LAW OF SUPPLY AND DEMAND
The law of supply
and demand states that when supply is greater than demand prices decreases.
When demand is greater than supply, price increases. When supply is equal to
demand, price remains constant
DEMAND
According to
Fajardo (1991), demand is the schedule of various of quantities of communities
which buyers are willing and able to purchase at a given price, time and place.
It is the consumer's desire and ability to purchase a good or services.
DETERMINANTS OF
DEMAND
1.
Income
of the Buyers
2.
Number
of Consumers
3.
Taste
or Preference
4.
The
prices of related goods or services
5.
Consumer
expectations.
Shifter in income is based on whether or not it is normal good or inferior good. A good is normal when you consume or demand more of it because your income has increased. Inferior goods do not necessarily mean they are inferior in quality to normal goods; it simply means people tend to buy more of them when their income is lower and less when their income is higher.
This means income
and for the product are directly related on normal goods and income and demand
for the product are inversely related.
What
is determinant of Demand?
It is a factor in
demand which cause fluctuations or movements to the demand curve. This
fluctuations lead to the changes of quantity demanded and the price of the
product or service
Explanation
to the behavior of the consumers whenever there is increase in price.
It is very evident
if the price increase consumers buy less goods and services and if the price
decrease consumers buy more goods and services. The following reasons to these circumstances are;
1. Substitution Effect - it refers to the changes in price motivate by consumers to buy relatively cheaper substitutes good.
2.
Income Effect – The changes in
price that affects the purchasing power of consumers’ income.
|
Table
1. Demand schedule |
|
|
PRICE |
QUANTITY DEMANDED |
|
1 |
60 |
|
2 |
50 |
|
3 |
40 |
|
4 |
30 |
|
5 |
20 |
|
6 |
10 |
CHANGES IN QUANTITY DEMANDED VS. CHANGE
IN DEMAND
|
GRAPH 1. CHANGE IN DEMAND |
|
 |
Change in
Demand. A change in demand
means that the entire demand curve shifts either left or right. The initial
demand curve D0 shifts to become either D1 or D2. This could be caused by a
shift in tastes, changes in population, changes in income, prices of
substitute or complement goods, or changes future expectation |
|
GRAPH 2. CHANGE IN QUANTITY DEMAND |
|
|
Change in Quantity
Demanded. A change in
the quantity demanded refers to movement along the existing demand curve, D0.
This is a change in price, which is caused by a shift in the supply curve. |
DEMAND
FUNCTION
Gabay, Remotin
& Uy (2007). It is a mathematical expression of the Law of Demand or the
relationship between price and quantity demanded.
Quantity demand is
the function of the price of goods and services, income of the consumers, price
of related commodities, and the size of the population expressed in a
mathematical equation:
P = price of goods and services
Y = income of the consumers
Pc = price of related communicates
Demand
Function:
Qd = a – bP
|
Table 2. Demand Schedule for Shoes |
|
|
Price |
Quantity Demanded |
|
1 |
100 |
|
2 |
80 |
|
3 |
60 |
|
4 |
40 |
|
5 |
20 |
Example demand schedule for shoes can also be expressed in the equation:
Qd = 120 – 20p
Where Qd stands for the quantity demanded of and P stands for the price one thousand pesos per pair of shoes. This manifests that if the price rises by one thousand, the Qd will drop by pairs of shoes. It is unlikely that price of a shoes will drop to zero, because is the amount or quantity that will be demanded if the price is zero. Based on the instruction that is: multiple the price by 200 and subtract the product form 1200.
Substituting the value of P or price presented on Table 2, we can verify the result and compare it to the value presented on the table. Assuming we use 2 as the value of price.
Qd = 120 – 20 (P)
= 120 - 20 (2)
= 120 – 40
= 80
Guide
Video: https://www.youtube.com/watch?v=XhMQGmalnuk
LAW
OF DEMAND
As price increases,
quantity demanded decreases, and as the price decreases, quantity demanded
increases. To elucidate if the price increase, consumers tend to buy less goods
and services. If the price decreases, consumers tend to buy more goods and
services
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SUPPLY
The schedule of
various quantities of commodities which producers are willing and able to
produce and offer at a given price, place and time (Fajardo, 1991). It
describes the amount of goods and services for the consumers.
DETERMINANTS
OF DEMAND
1. Technology
2. Cost of Production
3. Price expectation
4. Price of Related Goods
5. Taxes and subsidies
|
Table 2. Supply schedule |
|
|
PRICE |
QUANTITY SUPPLIED |
|
1 |
10 |
|
2 |
20 |
|
3 |
30 |
|
4 |
40 |
|
5 |
50 |
|
6 |
60 |
CHANGES IN QUANTITY SUPPLIED VS. CHANGE IN SUPPLY
|
GRAPH 3. CHANGE IN SUPPLY |
|
 |
Change in Supply. A change in supply is caused by factors other than the
price of the product. Decrease in supply, shifting the supply curve from S1
to S1. At the price P1, the quantity supplied will decrease from Q1 to Q2.
|
|
|
|
GRAPH 4. CHANGE IN SUPPLY |
|
|
A change in quantity
supplied - refers to a
change in quantity offered for sale as a result of a change in the price of
the product. |
SUPPLY FUNCTION
It is a
mathematical expression of the Law of Supply or relationship between price (p)
and quantity (Qs)
The supply curve
can be expressed mathematically in a function form as:
Qs =
f (Price, other factor held constant)
Supply can also be
expressed in an algebratic equation. Unlike the demand curve, has a positive
slope. The supply function is estimated as:
Qs =
f (P,P, I, Gs, n)
Where:
Qs
= quantity supplied
P = price of the goods and services
Pi = cost of inputs used
I = government taxes
Gs = government
subsidies
n = number
of firms
|
Table 3. Supply
Schedule for Shoes |
|
|
Price |
Quantity Supplied |
|
1 |
20 |
|
2 |
40 |
|
3 |
60 |
|
4 |
80 |
|
5 |
100 |
Using the supply schedule for shoes in table 3, supply function is estimated as:
Qs = 0 + 20P
Where Qs is the quantity supplied of shoes and P stands for price.
This
equation can be verified by the values of price shown in table 2 to compare the
result. Let us use 2 as the value of price, hence, quantity supply of shoes can
be estimated as follows:
Qs = 0 + 20P
Qs = 0 + 20(2)
Qs = 20 (2)
Q = 40
Guide Video: https://www.youtube.com/watch?v=H83dHEnG2B0
LAW
OF SUPPLY
As price increase, quantity supplied also increase, and as price decreases, quantity supplied also decreases.
MARKET EQULIBRIUM
Gabay, Remotin & Uy (2007), there is an inverse relationship between demand and supply. It is evident that consumers are willing to buy goods and services at a lower price. However, producers are willing to sell goods and services at a higher price. This circumstance creates equilibrium price and quantity, also known market equilibrium. It is the state which implies a balance between opposing forces, a situation in which quantity demanded and quantity supplied are equal. It is determined by the intersection of the demand curve and supply curve which means the quantity that consumers will buy is equal to the amount or quantity the producers are able and willing to offer.
Example
|
Table 4. Demand
and Supply Schedule of Shoes |
|||||
|
Points |
Price |
Quantity Demanded |
Quantity Supplied |
State of Market |
Pressure on Price |
|
A |
1 |
100 |
20 |
Shortage (-80) |
Upward |
|
B |
2 |
80 |
40 |
Shortage (-40) |
Upward |
|
C |
3 |
60 |
60 |
Equilibrium (0) |
Neutral/Equal |
|
D |
4 |
40 |
100 |
Surplus (40) |
Downward |
|
E |
5 |
20 |
100 |
Surplus (80) |
Downward |
MATHEMATICAL APPROACH OF MARKET EQUILIBRIUM
Under the market
equilibrium Qd intersects with Qs at a particular point. Given the
demand function and supply function, the equilibrium price and quantity can be
derived.
Based on the
preceding examples of the demand and supply schedule of shoes and equate the
two, tha is:
Qd = Qs
1200-200P = 0 + 200P
Transposing similar terms,
1200 – 0 = 200P + 200P
1200 = 400P
1200
= 400
3 = P
Equilibrium price is 3,000
By the substituting the equilibrium price into the demand and supply function, equilibrium quantity can be derived:
Qd = Qs
1200 - 200P = 0 + 200P
1200 – 200 (3) = 0 + 200 (3)
1200 – 600 = 0 + 600
600 = 600