Setting the Market Price: Interaction of Demand and Supply

As mentioned earlier, the price mechanism is the key in the allocation process of the
market system. Because of its importance, we have to understand how the price is determined. A
price is an index of worth of products, services, and wealth. As such, commodities like clothes,
rice, capital, as well as services like watching movies, and eating in restaurants have their
respective prices reflective of their value or worth. The price of a commodity as discussed
earlier is an indicator of scarcity. We saw how it is being used as a mechanism of allocation and
in answering the problems of production and distribution in an economy.

Since a market can be described as a state when and where transactions are made
between sellers and buyers, the price of a commodity will depend on the interaction between
buyers and sellers.

To the buyers, their wants and preferences are the factors that shape their demand for
various goods and services. The buyers want to purchase a good or a service based on the value
they attach to the good or service. And this value or consumer satisfaction is reflected in the
price they are willing to purchase the good or service. Usually, there is an indirect relationship
between the price of the commodity and the amount the buyers are willing to buy the
commodity. At a high price, they have to relate this value with a high level of additional
satisfaction which is only attained when they consume less of the commodity. Higher price is
attached with relatively scarce commodity. On the other hand, at a lower price, buyers are
willing to purchase more of the commodity because they attach a lower value of additional
satisfaction with a relatively abundant commodity.

To the producers, their willingness to supply a commodity will depend on their cost of
production. Usually producers compare their cost with the price. At a lower price, there are very
few sellers who are efficient in production that can produce the commodity at a lower cost.
Because of this, a small amount of the commodity will be supplied in the market. As the price is
increased, there will be more firms who can match the higher price with their higher costs. As a
result, there will be an increased amount of commodity supplies in the market. Thus, there is a
direct relationship between the supply and price of the commodity.

It can be seen that there is a disparity on how consumers and producers view the price of
a commodity. Consumers consider the price as a reflection of the value of their satisfaction while
producers equate price with their cost of production. At a high price, consumers then to consume
less because they feel that they have to economize on this relatively scarce commodity. On the
other hand, producers are willing to supply more because there are more firms that are efficient
in production at a higher price. This disparity is also reflected when the price is low. Consumers
buy more and producers supply less at this lower price.

However, despite the disparity of orientation of consumers and producers in the market,
there will be a situation when both will agree on the price and the amount of goods to be
consumed and supplied. This is attained by the process of competition in the market system. For
example, if the price is high, consumers will demand less while producers will supply more
resulting in a surplus. When there is a relative abundance of the product, the suppliers will
compete among each other by lowering their price to expand their sales. With the decrease in
price, consumers will be encouraged to buy more while sellers will be discouraged to produce
more. This reduces the surplus which can be eliminated if the forces of competition among
sellers continue until reaching what we refer to as the equilibrium point. Thus, the equilibrium
can be described as a point where there is agreement between buyers and producers on the
price and amount of products that will be bought and sold in the market. There is no surplus or
shortage at the point of equilibrium.

In order to understand this mechanism let us illustrate it through Graph 3.1 where the
determination of the equilibrium point is set at point E as the intersection of the demand curve
and the supply curve. It can be shown at this point that consumers are willing to pay the price up
to PE and buy quantity QE. From the point of view of producers, they are also willing to sell up
to quantity QE and at price PE. It means that at the equilibrium point consumers and producers are
in agreement on the price and quantity that will be bought and sold.
 Graph 3.1
Interaction of Demand and Supply

Price, P S
M Y
PH

E
PE

0 QM QE QY Quantity, Q

At a price higher that PE, for example, PH, consumers are willing to buy less amount of
the commodity amounting to QM because of the commodity has become expensive. On the other
hand, producers are willing to sell more of the commodity up to QY because a higher price is an
incentive for greater production. This means at a higher price, there is a disagreement on the
amount consumers are willing to buy and the amount the sellers are willing to supply the
commodity. The surplus created in this situation is called a disequilibrium condition.

The condition of disequilibrium can also be shown in the graph if the price is lower than
the equilibrium price PE. In this case, it will lead to an excess demand for the commodity due to
the lower price of the commodity.

Equilibrium is a concept in physics that means no pressure to change. In economics, it is

used as an agreement of parties in the market. The market equilibrium point implies that there
is no pressure to change the situation since there is an agreement between buyers and sellers
in the price and amount of product traded. Only when there are shortages and surpluses or what
we called disequilibrium in the market that the forces or pressures of competition will change the
condition.

The Demand Schedule and the Demand Curve

The demand curve or the demand schedule is one of the two important components in
setting the market price. The other component is the supply curve which we are going to discuss
later. The demand schedule or demand curve is a list that shows the willingness and ability of
a buyer to purchase a product in alternative prices at a particular period of time, ceteris
paribus or the other factors influencing the demand of the product are not changing.

Table 3.1
Demand for Fish balls
 Alternative Combination Unit Price Quantity of Fish balls
A Php 2.50 5
B 2.25 10
C 2.00 15
G 1.75 20
H 1.50 25
I 1.00 30

Graph 3.2
Demand Schedule of Fish balls
Price, P
A
Php 2.50
B
2.25
C
2.00
G
1.75
H
1.50
I
1.00
D
0 5 10 15 20 25 30 Quantity, Q

The schedule of demand shown in Table 3.1 shows the demand for fish balls at
alternative prices. The graphical representation of the demand curve is shown in Graph 3.2. From
Table 3.1, at price P2.50 per piece the consumer is willing to buy up to 5 pieces of fish balls.
This coordinate is shown at point A in Graph 3.2. If the price is decreased to P2.25, the demand
would increase to 10 pieces. This is shown at point B in the graph. If the price is further reduced
to P1.00, the consumer will buy up to 30 pieces of fish balls as shown at point I in the graph.

If we are going to connect all the coordinate points or combinations of prices and
quantities (A, B, C, G, H, I) we can form a demand curve D. It can be observed that this curve
has a negative slope that moves from northwest towards southeast. This implies that there is a
negative relationship between price and quantity demand. If the price is high, the demand for
fish balls is small. However when the price of fish balls decreases the quantity demand for fish
balls increases. This is the core of the law of demand.

There are two reasons why the demand for a product increases as it price decreases. This
is caused by the substitution effect and the income effect. The substitution effect states that if the
price of the commodity decreases, there is a substitution from the expensive product to a cheaper
one. Therefore, the expensive product is being replaced or substituted by a cheaper product by
the consumers. For example, if the price of a corn cub decreases but the price of siopao has not
changed the price of siopao has become relatively expensive compared with the price of a corn
cub. Because of this, consumers will substitute corn cub for siopao and the demand for corn cub
will increase while the demand for siopao will decrease if we assume that the amount of money
of the consumer did not change.

On the other hand, the income effect shows that if the price of a product increases
(decreases) despite no change in income, the ability of the buyer to purchase a commodity will
decrease (increase). For example, if a consumer has P500 which she can use to buy papaya at
P25 each or mangoes at P20 each. At her current income, the consumer can buy up to 20 pieces
of papayas or 25 pieces of mangoes. If the price of mangoes goes down to P10 each while there
is no change in the price of papaya, then the at the same income of P500, she can still buy 20
pieces of papayas but 50 mangoes. Thus, because of the price decrease of mangoes, the
purchasing power of her P500 has increased from 25 mangoes to 50 mangoes.

The Supply Schedule and the Supply Curve

The supply curve shows the graphical representation of the relationship between the price
of the product and the amount producers are willing to supply the product. Thus a supply curve
shows the ability of the producers to sell a product or service at alternative prices at a
particular period of time, ceteris paribus, or other factors affecting supply are not changing.

In Table 3.2 we are shown the supply schedule of corn cubs at alternative prices. At a low
price of P5 per unit producers are willing to sell up to 50 pieces of corn cubs. This combination
of price and amount of supply is shown in the coordinate point R in Graph 3.3. If the price is
increased to P10 per unit, there is an incentive for producers to produce more and they are
willing to supply up to 100 pieces of corn cubs. This combination is shown at coordinate point T
in the graph. If the price is increased up to P25 per piece, the suppliers are willing to supply up to
275 pieces.

At a low price there is little amount being supplied because there are very few efficient
producers that can match this low price with their cost of production. But as the price continues
to increase, producers with high cost of production become more efficient as their higher cost of
production can now match the higher price in the market. This is what is implied in the law of
supply.

Table 3.2
Supply of Corn Cubs
Alternative Combination Unit Price Quantity of Corn Cubs
R Php5.00 50
T 10.00 100
U 15.00 150
Y 20.00 225
W 25.00 275
 Graph 3.3
Supply Schedule of Corn Cubs
Price, P
S
Php 2.50 W
2.25 Y
2.00 U
1.75
1.50 T
1.00 R

0 50 100 150 225 275 Quantity, Q

Changes in Demand

According to our definition of demand, the price of a product is only one of the many
factors that can affect the demand of a commodity. Besides the price of the commodity, the
income of the consumers, the price of our products, expectation, tastes and preferences can also
affect the demand for a product. For example, if the income of a consumer increases as a result
of being promoted in his job, what will happen to his demand for chicken? We know that his
demand for chicken will increase as a result of his improved purchasing power. Does this mean
that the law of demand has been violated and the negative inclination of the demand curve no
longer holds?

The law of demand has not been violated even if demand for the product has increased
when the income of consumers has increased. The negative relationship between price and
quantity demand will still hold. What happens is that the demand curve shifts when other factors
affecting demand are changing.

This can be shown in Table 3.3 and Graph 3.4 where the demand for chicken is shown at
lower income and higher income. At a lower income, let say P20,000.00 a month, the consumer
is willing to buy only 5 kilos of chicken every month if the price is P250 per kilo. However, if
the price is reduced to P60 per kilo, the consumer is willing to buy up to 30 kilos per month. In
Graph 3.4 the demand curve D1 is shown by connecting points A, B, K, H, G, and I.

Table 3.3
Changes in Demand for Chicken due to Income Increase
Price per kilo Demand at lower income Demand at higher income
Php 250 5 20
220 10 25
180 15 30
140 20 35
100 25 40
 60 30 45

Graph 3.4
Shift in Demand Curve due to Income Increase
Price per kilo, P

260 M
A
240
220 B N
200
K T
180
160
U
140 H
120
W
100 G
80
Y
60 H
40
20 D1 D2

0 5 10 15 20 25 30 35 40 45 Q kilos of
chicken

If the income of the consumer is increased for whatever reason to a higher level say
P40,000.00 a month, the demand for chicken will increase at alternative prices. For example, at
price P250 per kilo, the consumer will increase his consumption from 5 kilos to 20 kilos per
month. At price P180 per kilo the consumer will purchase up to 30 kilos instead of 15 kilos when
his income was lower. And at price P60 per kilo, the consumer will buy 45 kilos instead of 30
kilos. If we connect the points M, N, T, U, W and Y, we can form a new demand curve D2.

Therefore when other factors affecting the demand curve are changing, the negative
relationship between price and quantity demand or the law of demand is not altered but the
change is depicted by a shift in the demand curve. In our discussion, the increase in demand
resulting from an increase in income shifts the demand curve to the right. It can be shown that a
reduction in demand from a decrease in income will shift the demand curve to the left. Whether
the demand curve shifts to either right or left the negative or indirect relationship between price
and quantity demand remain.

(INSERT CARTOON 3.3)

Changes in Supply
 There are many reasons that affect the supply schedule. The prices of inputs, both factors
and raw materials, changes in productivity and external factors can change the supply of goods
and services.

For example, if the price of the flour which is a raw material used in the production of a
pan de sal can shift the supply curve to the left. Increase in the cost of production can decrease
the amount being supplied by producers in the market. Therefore, for every price level, the
producer can only supply less amount of a product due to the increase of the price of the raw
materials needed for production.

To illustrate our point, refer to Table 3.4 and Graph 3.5. At price P10 per dozen, the
supplier of hopia is willing to supply up to 30 dozens. At price P15 they are willing to supply 60
dozens and at price P35, they are willing to sell up to 180 dozens.

Table 3.4
Change in supply of hopia due to the increase in input prices
Price per Supply before the change in Supply after the change in
dozen input prices input prices
Php 10.00 30 A 20 A
15.00 60 B 40 B
20.00 90 F 60 F
25.00 120 H 80 H
30.00 150 J 100 J
35.00 180 K 120 K

As a result of the increase in the price of mongo bean which is an ingredient in the
production of hopia, the supplier will be forced to reduce its production and supply. At price P10
per box, he will only supply up to 20 dozens instead of 30 dozens as before. At price P20, the
supply of hopia will be reduced from 90 dozens to 60 dozens. And at price P35, the producers
will supply only 120 dozens instead of 180 dozens before the increase in the price of mongo
bean.

Graph 3.5: Shift in the supply curve due to the increase in input prices

45 S2
Price per dozen of hopia, P

40 S1
K
35
J K
30
H J
25
F H
20
B F
15
A B
10
A
5

0 30 60 90 120 150 180 Q dozens of

Hopia
 In Graph 3.5, the initial supply curve is shown by S1 which is a line connecting the points
A, B, F, H, J and K. The increase in the price of the raw material is the reason for the shift of the
supply curve to S2. The new supply curve is a line connecting the points of A, B, F, H, J and
K.

The shift in the supply curve can also occur when there is an improvement in
productivity. In this case, the supply curve shifts to the right. Because the factor inputs have
become more productive, suppliers will need a smaller amount of factor inputs which will lower
their costs of production. Thus, at alternative prices, the producers are able to supply more of the
commodity they are producing.

The shift in supply can also be explained in terms of the price at alternative amounts of
production. The shift in supply can be viewed as the willingness of producers to supply a given
amount of product at a lower price because they have reduced their cost of production as a result
of an increase in productivity.

Applications in the Analysis of Supply and Demand

Setting the Minimum Wage

One of the most popular applications of the law of supply and demand is the intervention
of the government in setting the minimum wage in the labor market. We know that the
equilibrium wage rate is set by the interaction of the demand for labor and supply of labor in the
labor market.

In the labor market, the workers are the ones supplying labor services. Typical of a
supply curve, laborers are willing to render more hours of work if the price of labor or wage rate
is increased. On the other hand, firms and other establishments are the ones consuming labor
services which they use in their production activities. They are willing to increase their demand
for labor services if the wage rate or the price of labor is decreased.

If the government sets a minimum wage rate above the equilibrium wage rate determined
by the market, a condition of disequilibrium will occur in the labor market. As shown in Graph
3.6, at the minimum wage rate, Pm, maintained by the government the demand for labor services
will reach only QA because the firms may find the cost of labor too expensive at this minimum
wage rate. On the other hand, at this high wage rate laborers are willing to supply labor services
up to QB.

In Graph 3.6, at this minimum wage, the amount being supplied is higher than the amount
of demand for labor services (QA < QB). As a result, this will lead to a huge unemployment of
laborers. There are many who are willing to render their labor services at this high wage rate but
the price of labor is too high that firms are willing to demand less of labor services for their
production.

Graph 3.6: Effect of Setting the Minimum Wage

Wages, W S
A B
Pm

E
PE

0 QA QE QB Labor Services

Exchange Rate Control

Another application of looking into demand and supply is the effect of controlling the
price of dollar in the market of foreign currency. The commodity that is sold is dollar and its
price is shown in terms of peso per dollar or currency exchange rate.

One of the factors affecting the demand for dollars is the need of business establishments
for importing raw materials. In this example, if the price of a dollar or the exchange rate is high
businessmen would demand less of the foreign currency. On the other hand, the major suppliers
of dollars in our country are the exporters of Philippine products and services in the international
market. If the price of dollar or the exchange rate is increased, there is an incentive for exporters
to increase the amount of exports that would eventually also increase the supply of the dollar in
the market.

The equilibrium price of dollar or exchange rate is determined by the interaction of the
demand and supply of dollars in the market. In Graph 3.7, suppose the equilibrium exchange rate
is set by market forces at P70 per US dollar which is shown at the intersection of the demand and
supply curve. If at this exchange rate the government considers it too expensive as the price of a
US dollar, the monetary authorities can set the price at P50 per US dollar. At this price or
exchange rate, there will be an increase in the demand for dollars that can reach up to QB which
is higher than the supply of dollar which reached only up to QA.

This means that setting a foreign exchange control which sets the price of dollar below its
equilibrium exchange rate of P70 per US dollar will lead to an excess demand of dollar
amounting to QAQB.
 Graph 3.7: Effect of Exchange Rate Control

Dollar S
Price, P

E
70

A B
50
D

0 QA QE QB Quantity of Dollar

Demand and Supply in the Black Market

When the government intervenes in the market, it can lead to a disequilibrium situation
which ultimately can end up with the formation of a black market for the regulated good. For
example in our previous example of exchange rate control, a mandated exchange rate of P50 per
US dollar set by the government may lead to an excess demand for dollars because this price is
lower than the market determined exchange rate of P70 per US dollar. If the limited supply of
dollars is rationed, the excess demand for dollars will have to be met by a black market for US
dollars.

In Graph 3.8, the determination of a price in the black market is shown. As a result of the
exchange rate control, rationing of foreign exchange and the formation of a black market, the
supply curve of dollars will shift.

The initial supply curve S1 intersects the demand curve at point E where the equilibrium
exchange rate is set at P70 per US dollar and the equilibrium amount of dollar is set at QE.

At the exchange rate P50 per US dollar set by the government, only up QJ would be
supplied which is shown at point J in supply curve S1. If a black market for dollars would
emerge, the supply curve of the black S2 would start at this point and would increase steeply
compared with the initial supply curve S1.

The reason behind the steep increase in the supply curve in the black market is due to the
danger and other risks in operating illegal. Since the market is regulated, it is illegal to sell a
dollar higher than the mandated P50 per US dollar. If the suppliers are caught selling higher than
this price, they can be fined, their dollars confiscated and possibly imprisoned. The risks
involved in such operations would also increase their costs of supplying dollars.
 At a price lower than P50 per US dollar there is no risk in such operation, but at price
higher than P50, the supply curve will increases steeply compared to the initial supply curve S1.
At the new supply curve S2, the equilibrium price of dollar can be determined at a very high rate
say P90 per US dollar at point B. Therefore, it is possible that the price set in the black market
for dollars can be higher than the equilibrium price set if the market was not controlled.

Graph 3.8: Price Setting in the Black Market

S2
Dollar
Price, P
S1

B
70
E

J
50
D

0 QA QE QB Quantity of Dollar

Conclusion

In this chapter we have seen how the market system operates in the determining the value
of various commodities. Aside from showing how the equilibrium price was established using
demand and supply analysis, we have seen several applications of this simple framework in
understanding the consequences of disequilibrium situations arising from setting the price
beyond or below the market determined level.

Key Terms:
Demand Curve
Disequilibrium
Equilibrium
Income Effect
Law of Demand
Law of Supply
Movements
Price
Shifts
Substitution Effect
Supply Curve

Exercises
1. Using the following data, graph the demand for and supply of bananas. Determine market
equilibrium. Put the necessary labels.

Price Demand Supply

5 300 50
7 275 60
10 200 100
15 150 150
20 100 200
25 50 250

2. If rice and corn are substitute goods, if the price of corn decreases, there would be:
a. increase in demand for rice
b. increase in the quantity demanded for rice
c. decrease in demand for rice
d. decrease in the quantity demanded for rice

3. The decrease in demand for lechon due to the fear of getting fat brought about by cholesterol
could be brought about by:
a. consumer income
b. consumer expectation
c. consumer taste and preference
d. price of beef steak

4. If the price of tomato decreases due to technological progress, there would be:
a. decrease in the supply of catsup
b. increase in the supply of catsup
c. decrease in the quantity supply of catsup
d. increase in the quantity supply of catsup

5. In a graph showing the relationship between price of VCD and quantity of VCD, if there is
evidence that the income of consumers and the price of DVD have influence on the demand for
VCD, the shift in the demand curve of VCD might be due to:
a. price of VCD or consumer income
b. quantity demanded for VCD or consumer income
c. price of DVD or consumer income
d. quantity demanded for VCD or price of DVD
e. quantity demanded for CD-RW or price of CD-R

6. In a graph, the movement of a curve is due to:

a. changes in the slope of the curve
b. changes in the variable not measured by the graphs axes
c. changes in the variable that is measured by the graphs axes
d. changes in the variable that is measured and is not measured by the graphs axes
7. The relationship between variables moving in the same direction is:
a. uncertain
b. neutral
c. indirect
d. direct

8. When demand and supply does not meet, there is;

a. disequilibrium
b. equilibrium
c. partial equilibrium
d. temporary disequilibrium

9. Market equilibrium will determine:

a. market price
b. market output
c. a and b
d. quantity demanded and supplies
e. none of the above

10. There is competition among sellers in the market if there is:

a. scarcity
b. shortage
c. surplus
d. all of the above

12. Given a perfectly elastic demand curve, a shift in the supply curve rightwards would result:
a. increase in quantity and increase in price
b. decrease in quantity and decrease in price
c. increase in quantity and no change in price
d. decrease in quantity and no change in price

13. Using the following data, graph the demand for and supply of ballpoint pens. Determine
market equilibrium. Put the necessary labels.

Price Demand Supply

10 350 75
16 325 85
22 225 150
30 175 175
39 150 230
45 75 270

14. If demand exceeds supply or supply exceeds demand, how will price maintain market
equilibrium?
15. Show through the use of graph the effect of a simultaneous increase in price and quantity
demanded and supplied on market equilibrium.

16. Conduct a debate about decreasing the price of rice. One group would discuss on the role of
demand while the other would discuss on the perspective of supply.

17. How does the setting of either price floor or price ceiling affect market equilibrium? Explain
through the use of graphs.