BASIC PRINCIPLES OF DEMAND

AND SUPPLY
Francaise Agnes T. Mascarina
Market
Supply
Demand
MARKET
 Market- is an interaction between buyers and
sellers of trading or exchange

 Good market- most common type of market,

where we buy consumer goods

 Labor market- where workers offer services and

look for jobs, where employers look for workers to
hire.
MARKET
 Financial Market – includes the stock market
where securities of corporations are traded.
DEMAND
 Various seasons of the year, demand for certain
types of goods will increase.

 Demand- is the willingness of a consumer to buy

a commodity at a given price.

 Demand schedule – 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=f(P)
DEMAND
 Income effect – is felt when a change in the
price of a good changes consumer’s real income
purchasing power , the capacity to buy within a
given income

 Purchasing power- the volume of goods and

services one can buy with his/her income.
 Example : If a good becomes more expensive, real
income decreases and the consumer can only buy
less goods and services with the same amount of
money income.
DEMAND
 Substitution effect – felt when a change in the
price of a good changes demand due to
alternative consumption of goods.

 Example: Lower price encourages consumption

away from higher-priced substitutes on top of
buying more with the budget
THE LAW OF DEMAND
 Ceteris paribus - which means all other related
variables except those that are being studied at
that moment and are held constant, there is an
inverse relationship between the price of a good
and the quantity demanded for that good

 As the price increases, the quantity demanded for

that product decreases . The low price of the good
motivates the consumer to buy more

 Price increases, the quantity demanded for the

good decreases.
 If ceteris paribus is dropped, non price variables
that also affect demand are now allowed to
influence demand

 Non-price factors ( demand ) - income, taste,

expectations, prices of related goods and
population.

 Consumer expectations of future price and

income
 Prices of related goods – as substitutes or
complements also determine demand.

 Example of substitute goods : butter and

margarine

 Complements- are goods that are used together

such as coffee and sugar.

 An increase in the demand for a good will

lead to an increase in the demand of
complement since they are used together
 Number of consumers – the higher the
population , the more consumers and the higher
will be the demand for the good.
SUPPLY
 Refers to the quantity of goods that a seller is
willing to offer for sale.
LAW OF SUPPLY
 Using the assumption of ceteris paribus ( other
things constant) , there is a direct relationship
between the price of a good and the quantity
supplied of that good.

 As the price increases, the quantity supplied of

that product also increases.
NON-PRICE DETERMINANTS OF SUPPLY
 If the assumption of ceteris paribus is dropped,
non-price variables are now allowed to influence
supply.

 Cost of production, technology and availability of

raw materials and resources
NON-PRICE DETERMINANTS OF SUPPLY
 Cost of Production – refers to the expenses
incurred to produce the good.
( an increase in cost will normally result in a lower
supply of the good even when price will not change
since the producer has to shell out more money to
come up with the same amount of output.

 Technology – the use of improved technology in

the production of a good will result in the
increased supply of good.