BASIC ELEMENTS OF DEMAND

AND SUPPLY
Managerial Economics
OUTLINE
• The Market
▫ How a Market Demand
▫ Market Demand
▫ NonPrice Determinants of Demand
▫ Effects of Changes in NonPrice Determinants of
Demand
▫ Market Supply
▫ NonPrice Determinants of Supply
▫ Effects of Changes in NonPrice Determinants of
Supply
• Market Equilibrium
FUNDAMENTAL ECONOMIC PROBLEM

are not
Economic Unlimited
sufficient to
Resources Wants
satisfy

SCARCITY
Three Questions to Consider

What goods to produce?

How they shall be produced?

For whom they shall be produced?

How to address the problem?

MARKET
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
for money.”

• It is where people are left alone to make their

own transactions.

• It is also where forces of demand and supply

interact.
• Meeting of two forces paves the way to providing
answers to the three questions:

• What goods to produce?

• How they shall be produced
• For whom they shall be produced
What the market can do?
• “Buyers make known their decisions to buy or
not to buy and on what terms, and sellers make
known their willingness and ability to sell or not
to sell and on what terms.
How a Market Functions

• Markets are strictly made up of:

Sellers Buyers

Decision and Action Decision and Action

Supply Demand
Importance of Markets
• Markets act as the mechanism by which resources are
allocated.

• Illustration:
• 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 regular
basis. The collective desires of buyers to purchase a
commodity constitute demand for the commodity. If the
sellers agree to the demand, economic resources will be
required and subsequently, a demand for them will be
forwarded to the resource owners. The higher the
demand is for product and services, the higher will be
the demand for economic resources.
Market Demand
• It refers to “the buyers’ willingness and ability to
pay a sum of money for some amount of a
particular good or service.”

• The relationship between price and quantity

demanded is the subject of the law of demand.
Law of demand
• It is the “quantity of any good which buyers are
ready to purchase varies inversely with the price
of the good.”

• This means that people will tend to buy more of

a product as its price decreases, assuming that
all factors influencing demand remain constant.
Table 1 indicates that at P5,000
per unit, the total quantity
demanded for bicycles is 10,000
units. A change in price,
however, affects demand. At
P10,000 per unit, demand goes
down to 5,000 units. This means
that at a certain period in a given
market, people will buy more of
a product or service if its price is
lowered

Lower prices not only motivate

current buyers to buy more of
the commodity but also attract
new buyers to buy.
 The Demand Curve
The graph (Figure 9)
shows a curve representing
the inverse relationship
between prices of goods
and services and the
quantity of goods and
services demanded, which
in this case to bicycles. This
curve is referred to as the
demand curve.
NonPrice Determinants of Demand
1. Average income of consumers
2. Size of the market
3. Price and availability of related goods
(Two types: Substitutes and Complements)
4. Preferences or taste
5. Special influences
6. Expectations about future economic conditions
Effects of Changes in NonPrice
Determinants of Demand
• The law of demand applies only when all the
factors influencing demand remain constant. A
change in any of the nonprice factor of demand
may affect the original set of demand for a
certain product or service.
Shifts in the Demand Curve
Market Supply
• It is defined as “the quantity of a good or service
which sellers desire to sell at a given price.”

• The supply situation may be presented in two

ways:
▫ The supply schedule
▫ The supply curve
Supply Schedule
• It is a tabular presentation showing the
relationship between a commodity’s market
price and the amount of that commodity that
producers are willing to produce and sell, other
things held equal.

• Suppliers are encouraged to produce and sell

more of a particular commodity if a higher price
is paid for it by the buyers. The higher the price,
therefore, the higher the quantity supplied.
Supply Curve
• It is the graphical illustration of the supply
schedule. The supply curve moves in an upward,
sloping direction, indicating the direct
relationship between price and quantity
supplied.
Law of Supply
• The supply curve is manifestation of the law of
supply which is stated simply as follows:

• As price goes up, the quantity of goods and

services under consideration tends to increase.
Inversely, as the price goes down, the quantity
supplied tends to decrease. Figure 11 is an
illustration of a hypothetical supply curve for
bicycles.
NonPrice Determinants of Supply
1. Cost of production
2. Number of suppliers
3. Prices of goods and services related in
production
4. Taxes and subsidies
5. Technology
Effects of Changes in the NonPrice
Determinants of Supply
Shifts in the Supply Curve
Market Equilibrium
• Supply and demand are opposing forces that
must be considered in the determination of
prices of commodities in the market. When the
individual schedules of supply and demand are
put together, there will be a price where the
quantity buyers want to buy exactly equals the
quantity which sellers are offering for sale.

• The price at which supply and demand are equal

is the equilibrium price.
• The hypothetical supply
and demand schedule for
onions indicate the
quantity supplied and
demanded at various
prices. At the price of
forty pesos per kilo, firms
are willing to supply the
market with 8,000 kg,
which is exactly the same
quantity demanded by
buyers at the same price.
• The equilibrium price of
forty pesos and the
equilibrium quantity of
8,000 kg, however, will
only be good for the
short term. When there
are changes in the
demand and supply, a
new equilibrium price
and a new equilibrium
quantity will emerge.
• When onions are sold at
prices above forty pesos,
there will be a surplus
of onions in the market
as there will be less
buyers. This situation
will force the seller to
lower his price until the
equilibrium price of
forty pesos is reached.
This action clears the
market of onions.
• When onions are sold at
prices below forty
pesos, more buyers will
be interested to buy,
creating a shortage.
When buyers are willing
to pay forty pesos,
supply will move up to
the point of equilibrium
with demand. This
action also clears the
market of onions.
• Equilibrium is set at the
point where the quantity
demanded (line QD)
intersects the quantity
supplied (line QS). A
condition of surplus will
occur at prices above forty
pesos (equilibrium price)
because the quantity
demanded is less than the
quantity supplied.
Inversely, a condition of
shortage occurs at prices
below forty pesos because
the quantity demanded is
greater than the quantity
supplies.
End