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Demand Function
-is a function of price
-representation of the inverse relationship of price
and demand; and is not a formula
-(P) Price is an independent variable
-(Qd) Quantity Demanded is a dependent variable
*linear function (constant/equal)
( )
Q (quantity demanded)
50
40
30
20
10
Example:
P (price)
0
2
4
6
8
Demand Curve
10
Qd
8
6
4
Qd
2
0
10
20
30
40
50
Change in demand:
-demand increase shift to the right
-demand decrease shift to the left
Law of demand shows the inverse relationship
between price and demand
( price : quantity demanded)
( price : quantity demanded)
Qd
Qd
= 50 5(P)
=50-5(0)
=50-0
= 50
= 50 5(P)
=50-5(2)
=50-10
= 40
Q (quantity demanded)
50
40
30
20
10
Determinants of Demand
(Non-price determinants)
1) Taste or Preferences
2) Number of Buyers
3) Income (of buyers)
D = superior good (goods/services that are
the first to be bought when income increases
D = inferior good (goods/services that
were not bought when income increases or
will be subsequently bought after the
purchase of superior goods)
4) Price of Related Goods
Substitute Goods serves as a
replacement; positive relation; proportional;
increase of price decreases the demand, and
increases the demand of the substitute good
Complementary Goods goods that
require the presence of another good;
negative relation; inversely proportional
5) Expectations consumers are expecting that
the demand will increase (therefore supply
will decrease) e.g. panic buying
Law of Demand (explained by 3 principles)
1) Common Sense
2) Law of Diminishing Marginal Utility
3) Substitution Effect (cheaper goods are
considered being bought, without the
presence of change in price of other goods)
and Income Effect (absence of change in
income, but change in the price of goods
have an effect on purchasing power)
Q (quantity supplied)
10
20
30
40
50
Supply Curve
10
8
6
4
2
0
10
20
30
40
Change in supply:
- increase in supply shift to the right
- decrease in supply shift to the left
Law of supply shows the direct/positive
relationship between price and quantity
( price : quantity supplied)
( price : quantity supplied)
50
Supply Function
-is a function of supply
-representation of the positive relationship of price
and supply; and is not a formula
-(P) Price is an independent variable
-(Qd) Quantity Supplied is a dependent variable
*linear function (constant/equal)
( )
c = intercept; d= slope
Example:
P (price)
0
2
4
6
8
Qs
Qs
Qs
Qs
= 10 + 5(P)
=10 + 5(0)
=10 + 0
=10
= 10 + 5(P)
=10 + 5(2)
=10 + 10
= 20
Q (quantity supplied)
10
20
30
40
50
Determinants of Supply
(Non-price determinants)
1) Resource Price (new materials) (-)
(RP = Cost of Production (CoP) = S)
2) Technology (adoption of new tech.) (+)
(CoP = S)
3) Taxes & Subsidies (received by firms/
production that have an important role in the
economy *e.g. farmers & fisheries)
(Tax = CoP = S) (-)
(Subsidies = CoP = S) (+)
4) Price of other goods (goods of the same
material; made in the same equipment
producing the goods)
5) Number of Sellers
(NoS = S)
6) Expectations - suppliers are expecting that
the demand will increase (therefore supply
will decrease) e.g. hoarding
EQUILIBRIUM
- supply and demand are equal (when the supply
function and demand function intersect)
- the allocation of goods is at its most efficient
because the amount of goods being supplied is
exactly the same as the amount of goods being
demanded
Equilibrium Function
Equilibrium Price (Pe):
Example:
Equilibrium
Price &
Quantity
P
0
2
Qd
50
40
Qs
10
20
30
30
6
8
20
10
40
50
( )
( )
( )
( )
( )
10
8
Example:
Surplus
( )
( )
( )
( )
Shortage
0
10
20
30
40
Qs Qd = 0 (equilibrium)
Qs Qd = (-) (shortage)
Qs Qd = (+) (surplus)
Example:
P@6
P@2
= 40-20
= 20 (surplus of 20 units)
=20-40
= -20 (shortage of 20 units)
50