Lesson Outline
• Introduction: Define Supply and Demand using practical
examples of products in the market(10 minutes)
• Motivation: Explain how a knowledge of the effects on
price can be important to an entrepreneur (15 minutes)
• Instruction Delivery: Discuss with the supply and demand
model and its applications in competitive markets (50 min)
• Practice: Perform an analysis of an event that affects the
Equilibium Price and/or the Equilibrium Quantity (20 min)
• Enrichment: Research on how changes in one market for a
good can affect other markets (Optional)
• Evaluation: Accomplish different evaluative tasks
(teachers discretion) (25 min)

Supply and
Demand I:
How Markets
Work

In this chapter you will…
• Learn the nature of a competitive market.
• Examine what determines the demand for a good in a
competitive market.
• Examine what determines the supply of a good in a competitive
market.
• See how supply and demand together set the price of a good
and the quantity sold.
• Consider the key role of prices in allocating scarce resources.
• Compare the prices of commodities and analyze the impact on
consumers
• Analyze the effects of contemporary issues such as migration,
fluctuations in the exchange rate, oil price increases,
unemployment, peace and order, etc. on the purchasing power
of the people.

Activity 1
• Brainstorming
In Five (5) minutes write as many
concepts/ideas you have learned or have
known which are related to Price. Write your
answer on a piece of paper and write all
your concepts and ideas on the whiteboard /
blackboard.

THE MARKET FORCES OF
SUPPLY AND DEMAND
• Supply and Demand are the two
words that economists use most
often.
• Supply and Demand are the forces
that make market economies work!
• Modern microeconomics is about
supply, demand, and market
equilibrium.

MARKETS AND COMPETITION
• The terms supply and demand refer
to the behaviour of people. . .
• . . .as they interact with one another
in markets.
• A market is a group of buyers and sellers
of a particular good or service.
– Buyers determine demand...
– Sellers determine supply…

Competitive Markets
• A Competitive Market is a market
with many buyers and sellers so that
each has a negligible impact on the
market price.

Competition: Market Structure
 Perfectly Competitive:
 Homogeneous Products
 Buyers and Sellers are Price Takers
 Complete Information
 Monopolistic Competition:
 Many Sellers, differentiated products
 Oligopoly:
 Few Sellers, not aggressive competition
 Monopoly:
 One Seller, controls price

DEMAND
• Quantity Demanded refers to the
amount (quantity) of a good that
buyers are willing to purchase at
alternative prices for a given period.

Determinants of Demand
• What factors determine how much ice
cream you will buy?
• What factors determine how much you
will really purchase?
1) Product’s Own Price
2) Consumer Income
3) Prices of Related Goods
4) Tastes
5) Expectations
6) Number of Consumers

1) Price
Law of Demand
– The law of demand states that,
other things equal, the quantity
demanded of a good falls when
the price of the good rises.

2) Income
• As income increases the
demand for a normal good will
increase.
• As income increases the
demand for an inferior good will
decrease.

3) Prices of Related Goods
Prices of Related Goods
– When a fall in the price of one
good reduces the demand for
another good, the two goods are
called substitutes.
– When a fall in the price of one
good increases the demand for
another good, the two goods are
called complements.

4) Others
• Tastes
• Expectations

The Demand Schedule and the
Demand Curve
 The demand schedule is a table that
shows the relationship between the
price of the good and the quantity
demanded.
 The demand curve is a graph of the
relationship between the price of a
good and the quantity demanded.
 Ceteris Paribus: “Other things being
equal”

Catherine’s Demand Schedule
0
3.00
2
2.50
4
2.00
6
1.50
8
1.00
10
0.50
12
0.00
Quantity of cones
Demanded
Price of Ice-cream
Cone (Pesos)

Catherine’s Demand Curve
Price of Ice-
Cream
Cone
Quantity of
Ice-Cream
Cones
2 4 6 8 10 12
0
P3.00
2.50
2.00
1.50
1.00
0.50

Market Demand Schedule
• Market demand is the sum of all individual
demands at each possible price.
• Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
• Assume the ice cream market has two
buyers as follows…

0
3.00
10
0.50
12
0.00
Catherine
Price of Ice-cream
Cone (Pesos)
Market demand as the Sum of Individual
Demands
+
1
6
7
Nicholas
1
2
2.50
4
2.00
6
1.50
8
1.00
2
3
4
5
4
7
10
13
16
19
Market
=

Price of Ice-
Cream
Cone
Quantity of
Ice-Cream
Cones
D3
D1
D2
Decrease
in demand
Increase
in demand
Figure 4-3: Shifts in the Demand Curve

The Determinants of Quantity Demanded

Shifts in the Demand Curve versus
Movements Along the Demand Curve

Price of
Cigarettes,
per Pack.
Number of Cigarettes
Smoked per Day
D2
A policy to discourage
smoking shifts the demand
curve to the left.
0 20
P20.00
D1
A
10
B
Shifts of the Demand Curve

Price of
Cigarettes,
per Pack.
Number of Cigarettes
Smoked per Day
0 20
P20.00
D1
A
A tax that raises the price
of cigarettes results in a
movements along the
demand curve.
C
12
P40.00
A Movement Along the Demand Curve

A. The price of iPods
falls
B. The price of music
downloads falls
C. The price of CDs
falls
A C T I V E L E A R N I N G
Demand Curve
25
Draw a demand curve for music downloads.
What happens to it in each of
the following scenarios? Why?

A C T I V E L E A R N I N G
A. Price of iPods falls
26
Q2
Price of
music
down-
loads
Quantity of
music downloads
D1
D2
P1
Q1
Music downloads
and iPods are
complements.
A fall in price of
iPods shifts the
demand curve for
music downloads
to the right.

A C T I V E L E A R N I N G
B. Price of music downloads falls
27
The D curve
does not shift.
Move down along
curve to a point with
lower P, higher Q.
Price of
music
down-
loads
Quantity of
music downloads
D1
P1
Q1 Q2
P2

A C T I V E L E A R N I N G
C. Price of CDs falls
28
P1
Q1
CDs and
music downloads
are substitutes.
A fall in price of CDs
shifts demand for
music downloads
to the left.
Price of
music
down-
loads
Quantity of
music downloads
D1
D2
Q2

SUPPLY
• Quantity Supplied refers to the
amount (quantity) of a good that
sellers are willing to make available
for sale at alternative prices for a
given period.

Determinants of Supply
• What factors determine how much
ice cream you are willing to offer or
produce?
1) Product’s Own Price
2) Input prices
3) Technology
4) Expectations
5) Number of sellers

1) Price
Law of Supply
– The law of supply states that,
other things equal, the quantity
supplied of a good rises when the
price of the good rises.

The Supply Schedule and the
Supply Curve
 The supply schedule is a table that
shows the relationship between the
price of the good and the quantity
supplied.
 The supply curve is a graph of the
relationship between the price of a
good and the quantity supplied.
 Ceteris Paribus: “Other things being
equal”

Ben’s Supply Schedule
5
3.00
4
2.50
3
2.00
2
1.50
1
1.00
0
0.50
0
0.00
Quantity of cones
Supplied
Price of Ice-cream
Cone (Pesos)

Price of Ice-
Cream
Cone
Quantity of
Ice-Cream
Cones
6 8 10 12
0 2
1.50
1.00
1
2.00
3 4
P3.00
2.50
5
0.50
Ben’s Supply Curve

Market Supply Schedule
• Market supply is the sum of all individual
supplies at each possible price.
• Graphically, individual supply curves are
summed horizontally to obtain the market
demand curve.
• Assume the ice cream market has two
suppliers as follows…

5
3.00
0
0.50
0
0.00
Ben
Price of Ice-cream
Cone (Pesos)
Market supply as the Sum of Individual
Supplies
+
8
0
0
Nicholas
13
4
2.50
3
2.00
2
1.50
1
1.00
6
4
2
0
10
7
4
1
0
0
Market
=

Price of Ice-
Cream
Cone
Quantity of
Ice-Cream
Cones
S3
S2
S1
Decrease
in supply
Increase
in supply
Shifts in the Supply Curve

The Determinants of Quantity Supplied

SUPPLY AND DEMAND
TOGETHER
• Equilibrium refers to a situation in which
the price has reached the level where
quantity supplied equals quantity
demanded.

Equilibrium
• Equilibrium Price
– 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
– 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.

At P2.00, the quantity demanded
is equal to the quantity supplied!
Demand Schedule Supply Schedule
Equilibrium

Equilibrium price
Demand
Supply
P2.00
6 8 10
0
Equilibrium
Equilibrium quantity
Quantity of Ice-
Cream Cones
Price of
Ice-Cream
Cone
4
2
1 3 5 7 9 11
The Equilibrium of Supply and Demand

Equilibrium
• Surplus
– When price > equilibrium price, then quantity
supplied > quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to increase sales,
thereby moving toward equilibrium.
• Shortage
– When price < equilibrium price, then quantity
demanded > the quantity supplied.
• There is excess demand or a shortage.
• Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.

Demand
Supply
P2.00
6 8 10
0 Quantity of Ice-
Cream Cones
Price of
Ice-Cream
Cone
4
2
1 3 5 7 9 11
P2.50
Surplus
Quantity
Demanded
Quantity
Supplied
Excess Supply

Demand
Supply
P2.00
6 8 10
0 Quantity of Ice-
Cream Cone
Price of
Ice-Cream
Cone
4
2
1 3 5 7 9 11
P1.50
Shortage
Quantity
Supplied
Quantity
Demanded
Excess Demand

Three Steps To Analyzing
Changes in Equilibrium
• Decide whether the event shifts the
supply or demand curve (or both).
• Decide whether the curve(s) shift(s)
to the left or to the right.
• Use the supply-and-demand diagram
to see how the shift affects
equilibrium price and quantity.
• Example: A Heat Wave

D1
Supply
P2.00
6 10
0 Quantity of Ice-
Cream Cone
Price of
Ice-Cream
Cone
4
2
1 3 5 7 11
D2
P2.50
1. Hot weather increases the
demand for ice cream…
2. …
resulting in
a higher
price …
3. … and a higher quantity
sold.
New equilibrium
Initial
equilibrium
How an Increase in Demand Affects the Equilibrium

Demand
S1
P2.00
10
0 Quantity of Ice-
Cream Cones
Price of
Ice-Cream
Cone
4
2
1 3 7 11
S2
P2.50
1. An earthquake reduces the
supply of ice cream…
2. …
resulting in
a higher
price …
3. … and a lower quantity
sold.
New equilibrium
Initial equilibrium
How a Decrease in Demand Affects the Equilibrium

D1
S1
0 Quantity of Ice-
Cream Cone
Price of
Ice-Cream
Cone
Q1
D2
Large increase
in demand
P2
S2
Q2
New
equilibrium
Small
decrease in
supply
Initial equilibrium
P1
A Shift in Both Supply and Demand

D1
S1
0 Quantity of Ice-
Cream Cone
Price of
Ice-Cream
Cone
Q1
D2
Large
decrease in
supply
P2
S2
Q2
New
equilibrium
Small increase
in demand
Initial equilibrium
P1
A Shift in Both Supply and Demand

Table 4-8: What Happens to Price and
Quantity when Supply or Demand Shifts

• Market economies harness the
forces of supply and demand. . .
• Supply and Demand together
determine the prices of the
economy’s different goods and
services. . .
• Prices in turn are the signals that
guide the allocation of resources.

Purchasing Power
• Is the value of a currency expressed in
terms of the amount of goods or services
that one unit of money can buy.
Inflation – is a phenomenon of rising general
level of prices of goods and services over
period of time.
Deflation – a decrease in the general level of
prices of goods and services.

Basic Commodities
- Are raw materials or primary agricultural
products that can be bought and sold in
the market like corn, wheat, copper, crude
oil..
What causes commodities price to change?
1. When supply exceeds demand, price fall
and when demand is greater than supply
prices rise.

Basic Commodities
2. Natural disasters can also cause prices to
change like the El Nino and La Nina climate
phenomenon, volcanic eruptions,
earthquakes, typhoon, and landslide, among
others.
3. Production costs can also cause price to
rise or fall like the implementation of Salary
Standardization Law and Minimum Wage
Law, and the shifting of production from
human to technology.

Employment Sector in the
Phillipines
1.Agricultural Sector
2.Industrial Sector
3.Services Sector

Demand and Supply of Labor
Labor surplus – is an economic condition in
which the supply of labor is greater than the
demand for labor.
Labor shortage – is an economic conditions
in which supply of labor is less than the
demand for labor.

Elasticities of Demand and Supply
• Elasticity – is a measure if how much
buyer and sellers respond to change in
market conditions.
• Coefficient of elasticity – is the number
obtained when the percentage change in
demand is divided by the percentage
change in the determinant.
• Elastic – a change in a determinant will
lead to proportionately greater change in
demand or supply. Coefficient of elasticity
is greater than 1.

Elasticities of Demand and Supply
• Inelastic – a change in a determinant will
lead to proportionately lesser change in
demand or supply. Coefficient of elasticity
is less than 1.
• Unitary elastic – change in determinant
will lead to a proportionately equal change
in demand or supply. Coefficient of
elasticity is equal to 1.

Elasticity of Demand
• Three Types of Elasticity of Demand
1. Price Elasticity of Demand
- This measure the responsiveness of demand
to a change in the price of the good.
a. Arc Elasticity – the value of elasticity is
computed by choosing two points on the
demand curve and comparing the
percentage changes in the quantity and the
price on those two points.
Ep = {(Q2-Q1)/(Q2+Q1/2)} / {(P2-P1)/(P2+P1/2)}

Elasticity of Demand
Where:
Q2 = new quantity demanded
Q1 = original quantity demanded
P2 = new price of the good
P1 = original price of the good
b. Point Elasticity – measures the degree of
elasticity on a single point on the demand
curve. Change on single point are
infinitesimally small.
Ep = {(Q2-Q} / {(P2-P1) /P1 }
r

Elasticity of Demand
2. Income Elasticity of Demand
- This measure how the quantity demanded
changes as consumer income changes.
- Is equal to (% change in quantity demanded)/
(% change in income)
3. Cross Price Elasticity of Demand
- This measure how many quantity demanded
changes as the price of related goods
change.
- Measures the responsiveness of the demand
for a good to the change in the price of
substitute good or a complement.

Price Elasticity of Supply
- Determines whether the supply curve is
steep or flat. A steep curve signifies a high
degree of elasticity or ability to change,
while a flat curve indicates an inability to
change in response to a change in the price
of the good. Goods that are easy to produce
have elastic supply while those which need
a long time to produce and which are hard
to make have inelastic to supply.

Summary
• Economists use the model of supply and
demand to analyze competitive markets.
• In a competitive market, there are many
buyers and sellers, each of whom has little
or no influence on the market price.

Summary
• The demand curve shows how the
quantity of a good depends upon the
price.
– According to the law of demand, as the price
of a good falls, the quantity demanded rises.
Therefore, the demand curve slopes downward
illustrating a negative relationship between
price and quantity.
– In addition to price, other determinants of how
much consumers want to buy include income,
the prices of complements and substitutes,
tastes, expectations, and the number of
buyers.
– If one of these factors changes, the demand
curve shifts.

Summary
• The supply curve shows how the quantity of a
good supplied depends upon the price.
– According to the law of supply, as the price of
a good rises, the quantity supplied rises.
Therefore, the supply curve slopes upward
illustrating a positive relationship between
price and quantity.
– In addition to price, other determinants of how
much producers want to sell include input
prices, technology, expectations, and the
number of sellers.
– If one of these factors changes, the supply
curve shifts.

Summary
• Market equilibrium is determined by the
intersection of the supply and demand
curves.
• At the equilibrium price, the quantity
demanded equals the quantity supplied.
• The behavior of buyers and sellers
naturally drives markets toward their
equilibrium.

Summary
• If the market price is above equilibrium,
a surplus results, which causes the price
to fall.
If the market price is below equilibrium,
a shortage results, causing the price to
rise.

Summary
• We can use the supply-demand diagram to
analyze the effects of any event on a
market:
First, determine whether the event shifts
one or both curves. Second, determine
the direction of the shifts. Third, compare
the new equilibrium to the initial one.
• In market economies, prices are the
signals that guide economic decisions
and allocate scarce resources.