Basic Elements of Demand

& Supply
The fundamental economic
problem calls for making definite
decisions on what goods to
produce, how they shall be
produced, and for whom they shall
be produced.

The Market

A market exists when buyers

wishing to exchange money for a
good or service are in contact with
sellers wishing to exchange goods
or services for money. It is also
where the forces of demand and
supply interact.

How a Market Functions

Markets a re strictly made up of
buyers and sellers. The
actions and decisions of
buyers constitute demand for a
product or service, while the
sellers decisions and actions
constitute supply.

Markets are important

because they act as the
mechanism by which
resources are allocated. For
instance, when a buyer
decides on purchasing a
certain commodity on a regular
basis, he is sending a signal to
the seller to produce the
wanted commodity on a

Market Demand Refers to the buyers willingness

and ability to pay a sum of money
for some amount of a particular
good or service. However the
quantity demanded of a good or
service will depend on factors
such as needs, preferences,
income level, expectations about
the future, prices of commodities,

the buyers situation, etc.

The most important consideration,
however is the price. The
relationship between price &
quantity demanded is the subject
of the law of demand.
Stated in simple terms, the law of
demand indicates that the quantity
of any good which buyers are
ready to purchase varies inversely
with the price of the good.

This means that the people will

tend to buy more of a product
as its price decreases,
assuming that all other factors
influencing demand remain
constant.

Hypothetical Demand Schedule of

Beef per Month in Manila
Price of Beef (Per
kilo)

Quantity Demanded
(in kilos)

P 200.00

50

170.00

60

150.00

90

130.00

110

110.00

130

100.00

160

From the foregoing, it is shown

that an individual would tend to
buy more when its is low than
when the price is high. At a price
of P200.00, quantity demanded by
the consumers is 50 kilos while a
decrease of price to P100.00
increases the quantity demanded
of the consumers to 160 kilos.

Demand
Means the desire for a particular
good backed up by sufficient
purchasing power. Demand is
also the schedule of various
quantities of commodities which
buyers are willing to purchase at
various prices in a given time and
place.

Potential Demand - demand does

not mean mere need or desire,
which is not backed up by the
ability to pay or no purchasing.
Effective Demand - the demand,
which is backed up by the ability
to pay.

Demand then refers to the actual

purchase of a good or service.

Determinants of Demand
Income people buy more goods
and service when their income
increases, but will buy less if their
income decreases, thus, affecting
the demand for goods and
services. An increase in demand
will either increase or decrease
demand depending upon the kind
of community.

Population more people means

more demand for goods and
services. That is why, there are
more buyers in the city stores
than in the barrio stores.
Conversely, less population
means less demand for goods
and services. Obviously,
business is poor in the rural
areas compared to business in
the urban areas.

Tastes and Preferences

demand for goods and services
increases when people like or
prefer them. Such tastes or
preferences are greatly influenced
by advertisement or fashion. On
the other hand, if a certain product
is out of fashion, the demand for it
decreases.

Price Expectations - When people

expect the prices of goods,
especially basic commodities like
rice, soap, cooking oil or sugar to
increase tomorrow or next week,
they will buy more of these goods.
In the same manner, they
decrease their demand for each
product if they expect price to
decline tomorrow or in the a few
days. The reason for such
consumers behavior is to economize.

Prices of Related Goods - when the

price of a certain good increases,
people tend to buy substitute
products. For example, if the
price of Colgate increases,
consumers buy less of Colgate
and more of the close substitute
like Close-up or Hapee. This
means, the demand for Colgate
decreases while the demand for
substitutes increases. This means
if the price of one good increases,

the demand for the other good

increases.

The Law of Demand may be stated

as the quantity of a commodity
which buyers will buy at a given
time and place will vary inversely
with the price. This means that as
price increases, quantity
demanded decreases, and as price
decreases, quantity demanded
increases other things are
constant .

Income Effect
At lower prices, an individual has a
greater purchasing power. This
means, he can buy more goods
and services. But at higher prices,
naturally, he can buy less.

Substitution Effect
Consumers tend to buy goods with
lower prices. In case the price of a
product that they are buying
increases, they look for
substitutes whose prices are
lower. Thus, the demand for
higher priced goods will decrease.

Ceteres Paribus assumption

The law demand states that as price
increases, quantity demanded
decreases and as price decreases,
quantity demanded increases.
Such theory is true if we apply the
Ceteres paribus assumption
wherein it assumes that all other
things equal or constant.

Non-Price Determinants
Average Income of Consumers
Persons basically purchase the
necessities with their income.
As their income increase,
however, they tend to buy more
of the things they like to buy. A
1.

family with a car, for e.g., may purchase a

second unit. A person with two pairs of
shoes may buy another pair.

2. Size of the Market - the demand

curve is affected by the number of
people living in a given area. A
market with a big population like
Metro Manila tends to buy more
appliances and electricity than a
less populated region like
Cagayan Valley.

price and availability of related

goods - goods that are related
tend to influence each others
demand. Related goods &
services are of two types:
substitutes and complements
Substitutes are goods that
compete with each other such
as meat and fish.
Complements are goods that are
used jointly, like cement and
steel bars.
3.