The document discusses key concepts related to supply and demand including: - The definition of price from the perspective of consumers and producers - What a demand curve is and how it relates price and willingness to consume - Factors that influence demand such as income, prices of substitutes/complements, and expectations - Why the demand curve slopes downward - Shifts versus movements along the demand curve - What a supply curve is and how it relates price and willingness to supply - Factors that influence supply such as input prices, taxes, and expectations - Why the supply curve slopes upward - Shifts versus movements along the supply curve - How equilibrium price and quantity are determined by the intersection of supply and

8. PRICE
• Price is the monetary value of a unit of commodity
• From the point of view of consumers, price is a
payment for the purchase of a commodity whose
value reflects the satisfaction or utility derived
from the consumption of a good or service
• From the point of view of producers, price is the
revenue earned for a commodity sold whose value
reflects the cost of producing a unit of good or
service

9. WHAT IS A DEMAND CURVE?
• A schedule of the willingness and capacity of
a consumer to buy a commodity at
alternative prices at a given point in time
ceteris paribus (other things constant)
• The only factor that influences the level of
demand or consumption is the price of the
commodity itself
• Refer to graph 2.1 in the book

10. GRAPH 2.1 DEMAND CURVE

11. OTHER FACTORS AFFECTING THE
DEMAND OF A COMMODITY
• Income
• a higher level of income will give a person a higher
capacity to consume and vice versa
• Prices of Other Commodities
• If the other good is a substitute, the increase in the
price of the substitute good may increase the
demand for the commodity at hand and vice versa
• If the other good is a complementary good, a
decrease in its price will have a positive impact on
the demand of the good at hand and vice versa

12. OTHER FACTORS AFFECTING
THE DEMAND OF A COMMODITY
• Expectation
• If you believe that the price of gasoline will increase
tomorrow, there is a tendency for consumers to
increase their consumption today
• Taste
• Shaped by cultural values, peer pressure or the power
of advertising
• Market
• Population and demographic changes

13. WHY IS THE DEMAND CURVE
DOWNWARD SLOPING?
• Substitution Effect
• Decision of a consumer to substitute an
expensive good with cheaper goods when
there is a price change
• Income Effect
• An increase in purchasing power will
enable the customer to buy more of the
good and vice versa

14. CHANGES IN DEMAND CURVE
• Movement along the demand curve
• Change in quantity demand resulting from
the change in the price of the commodity
• As the price of a commodity decreases, the
movement along the curve will lead to an
increase in the quantity demand and vice
versa
• See graph 2.2

16. CHANGES IN DEMAND
CURVE
• Shifts in demand curve
• Changes in demand curve cased by any of the
other factors beside the price of the commodity
• A positive effect will shift the demand curve to the
right (increase in the demand for a commodity)
• A negative effect will shift the demand curve to
the left (decrease in the demand for the
commodity)
• See graph 2.3

19. WHAT IS A SUPPLY CURVE?
• A schedule showing a direct or positive
relationship between the price of the
commodity and the level of output that the
seller is willing to supply at a given point in
time ceteris paribus
• As the price of the commodity increases, there
will be more sellers that will be willing to
supply the good
• See graph 2.4

21. OTHER FACTORS AFFECTING
SUPPLY OF A COMMODITY
• Price of Production Inputs
• The production of any commodity will require
the use of 2 major inputs – intermediate inputs
or raw materials and factor inputs (land, labor,
capital and entrepreneurship)
• When the price of production inputs increases,
there will be an increase in the cost of
production and sellers will be reluctant to
maintain their previous level of supply

22. OTHER FACTORS AFFECTING
SUPPLY OF A COMMODITY
• Taxes
• An increase in sales tax, real estate tax and other business taxes
can increase the cost of supplying a commodity which will in
turn discourage sellers from increasing their supply
• Technology
• Labor-intensive technology is used if the cost of labor is
relatively cheap; Capital-intensive technology is used if wages
are high
• Improvements in technology can lower production cost and
encourage firms to supply more

23. OTHER FACTORS AFFECTING
SUPPLY OF A COMMODITY
• Expectation
• If there is an expectation that the price of rice
will increase next season, this will encourage
farmers to plant more rice now in anticipation of
higher price in the future. This expectation can
also discourage rice dealers to sell rice currently
and some of them will keep a higher inventory
of rice currently so they can sell it in the future
with higher returns.

24. WHY IS THE SUPPLY CURVE
UPWARD SLOPING?
• Variations in the unit cost of production
• Who can supply the good, if the market price is 6?; if the market price is 16?
• The previously ineffective producers at lower prices have become more
efficient and competitive as the price of the commodity increases
Producer Cost of Production
A 5 per unit
B 7 per unit
C 10 per unit
D 13 per unit
E 15 per unit

25. CHANGES IN THE SUPPLY
CURVE
• Movement along the supply curve
• Change in the price of the commodity
• An increase in the price of the commodity
will increase the quantity supplied as
shown by movement northeast along the
supply curve and vice versa
• See graph 2.5

27. CHANGES IN THE SUPPLY
CURVE
• Shift in the supply curve
• Changes in other factors affecting supply except
the price of the commodity
• A positive effect will shift the supply curve to
the right (increase in the supply of a commodity)
• A negative effect will shift the supply curve to
the left (decrease in the supply of the
commodity)
• See graph 2.6

29. DETERMINATION OF THE PRICES
OF COMMODITIES
• Equilibrium Price
• When buyers and sellers transact in the market and they
agree on the price of the commodity and the amount to be sold
and bought
• See graph 2.7
• Disequilibrium
• Cases when there are disagreements among buyers and sellers
on the price and quantity (excess demand and excess supply)
• See graph 2.8

32. CHANGES IN EQUILIBRIUM PRICE
AND OUTPUT
• Shift in the Demand Curve to the Right
• Shift in the Demand Curve to the Left
• Shift in the Supply Curve to the Right
• Shift in the Supply Curve to the Left

34. SIMULTANEOUS CHANGES
IN DEMAND AND SUPPLY
• Shift of the Demand Curve to the Right and
Shift of the Supply Curve to the Right (equal
proportion)
• Shift of the Demand Curve to the Right and
Shift of the Supply Curve to the Left (unequal
proportion)

36. OTHER APPLICATIONS OF
SUPPLY AND DEMAND ANALYSIS
• Price Ceiling
• Government imposed price control (prices
cannot go higher than the mandated price
ceiling)
• See graph 2.15
• Price Floor
• Government imposed price control (prices
cannot go lower than the mandated price floor)
• See graph 2.16

38. OTHER APPLICATIONS OF SUPPLY
AND DEMAND ANALYSIS
• Applications in the Labor Market
• Those buying labor services are the firms and
firms will hire laborers if the monetary value of
the labor productivity (marginal benefit) is
equal to the wage rate (marginal cost)
• The laborers are the ones supplying the labor
services and to them, the wage rate is the
opportunity cost of leisure
• See graph 2.17

39. OTHER APPLICATIONS OF SUPPLY
AND DEMAND ANALYSIS
• Minimum Wage as Price Floor
• If the equilibrium price in graph
2.17 is considered too low by the
laborers, they may demand the
government to impose a minimum
wage
• See graph 2.18

40. OTHER APPLICATIONS OF
SUPPLY AND DEMAND
ANALYSIS
• Application in the Foreign Exchange Market
• Demand for USD is influenced by demand for
imports. At higher USD price, imports becomes
expensive and our demand for USD decreases
• Supply of USD is based on the inflows of USD
brought by exports and remittances. At higher
USD price, it motivates exporters and Filipinos to
work overseas
• See graph 2.19

41. OTHER APPLICATIONS OF SUPPLY
AND DEMAND ANALYSIS
• Labor Migration and the OFWs
• Supply of OFWs increases when foreign wage rate
increases or when the exchange rate increases even
if the foreign wage rate does not change
• Demand for OFWs increases when foreign wage
rate decreases
• Even at lower foreign wage rate, there will be more
OFWs willing to go abroad because the peso value
of their foreign wage is still high with the
depreciated peso
• See graph 2.20

42. OTHER APPLICATIONS OF SUPPLY
AND DEMAND ANALYSIS
• Determination of Rent
• Rent refers to the price of using land in the process of
production
• Supply curve of land is vertical because land is fixed and
cannot be increased with increase in rent or price of land
• Low demand of land Do = idle
• High demand of land D1 = agriculture
• Very high demand of land D2 = business, high rises and
condominiums
• See graph 2.21

43. CONTEMPORARY ECONOMIC ISSUES
FACING THE FILIPINO ENTREPRENEUR
• There are 4 types of Market Structures
based on the Market Power of the actors in
any transaction
• Market Power
• The ability of any actor or group of actors in the
market to significantly influence the price in the
market and the quantity to be produced and
sold
• Aim of every actor is to enhance its market
power

44. PRINCIPLE OF
DIMINISHING MARGINAL
PRODUCTIVITY &
INCREASING MARGINAL
COSTS
• A fixed factor input (capital, land) is mixed with a
variable factor input (labor), the employment of
additional labor will increase the total production but
at a decreasing rate
• As the firm employs additional variable inputs, it also
increases its total cost of production. Since each
additional variable input is less productive than the
previous ones, they become costlier to employ
(increasing marginal costs with the increase in output
production)

45. PRINCIPLE OF
DIMINISHING MARGINAL
UTILITY
• This implies that the additional satisfaction
(utility) provided by an additional
commodity consumed is lower than the
additional satisfaction given by the previous
level of consumption of the commodity
• The optimal demand for a commodity is
attained when its price is equal to the
marginal utility derived from the last unit
consumed

46. IT STATES THAT THE AMOUNT
OF SATISFACTION PROVIDED
BY THE CONSUMPTION OF
EVERY ADDITIONAL UNIT OF A
GOOD DECREASE AS WE
INCREASE THE
CONSUMPTION OF THAT
GOOD

47. HOW TO CALCULATE
MARGINAL UTILITY?
1. Determine the primary total
utility
Marginal utility = Change in total utility /
Change in the number of units purchased or
consumed

48. DIMINISHING UTILITY VS.
MARGINAL UTILITY
Marginal utility
focuses primarily
on the increased
satisfaction
obtained when
consumers buy
additional units of
a product or
service.
Diminishing utility,
suggests that there
is an inverse
relationship
between customer
satisfaction and
additional units.

49. HOW TO CALCULATE
MARGINAL UTILITY?
2. Calculate the secondary total
utility
3. Determine the difference
between utilities and goods
4. Complete the calculation

50. EXAMPLE OF MARGINAL
UTILITY CALCULATION
• During their work break, Doctor Moore buys
their lunch from their workplace cafeteria.
When they do, they discover that their chicken
sandwich costs approximately P5. Doctor
Moore is hungry, and they're willing to pay
approximately P10 for their sandwich for the
cafeteria staff to cook the sandwich. They pay
this amount, and when they want to buy
another sandwich, they discover that the
sandwich is now P7. They're willing to pay less
for the second product because they're not as
hungry as they were for the primary product.

51. EXAMPLE OF MARGINAL
UTILITY CALCULATION
• In this case, the total utility refers to the cost of
both sandwiches, which has a sum of P17.
• The following week, Doctor Moore wants to buy a
sandwich again. This time, they pay P5 for their
first sandwich, P4 for the second, and then P3 for
the next three sandwiches. The total utility of the
second event refers to the sum of these purchases,
and equals P18.
• Doctor Moore wants to calculate the marginal
utility, and does so by discovering the difference
between both events.

52. EXAMPLE OF MARGINAL
UTILITY CALCULATION
• Marginal utility = total utility
difference / quantity of goods difference
Marginal utility = (18-17) / 5-2
Marginal utility = 1/3
Marginal utility = 0.33

53. EXAMPLE OF DIMINISHED
MARGINAL UTILITY
• Doctor Bennett buys a slice of pizza for $2, and they're very
hungry, so they decide to buy five slices of pizza. After
consuming the first slice of pizza, they obtain a positive
utility. This is because they're hungry when they consume
the first product, and they experience a high benefit from
the product. After they consume the second slice of pizza,
they feel more satiated and less hunger. This causes them to
experience less utility because they have a smaller benefit
from consuming the second slice of pizza. The third slice
holds less utility because they're less hungry.
• When they finish the fourth pizza slice, they realize they're
completely fulfilled and can experience increased discomfort
from eating more food. This results in negative utility.

55. PRINCIPLE OF DIMINISHING
MARGINAL PRODUCTIVITY &
INCREASING MARGINAL COSTS
• Profit – difference between total revenue and total
costs
• Maximum Profit – attained when the difference
between total revenue and total costs is the widest or
marginal revenue is equal to marginal costs (marginal
profit is zero)
• As long as marginal profit is positive, there is motivation to
increase production as this will increase profit

56. PERFECT COMPETITION
• A market structure where no single seller or buyer has
power to determine the price and the level of output in
the market
• Large number of buyers and sellers
• Suppliers sell similar or undifferentiated products
• Free entry and exit
• Mobility of resources
• Perfect information
• Ideal market structure since it leads to an efficient use
of resources

57. MONOPOLY
• A market structure characterized by a single seller in
the market
• Exact opposite of a perfect competition
• Enormous market power
• Unique product
• Huge profit (limiting production and setting higher
price)
• Restrictions to entry (scale barriers and legal barriers)
• If there is only a single buyer, the market is known as
a monopsony

58. OLIGOPOLY
• A market structure characterized by few sellers
producing similar and differentiated products
• Imperfect competition (there is competition among the
few sellers, but it is imperfect since the excess profit is
only reduced but not eliminated)
• Interaction of these few sellers:
• Independent actions – mimics a competitive market
• Collusion – forming a cartel and monopolizing the market
• Since collusion is not allowed here, firms opt to react to their
fellow firms decisions or follow the industry leader

59. MONOPOLISTIC COMPETITION
• This market structure has the elements of both
competitive and monopolistic markets
• Imperfect competition
• Competitive (numerous sellers and buyers that
can freely enter and exit the market)
• Monopolistic (product although similar, can be
differentiated through advertising and
packaging, which leads to brand loyalty)

60. MARKET STRUCTURES AN
IMPLICATIONS FOR ENTREPRENEURS
• If you have limited resources and productive capacity…
• The firm may enter the perfectly competitive market,
but the ability to expand and find a niche is very
limited
• Thus, a monopolistically competitive market is better,
although the firm must be cautious of potential rivals
• Difficult in entering the monopolistic and oligopolistic
market

61. INVESTMENT AND INTEREST
RATE
• External funds can be sourced from the capital
market
• Demand curve for funds shows and indirect
relationship between interest rate and the amount
being borrowed
• Supply of funds (savings) is positively related with
the interest rate
• If the price of capital is high, it may discourage
potential entrepreneurs to engage in business and
existing entrepreneurs may postpone their
expansion and investment plans, and vice versa

62. RENTALS AND THE COST OF
BUSINESS OPERATIONS
• It may not be wise for a small and beginning enterprise with
limited resources to locate its office in high-end commercial
districts because rental rates can eat up a huge part of its
revenues
• BUT there are several benefits of having an office in those areas
• Gives legitimacy and prestige
• Savings – attracting a lot of customers, accessible to workers and
near to clients and service providers
• Commercial districts are well planned and designed for business
with their good infrastructure and adequate support services

63. MINIMUM WAGE
• Example of floor price that prevents the market to
seek its equilibrium condition because of a
government policy
• For labor intensive industries, minimum wage can
discourage firms to hire additional workers, since the
wage rate has become prohibitive.
• As a result, some of these firms locate their
manufacturing plants in regions or countries where
labor is relatively inexpensive

64. TAXES
• Taxes can increase the cost of business
operations and can threaten the profitability
of business enterprises at their initial stage of
operations
• In order to attract pioneer, foreign and local
firms to establish their presence in the
country, governments can give tax incentives

65. SYNTHESIS
• Every commodity has a price. The price is a
monetary value of a unit of commodity. For
consumers, it reflects the value of satisfaction on
the good consumed. For producers, it reflects the
costs of producing a unit of commodity.
• This price is determined by the interaction of
demand and supply. Equilibrium price is the
agreed price consumers are willing to purchase
and producers are willing to sell the same quantity
of the commodity.

66. SYNTHESIS
• Changes in the price is influenced by changes in the
factors affecting demand and supply
• Disequilibrium is a condition when consumers and
producers are not in agreement on the quantity to be
bought and sold at a given price
• The analysis of demand and supply can be applied in
the determination of prices of various markets and
changes in factors affecting demand and supply
• The price of a commodity is also influenced by the
market power of actors in the market