Manual for economics with work exercises. By elsa t. silon/ramon a. bernardo/melani c.

quilloy

DEMAND, SUPPLY AND MARKET EQUILIBRIUM

In a market economy or capitalists economy, the interaction of demand and supply of goods and services
determine the prices of goods and services.

Demand
- Demand is the schedule of various quantities of goods and services which buyers are willing and
able to purchase at a given price, time and place, all other factors are held constant [ceteris
paribus].
- The law of demand states that as the price increases, the quantity demanded decreases, and as
the price decreases, the quantity demanded increases, ceteris paribus.
- Various factors affecting demand include the following;
1. Price of the product
2. Income of the buyers
3. Quality of the product
4. Season
5. Price expectation
6. Number of consumers/population
7. Tastes and preferences
8. Promotion and advertisement
9. Religion
10. Price of related products
11. Fashion/fad
12. Customs and tradition
- A demand schedule is a listing of the different quantities of goods and services that buyers will
purchase given the various alternative prices.
Example.

PRICE OF X [Pᵪ] QUANTITY DEMANDED FOR COMMODITY X [Qdᵪ]

10 9

20 8

30 7

40 6

50 5

60 4

70 3

80 2
A demand curve is a plotted demand schedule as in figure below.

A demand function is expressed in this form;

Qdᵪ = f [Pᵪ]

Where; Qdᵪ - quantity demanded for commodity X

Pᵪ - price of commodity X

While a demand equation is presented as follows;

Qdᵪ = a - bPᵪ

Where; a - intercept
B - slope [the formula; ∆Q / ∆P]

Example; Qdᵪ = 20 – 0.4 Pᵪ

Interpretation of the intercept and the slope

a = 20 the intercept means that if the price of commodity X is zero, the buyer will purchase 20
units of the commodity.
B = -0.4 the slope means that for every one unit change [either an increase or decrease] in the
price of X, the quantity demanded will change by 0.4 unit.

The negative sign indicates a negative [inverse] relationship between the price of X and
the quantity demanded.
Calculate the quantity demanded assuming the following prices;
1. P=20 2. P=30 3. P=40
Answer
1. If P=20, then 2. If P=30, then 3. If P=40
Qx = 20 – 0.4 [20] Qx = 20 – 0.4 [30] Qx = 20 – 0.4 [40]
= 12 =8 =4
Plot the demand curve

Price Qd

20 12

30 8

40 4

Movement Along a Given Demand Curve versus a Change in Demand

- A movement along a given demand curve is the change in the quantity demanded due to the
changes in the price of the product when all other factors are held constant [figure 4].
A change [or shift] in the demand refers to the shift in the entire demand schedule due to the changes in
some factors that were held constant like income, price of related products, population and others.

Table 2. Demand Schedule

Price Qd1 Qd2

5 18 36

10 16 32

15 14 28

20 12 24

25 10 20

30 8 16

35 6 12

40 4 8

Market demand curve is the total demand obtained by taking the horizontal summation of all individual
demand curves of the consumers in the market.

Table 3. Demand schedule

Prices Consumer A Consumer B Consumer C Total Demand

15 5 10 2 17

14 8 13 4 25

13 11 16 6 33

12 14 19 8 41

11 17 22 10 49

10 20 25 12 57
Supply

- Supply is the schedule of various quantities of goods and services which sellers are willing and
able to sell at a given price, time and place, all other factors are held constant [ceteris paribus].

- The law of supply states that as the price increases, the quantity supplied also increases, and as
the price decreases, the quantity supplied also decreases, ceteris paribus.

- Some factors affecting supply;

1. Price of the product
2. Cost of production
3. Availability of raw materials
4. Technology
5. Number of sellers
6. Price expectation
7. Taxes and subsidies
8. Prices of other products
 - A supply schedule is a listing of the different quantities of goods and services that sellers will sell
given the various alternatives prices.

Example;
Table 4. Supply Schedule for Commodity X

Price of X [Pᵪ] Quantity supplied for commodity X [Qsᵪ]

10 1

20 2

30 3

40 4

50 5

60 6

70 7

80 8

A supply curve is a plotted supply schedule [Figure 7].

Supply Function; Qsᵪ = f [Pᵪ]

Where; Qsᵪ - quantity supplied for commodity X
Pᵪ - price of commodity X
Supply equation;
Where; a - intercept
b - slope [the formula; ∆Q/∆P]
example; Qsᵪ = -10 + 0.6 Pᵪ

Interpretation of the intercept and the slope

a = -10 the intercept means that if the price of commodity X is zero, the seller will sell -10 units
of the commodity.
A negative quantity is nothing.
This only emphasizes the if there is no price, the seller will sell nothing.

b = 0.6 the slope means that for every one unit change in the price of X, the quantity supplied
will change by 0.6 unit.
The positive sign signifies a positive relationship between the price and the quantity
supplied.

Calculate the quantity supplied assuming the following prices;

1. P=20 2. P=30 3. P=40
If P=20, then If P=30, then If P=40, then
Qᵪ = -10 + 0.60 [20] Qᵪ = -10 + 0.60 [30] Qᵪ = -10 + 0.60 [40]
=2 = 8 = 14

Price Qs

20 2

30 8

40 14

Movement Along a Given Supply Curve versus a Change in Supply

- Movement along a given supply curve is the change in the quantity supplied due to the changes
in the price of the product when all other factors are held constant.
Change in the supply refers to shift in the entire supply schedule due to changes in some factors that
were held constant like the cost of production, availability of raw materials, price expectation and others.

Table 5. Supply Schedule

Price Qs₁ Qs₂

10 4 2

12 8 4

14 12 6

16 16 8

18 20 10

20 24 12

22 28 14

24 32 16

Market supply curve is the horizontal summation of all individual supply of the sellers in the market.

Prices Seller Seller Seller Total

A B C Supply

1 11 5 1 17

2 15 9 4 28

3 19 14 7 40

4 23 18 10 51

5 27 22 13 62

6 31 27 16 74
Market Equilibrium

- The condition when quantity demanded is equal to quantity supplied is said to be market
equilibrium.

When there is no equilibrium, there is no balance between the demand and supply.
- Shortage is a condition when the quantity demanded exceeds the quantity supplied.
o This happens when the price gets lower than the equilibrium price
Surplus is a condition when the quantity supplied is greater than the quantity demanded.
- This occurs when the price is above the equilibrium price.
Numerical example using data on tables below

Demand and Supply Schedule

Price of X (Pᵪ) Quantity demanded for Quantity supplied for

commodity X (Qdᵪ) commodity X (Qsᵪ)

10 9 1

20 8 2

30 7 3

40 6 4

50 5 5

60 4 6
 70 3 7

80 2 8

Market Equilibrium in Mathematical Language

Assume the previous demand and supply equations:
Demand: Qdᵪ = 20 - 0.4 Pᵪ
Supply: Qsᵪ = -10 + 0.6 Pᵪ

Find the equilibrium price and quantity.

Demand = Supply
Qdᵪ = Qsᵪ
20 - 0.4 Pᵪ = -10 + 0.6 Pᵪ
20 + 10 = 0.6 Pᵪ + 0.4 Pᵪ
30 = 1Pᵪ
30 = Pᵪ
The equilibrium price is P30.
The equilibrium quantity can be obtained using either the demand or supply equations.

Demand Supply
Qdᵪ = 20 - 0.4Pᵪ Qsᵪ = -10 + 0.6 Pᵪ
= 20 - 0.4 {30} = -10 + 0.6 (30)
= 8 = 8
Therefore, the equilibrium quantity is 8 units.