DEMAND FUNCTION

DEMAND
It is the quantity of goods that a consumer would be willing and able to buy at different prices during some specified period of time.

DEMAND
Once the particular price of a commodity goes down, consumers demand for that commodity goes up. When price of commodity goes up, consumers demand goes down.

DEMAND FUNCTION
It is the number of units x that consumers are willing to purchase at a given price per unit y of commodities. The equation can be written in the form: = ()

DEMAND FUNCTION
Based on the law of demand, the relationship between prices (denoted by y) and the quantity demanded (denoted by x) is most often inverse, thus, its demand function is a decreasing line.

EXAMPLE
Select-O Company analyzed its sales and found out that their ice cream sales increases by 200 gallons for every P10 reduction in price. Customers buy 800 gallons at a price of P1,000.

To identify the demand equation, we will use the formula: 2 1 1 = 1 2 1 10 1000 = 800 200 =
1 20

+ 1040

Graphing the said equation

1200 1000 800 P 600 r i c 400 e 200 0 0 5000 10000 15000 20800, 0 20000 25000 0, 1040

-200

Quantity Demanded

The y-intercept means that the highest price to be paid for the ice cream is P1,040 and the x-intercept means that the largest quantity that will be demanded is 20,800 gallons of ice cream.

SUPPLY FUNCTION

SUPPLY
It is the quantity of goods that a producer would be willing and able to produce to make available for sale in the market at various prices during a specified period of time.

SUPPLY
As price of commodity goes up, quantity supplied goes up, too. When the price of commodity goes down, producers tend to keep or reduce supplies of commodity.

SUPPLY FUNCTION
It is the relationship specifying the amount of any commodity that manufacturers or sellers can make available in the market at various prices.

EXAMPLE
Select-O Company is willing to supply the market 1,200 gallons of ice cream at P1,000 per gallon. At a price of P1,500 per gallon of the same ice cream, the company will supply the market 2,000 gallons. (Assume that the supply equation is linear)

To identify the supply equation, we will use again the formula:

2 1 1 = 1 2 1 1500 1000 1000 = 1200 2000 1200 500 1000 = 1200 800 5 = + 250 8

Graphing the said equation

1600 2000, 1500 1400

1200
P 1000 r i 800 c e 600 400 200 0 0 500 1000 1500 Quantity Supplied 2000 2500 0, 250 1200, 1000

The y-intercept means that the lowest price the supplier would sell the ice cream is P250.

SPECIAL CASES

SPECIAL CASES
The line is either a demand or a supply function if the line is horizontal or vertical and it passes at Quadrant I.

EXAMPLES
600 500

y=b
400

300

200

100

0 0 200 400 600 800 1000 1200

Price is constant at varying quantity of goods demanded / supplied.

1200

1000

800

600

x=a
400

200

0 0 100 200 300 400 500 600

Quantity demanded / supplied is constant while the price varies

NOTE: A line is neither a demand nor a supply function if the line is outside the Quadrant I.

These lines have equations with: a) A negative slope with a yintercept of either zero or a negative number. b) A zero slope (horizontal line) with a y-intercept of either zero or a negative number. c) Undefined slope (vertical line) with an x-intercept of either zero or a negative number.

MARKET EQUILIBRIUM
A market is said to have reached its equilibrium point when the quantity demanded is equal to quantity supplied at a certain price per unit of commodity and there are no internal forces to sudden change.

MARKET EQUILIBRIUM
Illustrating this situation in a Cartesian Plane, the supply and demand curve intersects and this intersection is called the market equilibrium point (MEP).

EQUILIBRIUM PRICE
It is the price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect.

EQUILIBRIUM QUANTITY
It is the quantity supplied and the quantity demanded at the equilibrium price. On a graph, it is the quantity at which the supply and demand curves intersect.

SOLVING FOR THE MEP

Algebraically, the market equilibrium point (MEP) can be solved by solving demand and supply equations simultaneously.

EXAMPLE
From our given example on demand and supply, we arrived at the following equations:
1 D: = + 1040 20 5 S: = + 250 8

To solve this, we will use the elimination method: From the given equations, since its easier to eliminate y, we will subtract the two equations.

1 = + 1040 20 5 = + 250 8 _______________ 27 0= + 790 40 27 = 790 40

= 1170.37

The market eqm. quantity is 1170 units.

To get the market equilibrium price, simply substitute the value of x to any of the two equations: =
=
5 + 250 8 5 1170.37 8

+ 250

= 981.48

The market equilibrium price is P981.48.

Graphing the two equations

1600
1400 1200

Surplus MEP (1170.37, 981.48)

P 1000 r i 800 c e 600 400

Shortage

200
0 0 5000 10000 15000 20000 Quantity Demanded / Supplied 25000

Excess supply, or surplus, is the condition that exists when quantity supplied exceeds quantity demanded at the current price. Excess demand, or shortage, is the condition that exists when quantity demanded exceeds quantity supplied at the current price.

SOLVING FOR THE M.E.P. (NON-LINEAR EQUATIONS)

NON-LINEAR
Determine which is the demand and the supply function and find its MEP. 16 2 + 9 2 = 144 9 2 4 2 = 36

Since the second equation has a positive slope, we can say that it is the supply function and the other one is the demand function. D: 16 2 + 9 2 = 144 S: 9 2 4 2 = 36

Observing the two given equations, we can say that we can use the elimination method since there are similar terms between the two.

Lets now apply the elimination method: 9 2 + 16 2 = 144 - 2 9 4 2 = 36 _________________________ 20 2 = 108 =

2 108 20

= 5.40 = 2.32

Substitute the value of x to any of the two equations. 9 2 4 2 = 36

9 4
2

9 = 36 + 21.6 = =
2 57.6 9 57.6 9

108 20 2

=36

= P2.53

Graphing the two equations

4.5
4 3.5 3

P r 2.5 i c 2 e 1.5
1 0.5 0 0 1

MEP (2.32, 2.53)

2 3 4 5 Quantity Demanded / Supplied