Supply and Demand

1. The Market System
Demand, Supply and Price
Determination

2. Introduction to Markets
 Market – any place
or process that
brings together
buyers and sellers
with a view to
agreeing a price
 The basis of how an
economy operates –
through production
and subsequent
exchange

3. Introduction to Markets - Mind Map

4. Introduction to Markets
 The range of markets:
 Organised markets – commodities e.g. rubber, oil,
sugar, wheat, gold, copper, etc.
 Financial markets – stocks, shares, currencies,
financial instruments
 Goods markets – the supply and demand
of goods and services in general, food, clothing,
leisure, houses, cars, medical care, etc.
 Factor markets – the supply and demand
of factors of production – land, labor,
capital and entrepreneur

5. Introduction to Markets
 A market does NOT have to be
a physical place like a shop
 The market place consists of all those
who have items/services for sale
and all those who are interested
in buying those items/services
 Many businesses have global markets
because of the developments in
technology.

6. Introduction to Markets
 Demand – the
amount consumers
desire to purchase at
various alternative
prices
 Demand – reflects
the degree of value
consumers place on
items – price and
satisfaction gained
from purchase
(utility)
 Supply – the
amount producers
are willing to offer
for sale at various
prices
 Supply – reflects
the cost of the
resources used
in production and
the returns/profits
required

7. Introduction to Markets
 Factors affecting the efficiency of markets
 The amount of information about the markets held by
consumers and producers
 The ease with which factors of production can be put
to alternative uses
 The extent to which price is an accurate signal of the
true utility and true cost in determining the level of
demand and supply (externalities)
 The degree to which firms hold monopoly power
 The degree to which property rights are clearly
defined
 Whether the market can provide goods and services
(public goods)

8. The Market System - Mind Map

9. The Market System
 Market consists of:
 Consumers - create a demand for a
product
 Demand
 the amount consumers desire to
purchase at various prices
 Not what they will buy, but what they
would like to buy!
 Effective demand – must be willing AND
able to pay

10. Individual and Market Demand
 Market demand – consists of the sum
of all individual demand schedules
in the market
 Represented by a demand curve
 At higher prices, consumers generally
willing to purchase less than at lower
prices
 Demand curve – negative slope,
downward sloping from left to right

11. The Demand Curve
Price (Php)
Quantity Demanded
Demand
10
5
100 150
The demand curve
slopes downwards
from left to right (a
negative slope)
indicating an inverse
relationship between
price and the quantity
demanded. Demand
will be higher at lower
prices than at higher
prices. As price falls,
demand rises. As
price rises, demand
falls.

12. The Demand Curve 2
 The level of demand –
 determines where on the graph it sits
 Low demand –
 nearer the origin
 High demand –
 further from the origin (assuming same
scale)
 Dependent on a variety of factors
 Demand curve moves in response
to changing factors

13. The Demand Curve 3
 Factors influencing demand
Qdx = f (Px, Y, e, Prel, T, Pop)
 Where:
 Qdx = Quantity demanded
 Px = Price of goods and services
 Y = income of consumers
 e = consumers’ expectations of future prices
 Prel = price of related products
 T = consumers tastes and preferences
 Pop = population size

14. The Demand Curve 4
Changes in any of the factors other than
price causes the demand curve to shift
either:
 Left (Less demanded at each price) or
 Right (More demanded at each price)

15. The Demand Curve 5
Price (Php)
Quantity Demanded
Demand
10
100
D1
D2
10 200
Changes in any of
the factors affecting
demand other than
price cause the
entire demand curve
to shift to the left
(less demanded at
each price) or to the
right (more
demanded at each
price).

16. Exercise 1. Hypothetical Demand
Schedule for Medicine X
1. Graph the demand schedule
for medicine X from the given
table.
2. Suppose that quantity
demanded decrease by 20
units at all price level as a
result of the decline in
consumer income. Plot the
new demand schedule
together with the original
demand schedule.
Price
(Php)
Quantity
Demanded
10 75
12 62
14 53
16 42
18 35
20 30

17. Quiz 1. Hypothetical Demand
Schedule for Vitamin Z
1. Graph the demand schedule
for Vitamin Z from the given
table.
2. Suppose that quantity
demanded decrease by 50
units at all price level plot the
new demand schedule
together with the original
demand schedule.
3. Identify at least 3 possible
reasons for the decrease in
quantity demanded.
Price
(Php)
Quantity
Demanded
5 390
10 320
15 260
20 210
25 130
30 60

18. Quiz 2. Hypothetical Demand
Schedule for Carrots
1. Graph the demand schedule
for carrots from the given
table.
2. Suppose that quantity
demanded increase by 50
units at all price level plot the
new demand schedule
together with the original
demand schedule.
3. Identify at least 3 possible
reasons for the decrease in
quantity demanded.
Price
(Php)
Quantity
Demanded
10 270
12 205
14 150
16 105
18 65
20 30

19. The Supply Curve
 Factors influencing supply:
 Qsx = f (Px, T, C, Exp, Grt, Gs, M)
 Where:
 QSx = Quantity Supplied
 Px = Price of good x
 T = Technology
 C= Cost of Inputs used
 Exp = Expectations of future price
 Grt = Government regulations and taxes
 Gs = Government subsidies
 M= number of Firms in the market

20. The Supply Curve
 Changes in any of the factors OTHER than
price cause a shift in the supply curve
 A shift in supply to the left – the amount
producers offer for sale at every price
will be less
 A shift in supply to the right – the amount
producers wish to sell at every price increases
 HINT: Be careful to not confuse supply going
‘up’ and ‘down’ with the direction of the shift!

21. The Supply Curve
Price Php
Quantity Bought and Sold
Supply
3
200
7
800
The supply curve
slopes upwards from
left to right indicating
a positive relationship
between supply and
price. As price rises, it
encourages producers
to offer more for sale
whereas a fall in price
would lead to the
quantity supplied to
fall.

22. The Supply Curve
Price Php
Quantity Bought and Sold
Supply
4
400
S1
100
S2
900
Changes in any of the
factors affecting supply
other than price will
cause the entire supply
curve to shift. A shift to
the left results in a
lower supply at each
price; a shift to the
right indicates a greater
supply at each price.

23. The Market
Price (Php)
Quantity Bought and Sold
S
D
5
600
D1
300
Surplus
3
450
A shift in the demand
curve to the left will
reduce the demand to
300 from 500 at a
price of Php 5.
Suppliers do not have
the information or
time to adjust supply
immediately and still
offer 600 for sale at
Php 5. This results in
a market surplus (S >
D)
In an attempt to get rid
of surplus stock,
producers will accept
lower prices. Lower
prices in turn attract
some consumers to
buy. The process
continues until the
surplus disappears and
equilibrium is once
again reached.

24. The Market
Price (Php)
Quantity Bought and Sold
S
D
5
600
S1
100
Shortage
8
350
A shift in the supply
curve to the left
would lead to less
products being
available for sale at
every price.
Suppliers would
only be able to offer
100 units for sale at
a price of Php 5 but
consumers still
desire to purchase
600. This creates a
market shortage. (S
< D)
The shortage in the
market would drive
up prices as some
consumers are
prepared to pay
more. The price will
continue to rise
until the shortage
has been competed
away and a new
equilibrium position
has been reached.

25. Exercise 2. Hypothetical Supply
Schedule for Medicine X
1. Graph the supply
schedule for medicine X
from the given table.
2. Suppose that quantity
supplied increase by 10
units at all price level as
a result of the increase in
consumer income. Plot
the new supply schedule
together with the original
supply schedule.
Price
(Php)
Quantity
Supplied
12 21
10 18
8 16
6 13
4 7
2 2

26. Quiz. Hypothetical Supply Schedule
for Vitamin Z
1. Graph the supply schedule for
Vitamin Z from the given
table.
2. Suppose that quantity
supplied decrease by 100
units at all price level plot the
new supply schedule together
with the original schedule.
3. Identify at least 3 possible
reasons for the decrease in
quantity supplied.
Price
(Php)
Quantity
Supplied
40 440
35 370
30 310
25 260
20 180
15 110

27. Quiz. Hypothetical Supply
Schedule for Notebook
1. Graph the supply schedule for
notebook from the given table.
2. Suppose that quantity supplied
increase by 100 units at all
price level plot the new supply
schedule together with the
original schedule.
3. Identify at least 3 possible
reasons for the increase in
quantity supplied.
Price
(Php)
Quantity
Supplied
12 81
10 68
8 56
6 43
4 37
2 20

28. Exercise
1. Suppose that quantity
demanded decrease by 90
units at all price level as a
result of the decline in
consumer income. Construct
the new demand schedule in
the table provided. Using
this new demand schedule,
plot this together with the
original supply schedule and
determine the equilibrium
price and quantity.
Price
(Php)
Quantity
Demanded
Quantity
Supplied
5 480 160
10 410 200
15 350 260
20 300 300
25 220 340
30 150 430

29. EXERCISE. Hypothetical Demand and
Supply Schedule for Medical Care
Graph together the given
demand and supply
schedule. Suppose that
quantity demanded
decrease by 70 units at
all price level and
quantity supplied
decrease by 30 units,
construct the new
schedule and determine
the equilibrium price and
Price
(Php)
Quantity
Demanded
Quantity
Supplied
Condition
100 750 330
120 620 410
140 510 510
160 420 630
180 350 780

30. QUIZ. Hypothetical Demand and
Supply Schedule for denims
Graph together the given
demand and supply
schedule. Suppose that
quantity demanded
decrease by 30 units at
all price level and quantity
supplied decrease by 40
units, construct the new
Price
(Php)
Quantity
Demanded
Quantity
Supplied
Condition
1000 350 930
820 420 710
740 610 610
660 720 430
580 950 380

31. QUIZ. Hypothetical Demand and
Supply Schedule for Commodity XYZ
Graph together the given
demand and supply
schedule. Suppose that
quantity demanded
increase by 20 units at
all price level and quantity
supplied increase by 30
units, construct the new
Price
(Php)
Quantity
Demanded
Quantity
Supplied
Condition
120 90 180
100 100 160
80 130 130
60 150 70
40 200 20