Lesson 4: Application of Demand and Supply

1.1 Basic Principles of Demand and Supply

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone
of a market economy.
DEMAND
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded
is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity
demanded is known as the demand relationship.
Demand is the willingness of a consumer to buy a commodity at a given price. A demand schedule shows the various
quantities the consumer is willing to buy at various prices.
2 concepts of increasing demand
Income effect is felt when a change in the price of a good changes consumer’s real income or purchasing power, which
is the capacity to buy with a given income.
Substitution effect is felt when a change in the price of a good changes demand due to alternative consumption of
substitute goods.
Concept of Demand
1. Demand Schedule - refers to the amount (quantity) of a good that buyers are willing to purchase at alternative
prices for a given period.
Presented in Table 1 is a hypothetical monthly demand schedule for ice cream for one individual, Martha.
The quantity demanded is determined at each price with the following demand function (shows how the quantity
demanded of a good depends on its determinants, the most important of which is the price of the good itself.):
Qd = 6 – P/2
Table 1. Hypothetical Demand Schedule of Martha for Ice Cream (per cone)
Price of ice cream (per cone) Daily Quantity per day
Php 0 6
2 5
4 4
6 3
8 2
10 1

At a price of Php 10, Martha is willing to buy one ice cream a day. As a price goes down to Php 8, the quantity
she is willing to buy goes up to two ice cream. At a price of Php 2, she will buy five ice cream. There is a negative
relationship between the price of a good and the quantity demanded for that good. A lower price allows the consumer
to buy more, but as price increases, the amount the consumer can afford to buy tends to decrease.
2. Demand Curve

The demand curve is a graphical illustration of the demand schedule, with the price measured on vertical axis
(Y) and the quantity demanded measured on the horizontal axis (x). The values are plotted on the graph and are
represented as connected dots to derive the demand curve (Table 1.1).
 Table 1.1. Hypothetical Demand Curve of Martha for Ice Cream (per cone) for One Month

12

10

0
1 2 3 4 5

Quantity Demanded

The values are plotted on the graph and are represented as connected dots to derive the demand curve (Table 1.1). The
demand curve slopes downward indicating the negative relationship between the two variables which are price and
quantity demanded.
The downward slope of the curve indicates that as the price of ice cream increases, the demand for the good
decreases. The negative slope of the demand curve is due to income and substitution effects.
Factors Affecting the Shifting in Demand Curve
The individual demand curve illustrates the price people are willing to pay for a particular quantity of a good.

The market demand curve will be the sum of all individual demand curves. It shows the quantity of a good consumers plan
to buy at different prices.

Shifts in the demand curve

This occurs when, even at the same price, consumers are willing to buy a higher (or lower) quantity of goods.

Table 1.2 Diagram to show shift in demand

A shift to the right in the demand curve can occur for a number of reasons:

1. Price of the Given Commodity. It is the most important factor affecting demand for the given commodity. Generally,
there exists an inverse relationship between price and quantity demanded. It means, as price increases, quantity demanded
falls due to decrease in the satisfaction level of consumers.

2. Income. An increase in disposable income enabling consumers to be able to afford more goods. Higher income
could occur for a variety of reasons, such as higher wages and lower taxes.

3. Price of related goods – demand for the given commodity is also affected by change in prices of the related goods.
Related goods are of two types:

Substitute goods – are those goods which can be used in place of one another for satisfaction of a particular
want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand for given
commodity and vice-versa.

For example, if price of a substitute good (say, coffee) increases, then demand for given commodity
(say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given
commodity is directly affected by change in price of substitute good.

Complements goods - are those goods which are used together to satisfy a particular want, like coffee and
sugar. An increase in the price of complementary good leads to a decrease in the demand for given
commodity and vice-versa.

For example, if price of a complementary good (say, sugar) increases, then demand for given commodity
(say, coffee) will fall as it will be relatively costlier to use both the goods together. So, demand for a given
commodity is inversely affected by change in price of complementary goods.

4. Tastes and Preferences

Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in
fashion, customs, habits, etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a
commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.

5. Expectations of future price increases.

If the price of a certain commodity is expected to increase in near future, then people will buy more of that
commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in
future and change in demand in the current period.

*These non-price determinants can cause an upward or downward change in the entire demand for the product and this
change is referred to as a shift of the demand curve.

Law of Demand
Using the assumption “ceteris peribus”, a Latin phrase which means all other things remained equal or held
constant, there is an inverse (negative) relationship between price and quantity demanded. Therefore:

 consumers will buy more quantity of a good when price decreases.

 consumers will buy less quantity of a good when price increases.
Economist call this inverse relationship between price and quantity demanded the law of demand.
SUPPLY
Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are
willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the
market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy
theories, demand and supply theory will allocate resources in the most efficient way possible.

Concept of Supply

1. Quantity Supplied - refers to the amount (quantity) of a good that sellers are willing to make available for sale at alternative
prices for a given period.

Supply fuction: Qs = 100 + 5P – used to determine the quantities supplied at a given prices.

Table 2. Supply schedule of Martha for Ice Cream in One Week

Price of Ice Cream (per 1 liter) Supply (in liter/s)
Php 20 200
40 300
60 400
80 500
100 600
As can be seen in Table 2, the relationship between the price of ice cream and the quantity that Martha is willing to sell
is direct. The higher the price, the higher the quantity supplied.

120

100

80

60

40

20

0
200 300 400 500 600

Quantity Supplied (in hundred liters)

Table 2.1. Supply Curve of Ice Cream of Martha for One Week

Factors Affecting the Shifting of Supply Curve

 Price of the good

 Cost of Production
 Technology
 Number of Producers

*The law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply
relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more
at a higher price because selling a higher quantity at a higher price increases revenue.
Lesson 4.1. How Equilibrium Price and Quantity are Determined
Market Equilibrium
Equilibrium is a state of balance when demand is equal to supply. The equality means that the quantity
that sellers are willing to sell is also the quantity that buyers are willing to buy for a price. In market, equilibrium is an
explicit agreement between how much buyers and sellers are willing to transact. The price at which demand and supply are
equal is the equilibrium price.
Market equilibrium is a market state where the supply in the market is equal to the demand in the market.
If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results
in a disruption of the equilibrium.

If a market is not at equilibrium, market forces tend to move it to equilibrium. If the market price is above
the equilibrium value, there is an excess supply in the market (a surplus), which means there is more supply than demand.
In this situation, sellers will tend to reduce the price of their good or service to clear their inventories. They probably will
also slow down their production or stop ordering new inventory. The lower price entices more people to buy, which will
reduce the supply further. This process will result in demand increasing and supply decreasing until the market price equals
the equilibrium price.

If the market price is below the equilibrium value, then there is excess in demand (supply shortage). In this
case, buyers will bid up the price of the good or service in order to obtain the good or service in short supply. As the price
goes up, some buyers will quit trying because they don't want to, or can't, pay the higher price. Additionally, sellers, more
than happy to see the demand, will start to supply more of it. Eventually, the upward pressure on price and supply will
stabilize at market equilibrium.

DETERMINATION OF MARKET EQUILIBRIUM

Market Equilibrium is attained when the quantity demanded is equal to the quantity supplied.
How to determine supply and demand equilibrium equations:
Assuming that the demand function for Good X is: Qd = 60 – P/2
and the supply function for Good X is: Qs = 5 + 5P.
To find Qs = Qd we put the two equations together:
60 – P/2 = 5 + 5P
Applying the equations, we derive the following demand and supply schedules given the following prices:
Price Demand Schedule of Good X Supply Schedule of Good X
Ᵽ0 60 5
2 59 15
4 58 25
6 57 35
8 56 45
10 55 55
12 54 65
14 53 75
16 52 85

Equilibrium quantity is attained where Qd = Qs

Lesson 4.2 Market Structures
A market is an interaction between buyers and sellers of trading or exchange. It is where the consumer buys and the
seller sell. The market is a situation of diffused, impersonal competition among sellers who compete to sell their goods and
among buyers who use their purchasing power to acquire the available goods in the market.
A good market is the most common type of market because it is where we buy consumers good. The labor market is
where workers offer services and look for jobs, and where employers look for workers to hire. There is also financial market
which includes the stock market where securities of corporations are traded.
Market structure refers to the competitive environment in which buyers and sellers operate.
Factors of competition in the market:

 Number and size of buyers and sellers

 Similarity or type of product bought and sold
 Degree of mobility of resources
 Entry and exit of firms and input owners
 Degree of knowledge of economic agents regarding prices, costs, demand, and supply conditions
PERFECT COMPETITION
As the term suggests, perfect competition implies an ideal situation for the buyers and sellers.

Characteristics of a Perfectly Competitive Market

 There are so m any buyers and sellers that each has a negligible impact on market price. Change in output
of a single firm will not perceptibly affect market price of the good. No single buyer can influence the price
since he/she purchases only a small amount. Buyer cannot extract quantity discounts and credit terms.
 A homogenous product is sold by sellers, which means the products are highly similar in such a way
consumer will have no preference in buying from one seller over another. The goods offered for sale are all
exactly the same or are perfectly standardized.
 Perfect mobility of resources refers to the easy transfer of resources in terms of use or in terms of
geographical mobility.
 There is perfect knowledge of economic agents of market conditions such as present and future prices,
costs, and economic opportunities.
 Market price and quantity of output are determined exclusively by forces of demand and supply.
IMPERFECT COMPETITION
In other markets, one or more of the assumptions of perfect competition will not be met; thus, the market becomes
imperfectly competitive.
Different Types of Imperfectly Competition
a. Monopoly. It exists when a single firm that sells in the market has no close substitutes. The existence of a monopoly
depends on how easy it is for consumers to substitute the products for those of sellers.
Monopoly can exist for the following reasons:

 A single seller has control of entire supply of raw materials.

 Ownership of patent or copyright is invested in a single seller.
 The producer will enjoy economies of scale, which are savings from a large range of outputs.
 Grant of a government franchise to a single firm.
When monopoly enjoys a lot of power in the market, it actually does not have unlimited market power because it
faces indirect competition for consumer’s money for all goods.
 The monopolist faces a downward-sloping demand curve; meaning, the lower the price, the higher the quantity that
will be bought by the consumer.
b. Monopolistic Competition. It is imperfectly competitive market wherein products are differentiated and entry and exit
are easy. It allows such variety of choices. Since many firms exist in the market, consumers also have the freedom to choose
from whom to buy the good. It combines some characteristics of perfect competition and monopoly. It’s key characteristics
are:

 A blend of competition and monopoly;

 Firms sells differentiated products, which are highly substitutable but are not perfect substitutes;
 Many sellers offer heterogeneous or differentiated products, similar but not identical and satisfy the same basic
need;
 Changes in product characteristics to increase appeal using brand, flavor, consistency, and packaging as means to
attract customers;
 There is free entry and exit in the market that enables the existence of many sellers; and
 It is similar to a monopoly in that the firm can determine characteristics of product and has some control over price
and quantity.
The firm under monopolistic competition faces a downward-sloping demand curve. This means that it can sell more by
charging less and can raise price without losing all customers. As such, the firms in this market are given room to set
different prices by their product differences. In other words, a firm can set a higher price because it has something
different to offer its buyers.
The firm tends therefore to engage in non-price competition. This refers to any action a firm takes to shift the demand
curve for its output to the right without having to sacrifice its prices. This may include better service, product guarantees,
free home delivery, more attractive packaging, better locations, and advertising.
c. Oligopoly. It is a market dominated by a small number of strategically interacting firms. Few sellers account for most
of or total production since barriers to free entry make it difficult for new firm too enter.
Its characteristics are:

 Action of each firm affects other firms; and

 Interdependence among firms.
These strategically interacting firms try to raise their profits by colluding with each other to raise prices to the
detriment of consumers. Oligopolies may exist due to the existence of barriers, which may include economies of
scale, reputation of the sellers, and strategic and legal barriers such as the grant of patents/franchises, loyal following
of customers, huge capital investments and specialized input, and control of supply of raw materials by a few
producers.
Cooperative behavior in oligopoly usually takes the form of price-fixing or output-setting agreements such as the
one maintained by the OPEC (Organization of Petroleum Exporting Countries).
Lesson 4.2: Labor and Employment
Labor – refers to the exertion of human effort to acquire an income.
2 Types of Human Effort
1. Physical Effort – used muscles to earn a living. They are the blue-collar workers.
2. Mental Effort – used creativity, resourcefulness, and critical thinking. They are the white-collar workers.

Characteristics of Labor
 Labor is perishable.
 Labor and individual are inseparable.
 Labor supply does not change quickly.
 Most employable persons do not like to move. The following are some of the reasons:
 They want to stay close with their families.
 They are not aware of the demand for their services elsewhere.
 They lack the required skill
 They cannot afford the cost of moving from one place to another.

Kinds of Labor
 Manual Labor. This type of labor mostly involves the exertion of human effort specifically the use of
brawn and muscles, e.g. construction workers, dishwashers, farm workers, etc.
 Clerical Labor. It is considered as next higher in order than manual labor. Little mental effort is required
in clerical work as the job becomes routine for a while, e.g. secretary, office clerk, etc.
 Professional Labor. It requires a higher degree of intelligence than those clerks, e.g. lawyers, teachers,
engineering, nurses, doctors, physician, etc.
 The Labor of Management. Managers of all kinds and types perform functions which may be referred to
as labor of management, e.g. supervisors, managers, area managers, foreman, etc.
 The Labor of Entrepreneur. One who organizes the business and see to it that the business becomes
stable. The entrepreneurs bear the risk of running a business.
 The Labor of Inventors. Important ingredient of economic development is the output of the inventors.
Inventions like the electric lamp and the motor car are only some of the outputs of scientist which were
largely responsible for bringing the progress to the people.

Supply of Labor

Labor – one of the factors of the production.

Suppliers of Labor spend their time on the following activities:

 Non-market activity – good and services produced in the home.
 Market activity – immediate return in the form of income.

The Effects of Wages on the Quantity of Labor Supplied

Household regards non-market activity as a basic requirement for wholesome living. If income is not a
problem, they would spend all their time on it. But since they have to make some income, they will have to reduce
the time spent on non-market activity so they can allocate some time for supplying labor to the market.

Substitute Effect. If there are increase in wage rates and they feel that the returns they get from doing non-market
activities are lower, they will tend to switch over some hours to market activity.
Income Effect. When the household’s wage rate is higher, more income will available to the household for spending.
When the household decides to spend its money on leisure or other non-market activity, it reduces the time available
for pursuing a market activity. This will result to the reduction of the quantity supplied in the market.

The Demand for Labor

Quantity of Labor Demanded. It refers to the total number of man hours or man days hired by all firms in
an economy. The demand for labor depends on the real wage rate.

Real wage rate. It refers to purchasing power of a given nominal or wage rate. The nominal wage rate is the
amount in pesos paid to a worker for a unit of work.

Problems of Labor

 Unemployment and underemployment.

 Inadequate wages.
 Industrial and labor-management conflict.
 Economic insecurities.
Labor Migration and the Overseas Filipino Worker (OFW)
Phenomenon

What is migration?
Migration – refers to the movement of people from one place to another.
2 Types of Migration:
 Internal Migration – refers to the movement of people within one country i.e. rural to urban migration.
 International Migration – refers to the movement of people from one country to another.
Causes of Migration:
 Poverty
 Unemployment
 Victims of natural calamities
 Improve standard of living
 Better education
 Better environment
 Economic Security
EFFECTS OF MIGRATION

What is labor migration?

Labor migration – is the process of shifting a labor force from one physical location to another. Labor migration
takes place with the support of labor force.
Causes of labor migration
 The desire of job seekers to increase income and to improve the standard of living
 The emergence of new industries
 The relocation of production facilities of a given business to a new area.
What are OFWs?
Overseas Filipino Workers (OFWs) – are Filipinos who are presently and temporarily working outside the country. They
may be land-based of sea-based workers. Ex. Domestic Helpers, Teachers, Seamen, Nurses
According to POEA (Philippine Overseas Employment Administration) In 2014, there are 1,832,668 OFWs.
 Land-based – 1,430,842
 Sea-based – 401, 862
REASONS BEHIND THE OFW PHENOMENON
1. High Unemployment Rate
- Newly graduates join the labor force that increases the competition in the labor market. Instead of waiting for them
to be hired locally, Filipinos seek employment overseas.
2. Low Salary offered by employers in the Philippines
- Filipinos are willing to work abroad due to low salary. Even professionals like nurses, engineers and teachers would prefer
to work abroad as household help or office workers because of the higher salary offered overseas.
3. Discrimination in job hiring in the Philippines
- local employers tend to hire candidates even if they’re not the most qualified for jobs. The qualified and overage applicants
who were not able to find jobs decide to work abroad.
4. High Withholding Tax
- The Philippines has a high income tax rates for workers. Workers’ take home pay decreases after deducting the withholding
tax, GSIS/SSS premium, Pag-ibig and Philhealth and other mandatory deductions.

The Philippine Peso and The Foreign Currency

The Filipino Peso

 The Philippine peso (Filipino: piso ; sign: ₱; code: PHP) is the official currency of the Philippines. It is
subdivided into 100 centavos (Filipino: sentimo).
 The peso is usually denoted by the symbol "₱".
 The Philippine coins and banknotes are minted and printed at the Security Plant Complex of the Bangko Sentral
ng Pilipinas (Central Bank of the Philippines) in Quezon City
What is Currency?
• In economics, currency is a generally accepted medium of exchange.
• An exchange rate is the rate at which one currency may be converted into another, also called rate of exchange of
foreign exchange rate or currency exchange rate.
• The foreign exchange rate is simply the price of one currency in terms of another, or how much one currency can
be exchanged for another, in the same way that the price of a good is determined by how much money can be
exchanged for it.

Money Changing

• The main function of a foreign exchange department is to make money for the bank by speculating on whether a
particular currency will rise or fall against another. Banks compete fiercely with each other using experienced
market traders and millions of dollars or currency equivalents are exchanged daily.
Foreign exchange market
• The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized
trading of international currencies.
• Foreign exchange transaction is a type of currency transaction that involves two countries. Generally, a foreign
exchange transaction involves conversion of currency of one country with that of another. The conversion of currency
in a foreign exchange transaction can be performed through:
1. buying or selling of goods and services on credit;
2. borrowing or lending funds.
What Are the Functions of Foreign Currency Exchange Markets?
Primary Function. The primary function of foreign currency exchange markets is to convert the currency of one
country into another currency.
International Transactions. Foreign currency exchange markets serve to facilitate international financial
transactions.
Currency Value. The value of a country's currency can influence international trade, consumers' purchasing power
and inflation.
Investment. Fund managers and investment professionals use the foreign currency exchange market to help diversify
their portfolios and potentially increase their returns.
Loss Protection. International companies that work in multiple countries are subject to gains and losses based on
exchange rate fluctuations.
Forex Trading. Forex, the word, means FOReign EXchange market. This is an international market where the buying
and selling of money is done freely and 24 hours a day. All forex trading involves the buying of one currency and the
selling of another, simultaneously. Currency quotes are given as exchange rates; that is, the value of one currency
relative to another. The relative supply and demand of both currencies will determine the value of the exchange rate.
The trading of foreign currency is the exchange of money issued in one country for money issued in another.
Foreign currency trading takes place in the highly-solvent foreign exchange market. Currencies are traded for one
another at exchange rates, which are relative prices determined by market supply and demand.
Here are some simple tips that will help you increase your profit potential and prevent you from losing money.
1. Select your first broker.
2. Get a simple method you understand.
3. Trade the big trends and not trade frequently.
4. Work smart and not hard.
5. The formula to success - Using Simple Method + With Discipline Control Risks = Forex Trading Success
Tips & Warnings
*Document your training objectives. This can facilitate the process for everyone.
*Create and prioritize an outline of the demos and videos to use as a checklist for each handler.
*Let handlers know it takes time to master the forex system to keep them from being discouraged.
*Foreign exchange trading is a high-risk activity and should not be taken lightly.
*Monitor each handler individually, be available for one-on-one interaction and encourage questions for the best
training results.
What is foreign exchange risk?
Exchange risk is simple in concept: a potential gain or loss that occurs as a result of an exchange rate change.
About BPI Forex Corporation
BPI Forex Corporation is a wholly-owned subsidiary of the Bank of the Philippine Islands (BPI) established in
response to increasing foreign exchange demand following a liberalized foreign exchange environment in the
country. It delivers hassle - free service and offers very attractive exchange rates for your currencies.
List of Currencies
Aside from the US Dollar, BPI Forex Corporation transacts in the following currencies:
Australian Dollar, Korean Won, Bahrain Dinar, British Pound, Brunei Dollar, Canadian Dollar
Chinese Yuan, Hong Kong Dollar, Indonesian Rupiah, Japanese Yen, Malaysian Ringgit, Thailand Baht
New Zealand Dollars, Saudi Riyal, Singapore Dollar, Swedish Kroner, Swiss Franc, Taiwan Dollars,
BPI FOREIGN EXCHANGE

Currencies Buying Selling

(in Philippine Peso) (in Philippine Peso)
US Dollar 41.7500 42.5200
Euro 48.4700 52.5700
British Pound 61.7800 66.3000
Australian Dollar 39.6400 44.1600