1. Supply & Demand
Price Determination

2. SHORT REVIEW
• DEMAND. Price and quantity demanded are
inversely proportional. As price increases,
demand decreases and vice versa.
• SUPPLY. Price and quantity supplied are
directly proportional. As price increases,
supply increases and as price falls, quantity
supplied decreases.

3. SHORT REVIEW
• People are rational: they MIN-MAX!
• Consumers (households) buy more of something when it
is cheaper. (minimize expenses - maximize utility)
• Producers (firms) sell more of something when it is more
expensive. (minimize cost - maximize profit)
• Price is a “signal” for households to choose what goods and
services to buy. It is a “signal” for firms to choose what
goods and services to produce and how much to produce.
• Both households and firms want to be happy (and meet
their needs and wants).

4. Demand & Supply Curves in an Auction
P
At this price, the Q demanded
equals the Q supplied.
S
70
(in PHP)
60
This is the EQUILIBRIUM
PRICE.
50
40
30
D
20
10
0
1
2
3
no. of items
4
5
q

5. REVIEW
• Whose perspective are we using when
we talk about DEMAND?
• What happens to the demand, ceteris
paribus, when the price increases?
decreases?

6. RECALL
Shifts in Demand Curve
1.Income/Wealth
2.Tastes/Preferences
3.Substitute Goods / Complementary Goods
4.Expectations
5.Population

7. REVIEW
• Whose perspective are we using when
we talk about SUPPLY?
• What happens to the supply, ceteris
paribus, when the price increases?
decreases?

8. RECALL
Shifts in Supply Curve
1.Factors of Production
2.Technological Advancements
3.Related Products
4.Number of Sellers
5.Taxes or Subsidies

9. RECALL
Distinguishing Movements
1.Is it looking for the demand or supply of
a product?
2.Is it a price factor or a non-price factor?

10. In Summary...
• People are rational: they MIN-MAX!
• Consumers (households) buy more of something when it
is cheaper. (minimize expenses - maximize utility)
• Producers (firms) sell more of something when it is more
expensive. (minimize cost - maximize profit)
• Price is a “signal” for households to choose what goods and
services to buy. It is a “signal” for firms to choose what
goods and services to produce and how much to produce.
• Both households and firms want to be happy (and meet
their needs and wants).

11. Equilibrium
• The price at which the
quantity buyers are willing to
buy equals the quantity
sellers are willing to sell.
D
S
P
Buyers and sellers are happy!
• Price at equilibrium has no
tendency to change. Because
both the consumers and the
sellers are satisfied.
QS = Q D

12. Think about this!
• What would happen if the price is
below the Equilibrium Price?
• Observe the Quantity Demanded and
Quantity Supplied.

13. Excess Demand (shortage)
• At the current price, the
quantity demanded by
buyers is greater than the
quantity supplied by
sellers. (Buyers are
unhappy!)
• During a shortage, there is
a tendency for price to rise
as demanders compete for
the limited supply.
D
S
P
QS < Q D

14. Think about this!
• What would happen if the price is
above the Equilibrium Price?
• Observe the Quantity Demanded and
Quantity Supplied.

15. Excess Supply (surplus)
• At the current price, the
quantity supplied by sellers is
greater than the quantity
demanded by buyers. (Sellers
are unhappy!)
• When there is a surplus, there is
a tendency for price to decrease
as sellers “win” buyers to buy
their products.
• e.g. Post-Christmas sales
D
S
P
QD < Q S

16. Think about this!
• What is the relationship between the
Quantity Demanded and the Quantity
Supplied?
• What is there excess of?
• Who is happy? unhappy?
• What will be the tendency for the price?

17. Demand meets Supply…
In every market, one of three conditions can
prevail:
• Excess Demand -- who’s unhappy?
• Excess Supply -- who’s unhappy?
• Equilibrium (quantity supplied = quantity
demanded) -- who’s happy?

18. FILL-IN THE BLANKS
• Below the Equilibrium Price, there is
__________.
• Above the Equilibrium Price, there is
__________.
Can you give a concrete example when
you personally experienced this?

19. Ef f ects of a Shif t
in Supply or Demand

20. Recently, the lowest temperature
recorded in Baguio was around 6C.
This had an effect on the supply of
fresh produce (fruits, vegetables)
here in Manila.
What can we predict about the price
of vegetables?

21. Make Predictions
Illustrate the following cases by graphing the supply
and demand curves.
1. What would happen to the price of cigarettes if
higher taxes were imposed by the
government?
2. What would happen to the price of rice if it is
hoarded by large rice sellers?
3. What would happen to the price of petroleum
products during winter time when there is
greater consumption of electricity?

22. Supply-side Shifts
P
S2
D
S1
S3
(in PHP, per pack)
45
40
What will happen?
35
S2 The price will
increase.
30
S3 The price will
decrease.
20
10
0
100
200
300
400
pieces, in thousands
500
Q

23. Demand-side Shifts
D3
P
D1
S1
(in PHP, per pack)
45
D2
40
What will happen?
D2 The price will
decrease.
35
30
D3 The price will
increase.
20
10
0
100
200
300
400
pieces, in thousands
500
Q

24. Possible Shifts of Price
SUPPLY
DEMAND
PRICE
constant
right
1.
constant
left
2.
right
constant
3.
left
constant
4.
left
right
5.
right
left
6.

25. Applicat ions of Demand
and Supply Analysis
• Restriction on Supply
• Improvement in Technology
• Tariff
• Deregulation

26. What would happen if PRICE
was set (by the government
for example)?

27. Demand & Supply of Pandesal
P
S PRICE CEILING
D
a maximum price at
which a good
may be sold
(in PHP, per piece)
3.5
3
2.5
What is the net
result?
SHORTAGE
2
1.5
1
0
100
200
300
400
pieces, in thousands
500
Q

28. Demand & Supply of Labor
Perspective: Firms
MINIMUM
W
WAGE
a price floor or
legal minimum
S
price
(in PHP; per day)
600
D
500
400
What is the net
result?
300
UNEMPLOYMENT
(Surplus Labor)
200
100
0
10
20
30
in millions
40
50
L

29. DEFINITIONS
• Price Ceiling
• The maximum price that a good or
commodity can be sold
• Price Floor
• The legal minimum price for a good
or commodity