Microeconomics module 3

Republic of the Philippines
APAYAO STATE COLLEGE
Luna, Apayao, Philippines 3818
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Module 3
Objectives:
➢ Define the concepts of demand and supply, demand and
supply schedule, demand and supply curve, and the law of
demand and supply.
➢ Identify the different factors affecting demand and supply
➢ Graph demand and supply schedules
➢ Determine market equilibrium by interaction of the demand
and supply curves given hypothetical cases
➢ Explain the concept of price controls

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The need for products and services continues to grow in our expanding
society, as we are all consumers by nature. If we attempt to quantify our daily
individual consumption, we discover that most of the items we consume are
purchased in the market. As a result, the market is critical to the global circulation
of commodities and services.
Our demand is met in the market, which offers a variety of things at a fixed
price. If there is a specific demand for goods and services, manufacturers and
suppliers will continue to deliver and sell products for our consumption. In reality,
we have many buyers purchasing the same item, which results in many sellers
selling the same thing, and the process repeats. Since Adam Smith stated that
“consumption is the sole goal and aim of all production,” our lives are a give and
take relationship involving the exchange of goods and services, as well as the
production and consumption of products at an agreed price or value. This lesson
will introduce you to the fundamental ideas of demand and supply, but before we
go into demand and supply, let us first define the market.

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There are various types of markets, including wet and dry markets. A wet
market is where people typically purchase vegetables, meat, and other goods. On
the other hand, a dry market is where individuals can buy shoes, clothing, and
other dry products. However, the term “market” in economic terminology does
not always refer to a physical location where buyers and sellers may be observed
transacting. It can be an intangible area in which products and services are sold,
such as the stock market, or a virtual market where buyers and sellers do not
physically meet; instead, transactions are conducted online, as with Lazada Mall
and Shopee.
When purchasing products and services, the price affects the quantity of
goods and services purchased from the market. That is why the primary basis for
understanding demand and supply is the price.
1
A market is any institutional structure, or mechanism, that
brings together buyers and sellers of particular goods and
services
2
Set of conditions that allows buyers and sellers to freely interact,
so that an exchange between them occurs.
3
They determine the price and quantity of a good or service
transacted
What is a market?

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Demand pertains to the quantity of good or services that people are ready
to buy at a given price within a given time period, when other factors
besides price are held constant.
THE LAW OF DEMAND
➢ As the price increases, quantity demanded decreases; and as price
decreases, quantity demanded increases if other factors remain constant.
➢ When the price of a product is increased and the “other things” are kept
constant, buyers tend to buy less of the commodity. On the other hand,
when the price decreases, buyers tend to buy more of the commodity.
Desire to possess a
thing (good or service)
The ability to pay for it
or means of purchasing
it (price); and
Willingness in utilizing
it.
DEMAND

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Demand can be measured and presented as demand schedule or demand
curved.
➢ Demand schedule. The table below illustrates the relationship between the
quantity of a good demanded and its price.
➢
Table 1 Individual Demand Schedule for Dragon Fruit in Luna, Apayao
Dragon Fruit Price (P) Quantity Demanded
(kilos per week)
A
B
C
D
E
100
80
60
40
20
2
4
6
8
10
Demand curve.
A graphical relationship
between the quantity of a good
demanded and its
corresponding price, with
other variables held constant.
Figure 1.1 Demand for Dragon Fruit
in Luna, Apayao

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Justification for the Law of Demand
Income Effect
•When the price of goods decreases, the
consumer can afford to buy more of it or
vice versa.
Substitution
Effect
•It is expressed that consumers tend to buy
goods with a lower price. Hence, in case
that the price goods that consumers buy
increases, they look for substitutes with a
lower price.
The Law of
diminishing
Marginal
Utility.
•As you continue to consume a given
product, you will eventually get less
additional utility( satisfaction) from each
unit you consume .
Examine the graph in Figure 1.1.The vertical axis is labeled “price” while the
horizontal axis is labeled “quantity demanded.” Each point on the demand
curve corresponds to the given price and quantity demanded of dragon fruit.
We call the line connecting the points the demand curved.

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Determinants of Demand
➢ Determinants of demand are those that actually influence the
quantity of demand. These are referred to as non-price
determinants.
•Normal Good. Refers to a good for which demand at every price
increases when income rises or vice versa.
•Inferior Good. Refers to a good for which demand falls when
income rises and vice versa.
Consumers’ Income. A
change in income will
cause a change in
demand.
•The quantity demanded within any period depends not only on
prices in that period but also on prices expected in future
periods.
Consumers’ Expectation
of Future Prices
•Substitute products. Goods that can be used in place of other
goods. An increase in the price of one good causes an increase
in the demand for other good or vice versa.
•Complementary products. Goods that go together or cannot be
used without the other. An increase in the price of one good will
cause a decrease in the demand for other good.
Prices of Related
Products
•Religion, culture, traditions, and age are some of the factors that
can affect them.
Consumers’ Tastes.
•An increase in the population means more demand for goods
and services.
Population

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Change in Demand. There is a change in demand if the entire demand curve
shifts to the right (left), resulting in an increase (decrease) in demand due to
factors other than the price of goods sold.
The shift of a demand curve takes place where there is a change in any non-price
determinant of demands such as tastes and preferences, price of substitute goods
etc., resulting in the shift of the entire demand curve either upward or downward.
Figure 1.2 Decrease in Demand Figure 1.3 Increase in Demand

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➢ Change in Quantity
Demanded. It is due only to a
change in the price of goods and
services.
Figure 1.4 Change in Quantity Demanded

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The number of goods and services that producers or service providers are
able and willing to offer in a specific market per unit of time, other
things held constant.
The maximum units/quantity of goods or services producers can offer.
Supply schedule. Various quantities of good or service that is offered to the
market at different possible prices.
Table 2 Hypothetical Supply Schedule for Eggplant Per Week
Situation Price (P) Quantity Supplied
(kilos per week)
A
B
C
D
E
50
45
35
30
22
45
40
32
25
15
Supply
Examine the data above, as the price increases, quantity supplied also
increases. For instance, if the price of eggplant per kilo is P50.00, sellers will
be willing to sell 45 kilos of eggplant in the market. However, if the price will
decrease to P 22.00, sellers will only be willing to sell 15 kilos of eggplant.
These means that, if the price is high it provides higher profits to the seller or
vici versa.

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Supply curved. Graphical
representation of the supply
schedule. Shows graphically the
relationship between the quantity of
a good supplied and its
corresponding price, with other
variables held constant.
Change in Supply
➢ represented as a shift of the supply curve
➢ caused by changes in determinants of supply other than price
Figure 2.1 Supply Curve
Figure 2.2 Increase in Supply Figure 2.3 Decrease in Supply

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Changed in
Quantity Supplied
Caused by
changes in price only
Represented as a
movement along a
supply curve
The shift of a supply curve takes place when there is a change in any non-
price determinant of supply. Any non-price determinant change that increases
the quantity supplied, at any given price, shifts the supply curve to the right.
Any non-price determinant change that reduces the quantity supplied, at any
given price, shifts the supply curve to the left.
Figure 2.4 Changed in Quantity Supplied

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Determinants
of Supply
Change in Technology
Cost of Inputs Used
Expectation of Future Price
Price of Related products
Government Regulation and Taxes
Number of Firms in the Market
Weather Conditions
Optimization in the use Factors of Production
Government Subsidies
THE LAW OF SUPPLY
As the price increases, quantity supplied also increases; and as the price
decreases, quantity supplied also decreases, if other factors remain
constant.
As the price of a commodity rises, keeping “other things” constant,
sellers tend to offer more to the market, and as the price of the
commodity declines, sellers tend to offer less to the market.
Market Equilibrium
Occurs when the buying decisions of households and the selling
decisions of producers are equated
Determines the equilibrium price and equilibrium quantity bought and
sold in the market

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Surplus is a condition in the market
where the quantity supplied is more than
the quantity demanded. In figure 3.2
the price of tilapia per kilo is above the
equilibrium price, so there is a surplus of
( 600 tilapia per week) and the quantity
supplied (1000 tilapia/week) exceeds the
quantity demanded (400 tilapia/week).
This induces the sellers to lower market
price of tilapia for it to be more attractive
fo the consumers. This means that there
is a downward pressure to price when
there is a surplus in order to restore
equilibruim in the market
Figure 3.1 Market Equilibrium
Figure 3.2 Market Equilibrium- Surplus

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THE ROLE OF PRICE IN THE MARKET
Price is, in essence, the market’s medium of communication. By proposing
higher prices, buyers communicate to sellers their desire to purchase more of a
good or resource. On the other hand, sellers use pricing to convey information to
buyers about the cost of a good or resource.
• If too much of a good is produced => Price Decreases
• If not enough of a good is produced => Price Increases
Figure 3.3 Market Equilibrium- Shortage
Shortage (Excess Demand), occurs when
the quantity demanded exceeds the
quantity supplied at the current price
In figure 3.3 the price of tilapia per kilo
is below the equilibrium price, so there is
a shortage of ( 600 tilapia per week) and
the quantity supplied (1000 tilapia/week)
is below the quantity demanded (400
tilapia/week).
The excess induces producers to take
advantage of the shortage and increase
thoer pirce. This means that there is a
upward pressure to price when there is a
shortage in order to restore equilibruim in
the market

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PRICE CONTROLS
Floor Price-
• legal minimum price imposed by the government
on certain goods and services.
• Floor price is a form of assistance to producers by
the government.
• The setting a floor price is undertaken by the
government if a surplus in the economy persists.
Price Ceiling
• Legal maximum price imposed by the government.
• Price ceiling is imposed by the government
consumers from abusive producers or sellers who
take advantage of the situation.
• Price ceilings is utilized by the government if there
is a persistent shortage of goods in the economy.

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We require the market as an institutional framework or process that connects
buyers and sellers of specific goods and services to meet our requirements. Given
the competitive nature of markets, we must examine the flow of products and
services by comprehending the law of supply and demand. Price is inversely
proportional to quantity according to the law of demand. This is because as prices
rise, the amount demanded decreases; conversely, as prices fall, the quantity
demanded falls, ceteris paribus. Price and quantity are inextricably linked with
supply. Because as the price of a good grows, more sellers are eager to sell it; as
the price lowers, fewer sellers are willing to sell it, ceteris paribus. Other non-
price drivers include customers’ income, expectations of future costs, the pricing
of similar products, consumers’ preferences, population size, and weather
conditions. At a given price, the quantity supplied equals the amount sought. If
the price exceeds the equilibrium price, a surplus exists; a shortage exists if the
price is less than the equilibrium price. Prices fluctuate frequently; this is why the
government imposes price regulations. A floor price is the legally mandated
lowest price for certain goods and services imposed by the government. In
contrast, a price ceiling is the legally required maximum price charged by the
government.
SUMMARY

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Lucas, Marilou et al., (2009). Basic Economics with Taxation and Agrarian Reform
Coursebook.” ASCU-Solid North Inc.
Bato, Ma. Jesusa et al., (2011). “Micro Economics Simplified .” Mandaluyong City:
National Bookstore.
Bon Kristoffer Gabay et. al., (2012). “Economics: Concepts and Principles with
Agrarian Reform and Taxation).” Manila: Rex
Bookstore, Inc.
Mun, Har Wai et. al., (2016). Economics. Selangor Malasia: SJ Learning
Mendoza, Lorelie and Tapang, Bienvenido, (2001). Introduction to Economics.
University of the Philippines Open University
Pettinger, Tejvan., (2017). Cracking Economics. Octopus Publishing Group, Great
Britain.
Hooi Yean, Grace Lee et. al. (2019). Principles of Economics. Malaysia. SJ
Learning.
REFERENCES

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Module 3 Demand and Supply
SSE 104
MICROECONOMICS
Activities
Name:____________________________________________
Program & Section: __________________________________
Instructor: CESAR F. DE GUZMAN, JR.

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Face-mask Price (P) Quantity Demanded
(box per week)
A
B
C
D
E
300
250
200
180
150
150
200
250
300
350
Activity 3-1
Given the hypothetical market demand for face-mask at various prices in the
country for one week, graph the demand curve using the data below:

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1 2 3 4 5 6 7 8 9 10
A B
1. Market a. Downward pressure to price
2. Equilibrium b. The absence of it is the end of all economic
activities
3. Increase in demand c. Upward pressure to price
4. Decrease in supply d. Good for sellers
5. A fall in demand e. The place where buyer and sellers meet
6. Shortage f. When demand curve shifts to the right
7. Surplus g. A state of balance
8. Price ceiling h. When supply curve shifts to the left
9. Floor price i. When demand curve shifts to the left
10. Consumption j. Good for buyers
Activity 3-2
Match the items in Column A with Column B by writing the letter on
the answer sheet provided below:

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Alcohol Price (P) Quantity Demanded
(500 ml per week)
A
B
C
D
E
250
200
150
110
90
350
325
300
280
250
Activity 3-3
Given the hypothetical market supply for alcohol at various prices in the country for
one week, graph the supply curve using the data below:

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Classify them under the appropriate column in the table below:
Non-price determinants of DEMAND Non-price determinants of SUPPLY
Expectations Resource prices Taxes and subsidies
Average income Number of sellers Tastes
Number of buyers Prices of related goods Technology
Prices of other goods
Activity 3-4
Here is a list of non-price determinants of demand and supply.

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