The Law of Demand, The Law of Supply and Market Equilibrium

1. Demand,
Supply and
Market
Equilibrium
Lesson 3

2. Objectives
• Analyze market demand,
market supply and market
equilibrium
2 Annual Review May 19, 2024

3. 3
Demand
Law of Demand

4. 4
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The Law of Diminishing Marginal Utility

5. 5
What is the Law of Demand?
The law of demand is one of the most fundamental
concepts in economics. The law of demand states
that quantity purchased varies inversely with price.
In other words, the higher the price, the lower the
quantity demanded. This occurs because
of diminishing marginal utility. That is,
consumers use the first units of an economic good
they purchase to serve their most urgent needs
first, and use each additional unit of the good to
serve successively lower valued ends.

6. 6
 The law of demand is a fundamental principle of
economics which states that at a higher price
consumer will demand a lower quantity of a good.
 Demand is derived from the law of diminishing
marginal utility, the fact that consumers use economic
goods to satisfy their most urgent needs first.
 A market demand curve expresses the sum of quantity
demanded at each price across all consumers in the
market.
 Changes in price can be reflected in movement along
a demand curve, but do not by themselves increase or
decrease demand.
 The shape and magnitude of demand shifts in
response to changes in consumer preferences,
incomes, or related economic goods, NOT to changes
in price.
KEY
TAKEAWAYS

7. 7
Understanding the Law of Demand
The law of demand focuses on those unlimited
wants. Naturally, people prioritize more urgent
wants and needs over less urgent ones in their
economic behavior, and this carries over into
how people choose among the limited means
available to them. For any economic good, the
first unit of that good that a consumer gets their
hands on will tend to be put to use to satisfy the
most urgent need the consumer has that that
good can satisfy.

8. 8
Vignette:
For example, consider a castaway on a desert island who obtains a six pack of
bottled, fresh water washed up on shore. The first bottle will be used to satisfy the
castaway's most urgently felt need, most likely drinking water to avoid dying of thirst.
The second bottle might be used for bathing to stave off disease, an urgent but less
immediate need. The third bottle could be used for a less urgent need such as boiling
some fish to have a hot meal, and on down to the last bottle, which the castaway
uses for a relatively low priority like watering a small potted plant to keep him
company on the island.
In our example, because each additional bottle of water is used for a successively
less highly valued want or need by our castaway, we can say that the castaway
values each additional bottle less than the one before. Similarly, when consumers
purchase goods on the market each additional unit of any given good or service that
they buy will be put to a less valued use than the one before, so we can say that they
value each additional unit less and less. Because they value each additional unit of
the good less, they are willing to pay less for it. So, the more units of a good
consumers buy, the less they are willing to pay in terms of the price.

9. 9
Price per
piece
Quantity
Demanded
5 10
4 20
3 30
2 40
1 50
0 60
Demand Schedule

10. 10
F
E
D
C
B
A
0
1
2
3
4
5
6
0 10 20 30 40 50 60 70
DEMAND SCHEDULE
Price
Demand

11. 11
By adding up all the units of a good that consumers are willing to buy at any given price we
can describe a market demand curve, which is always downward-sloping, like the one
shown in the charts.

12. 12
The term "demand” expresses the relationship
between the urgency of consumer wants and the
number of units of the economic good at hand. It
does not really concern the prices of a good to be
demanded by the consumers. An example are
face mask and face shield, even there is changes
in prices it is still on demand because of its use
this pandemic.
On the other hand, the term "quantity
demanded" refers to changes due to the
reflection on prices. An example is the demand for
cabbage(repolyo), due to high supply and can be
easily bought, consumers are getting used it.
They are not willing anymore to buy or to buy it for
a higher price.
Demand vs
Quantity
Demanded

13. 13
Factors Affecting Demand
Rising Income
An increase in income may affect the demand due to high
purchasing power. Disposable Income can be refer to the amount of
money or value that a consumer have after the
expenses(tax,utilities,etc.) are settled.
The availability of substitute products
The unavailability of a one product in the market and have another
brand that serve the same purpose can be called a substitute product.
Example is toothpaste: if Colgate is not available as a first choice, there
will be close-up, hapee and pepsodent that serve the same purpose.

14. 14

15. The availability of closely complementary goods
The goods that cannot easily separate form one another
to serve their purpose are called complementary goods.
Example are Sugar and Coffee: These goods are usually
consumed at the same time with hot water. The absence of
one merely will not complete a coffee drink.

16. Future expectations
When a good is at its decline period, it will lose demand because people
will expect for a new and better version of the product. Example: Samsung S
and iPhone almost every year these two giants of mobile release new models
of their phones. The current generation of their product will not be easily sold
anymore as there will be a new model in the market and buyers might
change mind and wait for the new one.

17. Environmental Conditions
Forecasted typhons and natural calamities affects also the demand as the
consumer will shift to buy more goods that are important to them. Example: Typhons in
the Philippines may last for a week, access to roads and transportation is difficult, so
people tend to buy food (canned goods and rice) before the typhon hits.

18. SUPPLY
Law of
Supply

19. What is the Law of Supply?
The law of supply states that, all other factors
being equal, as the price of a good or service
increases, the quantity of goods or services
that suppliers offer will increase, and vice
versa. The law of supply says that as the
price of an item goes up, suppliers will
attempt to maximize their profits by
increasing the quantity offered for sale.

20. Understanding the Law Supply
The supply curve is upward sloping because, over time,
suppliers can choose how much of their goods to produce
and later bring to market. It is up to the produces and
suppliers how much they want to sustain a product in the
market.
Profit maximization is to utilize all the scarce resource of
a business for short run or long run and will lead them to a
high profit. Businesses wants to increase income and later
on will decide to increase or decrease the availability of
their product.

21. In the graph the upward
slope shows an increase
in price of a product
leads the producers to
increase their supply in
the market. The amount
of the product that a
producer wants to put in
the market with the given
market price is called
quantity supplied.

22. Practical Examples of How Supply Works
The law of supply summarizes the effect price changes have on producer
behavior.
For example, a business will make more video game systems if the price of
those systems increases. The opposite is true if the price of video game
systems decreases. The company might supply 1 million systems if the price is
$200 each, but if the price increases to $300, they might supply 1.5 million
systems.
To further illustrate this concept, consider how gas prices work. When the price
of gasoline rises, it encourages profit-seeking firms to take several actions:
expand exploration for oil reserves; drill for more oil; invest in more pipelines
and oil tankers to bring the oil to plants where it can be refined into gasoline;
build new oil refineries; purchase additional pipelines and trucks to ship the
gasoline to gas stations; and open more gas stations or keep existing gas
stations open longer hours.

23. The law of supply is so intuitive that you may not even be
aware of all the examples around you.
•When college students learn that computer engineering jobs pay
more than English professor jobs, the supply of students with
majors in computer engineering will increase.
•When consumers start paying more for cupcakes than for donuts,
bakeries will increase their output of cupcakes and reduce their
output of donuts in order to increase their profits.
•When your employer pays time and a half for overtime, the number
of hours you are willing to supply for work increases.

24. In economics, quantity supplied
describes the amount of goods or
services that are supplied at a
given market price. How supply
changes in response to changes in
prices is called the price elasticity of
supply. The quantity supplied
depends on the price level, and the
price can be set by either a
governing body by using price
ceilings or floors or by regular market
forces.
What is
Quantity
Supplied

25. Understanding Quantity Supplied
If a price ceiling is set, suppliers are forced to provide a good or service,
no matter the cost of production. Typically, suppliers are willing to supply
more of a good when its price increases and less of a good when its price
decreases.
Suppliers' Control Over Quantity Supplied
Ideally, suppliers want to charge high prices and sell large amounts of goods
to maximize profits. While suppliers can usually control the amount of goods
available on the market, they do not control the demand for goods at different
prices. As long as market forces are allowed to run freely without regulation,
consumers also control how goods sell at given prices. Consumers ideally
want to be able to satisfy their demand for products at the lowest price
possible.

26. The following are some of the factors which affect supply:
Natural Conditions:
If rainfall is plentiful, timely, and well distributed, there will be bumper crops. On
the contrary, floods, droughts, or earthquakes and other natural calamities are
bound, to affect production adversely. This is one set of conditions which brings
about a change in the supply.
Technical Progress:
The volume of production or supply is also influenced by progress in the
technique of production. In manufacturing industries, this is a very important
factor. A new machine may have been invented, a new process discovered, or
a new material found, or perhaps a new use may have been found for a by-
product. The discoveries of synthetic dyes, artificial rubber and wool are some
such discoveries or improvements in technique.

27. Change in Factor Prices:
A change in the prices of the factors of production also brings about a change in the
supply of the commodity. If the factors of production become cheap, the supply will
increase, and vice versa.
Transport Improvements:
Improvement in the means of transport reduces the cost and increases the supply of the
product. Thus conditions of supply change.
Transport Improvements:
Improvement in the means of transport reduces the cost and increases the supply of the
product. Thus conditions of supply change.
Calamities:
Calamities like war or famine must also affect the supply of goods. We are only too
familiar with the shortage-of commodities caused by the war and the dislocation of
production by famine. Even at higher prices adequate supplies are not forthcoming.

28. Monopolies:
The monopolists may deliberately increase or decrease the supply as it suits them.
Thus exercise of monopolistic power brings about a change in supply.
Fiscal Policy:
The fiscal policy of the Government also may affect the supply. For instance, a
higher import duty will restrict the supply and a lower duty will stimulate it. These are
some of the factors which bring about changes in the conditions of supply and
increase it or decrease it.

29. Elasticity and Supply
The elasticity of supply is measured by how fast quantity supplied can
respond to a change in price
If a small change in price can quickly lead to a relatively larger increase
in output, supply is elastic
If the quantity supplied change very little to a change in price, supply is
inelastic
If the price and quantity change are the same, supply is unit elastic

30. Market Equilibrium and
Disequilibrium

31. Market
Equilibrium
Market is a meeting place for buyers and sellers, where the buyer can
purchase goods from a seller for a price that is agreeable to both. Market is
not limited to physical locations (examples are wet market,super market,
grocery store). It can be also virtual like the stock exchange. Through
technology, online platform is also a market. (examples are amazon, Lazada,
shopee, play store, and lots of more)
The point where consumer and supplier expectations meet is known as
the market equilibrium. At this point quantity demanded is equal to
quantity supplied. It determines equilibrium price

33. Market Disequilibrium
Disequilibrium is a situation where internal and/or external forces prevent
market equilibrium from being reached or cause the market to fall out of
balance. This can be a short-term byproduct of a change in variable factors
or a result of long-term structural imbalances.
KEY TAKEAWAYS
•Disequilibrium is when external forces cause a disruption in a market's
supply and demand equilibrium. In response, the market enters a state
during which supply and demand are mismatched.
•Disequilibrium is caused due to several reasons, from government
intervention to labor market inefficiencies and unilateral action by a supplier
or distributor.
•Disequilibrium is generally resolved by the market entering into a new state
of equilibrium.

34. Understanding Disequilibrium

35. Understanding Disequilibrium
Sometimes, certain forces bring about a
movement in the price of a commodity or
service. When this happens the proportion
of goods supplied to the proportion
demanded becomes imbalanced, and the
market for the product is said to be in a
state of disequilibrium. This theory was
originally put forth by economist John
Maynard Keynes. Many modern economists
have likened using the term "general
disequilibrium" to describe the state of the
markets as we most often find them.
Keynes noted that markets will most often
be in some form of disequilibrium --- there
are so many variable factors that affect
financial markets today that true equilibrium
is more of an idea.

36. Shortage
happens when there is an excess in demand. In a
graphical representation the shaded part under the
equilibrium point is shortage.
It means quantity demanded exceeds
quantity supply. To eliminate the shortage suppliers
tend to increase production to meet the quantity
demand. This will increase prices. Why would they
increase prices? Because of there will be an increase
of input cost which is labor. Production time will
increase and it may increase wages expense.
And law of demand will apply by an increase in price, demand decreases. For there will be lesser
consumers to buy the product for a higher price.
An increase in supply will reduce the shortage. If we look at the perspective of Law of Supply, an increase
in prices is an chance to increase income, therefore producers will increase their supply.

37. Surplus
Represented in the graph as shaded area above
the equilibrium point.
Quantity supplied exceeds quantity demanded. To
eliminate the surplus firms and businesses
decrease their price.
The law of demand will apply, wherein decrease in
price increases quantity demand.
There will be an increase of consumers willing to buy the goods for lower price
In the side of Law of Supply: Producers will decrease their supply because it will not be profitable to have a
low price of their goods and services.

38. Thank you
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know next year will be even better than the last.
We look forward to working together.
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sales@contoso.com