Demand, Supply, and
Market Equilibrium
Subtitle
Describe the law of demand and
supply;
Learning Understand the different factors
Objectives: affecting demand and supply;
Explain how equilibrium price are
determined.
The Circular Flow of Economic Activity
The circular flow
of economic activity
shows the
connections
between firms and
households in input
and output markets.
The Basic Decision-Making Units
A firm is an organization that transforms resources (inputs) into
products (outputs). Firms are the primary producing units in a
market economy.
An entrepreneur is a person who organizes, manages, and assumes
the risks of a firm, taking a new idea or a new product and turning it
into a successful business.
Households are the consuming units in an economy.
The Market Setting
The market is made up of buyers and sellers
making choices under conditions of scarcity.
Buyers
They ask about the types of goods and
services available and the prices they must pay
for them.
Sellers
They inquire about the types of goods and
services buyers want and the prices they are
willing to pay.
The Market Setting
Markets enable buyers and sellers to interact, get
information, and engage in exchange.
Competition among buyers and sellers stimulates the
exchange of information that allows them to buy and sell
on the best terms possible.
Buyers compete
Competition in Identical with other buyers
Market for the limited
(Buyers) supply of the
good.
Sellers compete
Competition in Identical with other sellers
Market for the
(Sellers) consumers’
money.
Market competition
stimulates price
adjustments.
In Perfectly Competitive
Markets, there are many
buyers and sellers of an
identical products.
Economists use Supply and Demand
Model When talking about
competitive market– a market in
which a homogeneous good is traded
by a large number of buyers and
sellers.
Demand
It refers to the relationship between the price of a
good or service and the quantity of units all
consumers in a market would choose to buy during
a given time period.
Qd = f (P)
Quantity Demanded
A given quantity of a good or service
consumers would choose to buy at a
particular price.
Price (pesos per unit) Quantity Demanded
0 100,000
Demand Schedule
10 90,000
A demand schedule 20 80,000
is a table showing
how much of a 30 70,000
given product a 40 60,000
household would be 50 50,000
willing to buy at
different prices. 60 40,000
70 30,000
Demand curves are
usually derived from 80 20,000
demand schedules. 90 10,000
100 0
120
Demand Curve 100
The demand curve
is a graph 80
illustrating how
much of a given
product a 60
household would
be willing to buy at 40
different prices.
20
0
0 20000 40000 60000 80000 100000 120000
120
The Law of
Demand 100
An Increase in quantity
demanded
An increase in the number 80
of units that consumers
would choose to buy in
response to a decrease in 60
price.
A Decrease in quantity 40
demanded
A decrease in the number
of units that consumers 20
would choose to buy in
response to an increase in
price.
0
0 20000 40000 60000 80000 100000 120000
The Law of Demand
The law of demand states that there is a negative,
or inverse, relationship between price and the
quantity of a good demanded.
Non-Price Determinants of Demand
Taste/Preference
Income
Expectations
Price of Related Goods
Number of Consumers
D = f (P, T, I, E, PR, NC)
Shift in Demand Curve
Income
- An increase in income leads consumers to buy more of goods at
each and every price. A decrease in income leads consumers to
buy less of goods at each and every price.
➢Normal Goods – A good for which demand increases when
income increases.
➢Inferior Goods – A good for which demand decreases when
income increases.
Shift in Demand Curve
Tastes or preferences
Example: An increase in the value that people place
on hamburgers would lead them to buy more
hamburgers at each and every price.
Shift in Demand Curve
Price of Related Goods
Substitute – other goods that can be used in its place.
Complement – They are consumed together.
Shift in Demand Curve
Expectations of Future Prices
Example: If people expect the price of a commodity to rise
next week, they may consume more today and consume fewer
afterward.
Shift in Demand Curve
Number of Buyers
Example: The higher the population, the greater the demand
for a certain good.
How does suppliers
determine on which
The Market
Supply goods/services will be
offered in the
market?
The price they can charge
for their product and the
costs they would incur in
The Market producing and selling their
Supply product govern the
choices made by those
who supply goods and
services.
Therefore, things
are not produced
The Market and sold unless it
Supply is profitable and
technologically
feasible to do so.
Supply
It refers to the relationship between the price of a good or
service and the quantity or number of units all sellers in a
market would choose to sell during a given time period.
Quantity Supplied
A given quantity of a good or service sellers
would choose to buy at a particular price.
Supply Schedule
A method used to show the different amounts of a
certain product or item that a company would need
to supply based on different price points.
Supply Schedule Supply Curve
Price (pesos per Quantity
unit) Supplied (units 120
per week)
100
0 0
10 10 80
20 20
60
30 30
40 40 40
50 50
20
60 60
70 70 0
80 80 0 20 40 60 80 100 120
90 90
100 100
The Law of Supply
When the price of good rises, the quantity supplied goes
up.
When the price of good falls, the quantity supplied goes
down.
Therefore, there is a
positive relationship
The Law of
Supply between the price and
quantity supplied.
Ceteris paribus
Producers supply more
at a higher price
The Law of
because selling a higher
Supply quantity at a higher
price increases
revenue.
Movements Along the Supply Curve
An increase in quantity supplied
- It is an increase in the number of units that sellers would choose
to sell in response to a rise in price.
- It is represented graphically by a rightward movement along
the supply curve.
Movements Along the Supply Curve
A decrease in quantity supplied
It is a decrease in the number of units that sellers
would choose to sell in response to a fall in price.
It is represented graphically by a leftward
movement along the supply curve.
Shift of the Supply Curve
Technology
If a technological improvement allows producers to
produce more goods with the same or fewer inputs,
the cost of producing any given number of
hamburgers will fall.
Producers will be able to offer more hamburgers at
any given price.
Shift of the Supply Curve
Prices of inputs used in production
If the cost of production is less costly, then the supply of
goods will increase.
Shift of the Supply Curve
Prices of alternative goods produced
Substitute goods can be produced by using the same resources. If
the price of the alternative good falls, producers receive less
income for. It is more likely that the suppliers will switch
production from the other alternative good.
Shift of the Supply Curve
Expectations of future prices
If the sellers expect that the price of the goods will rise next week,
they may decide to sell fewer goods/services now and sell more
afterward.
Shift of the Supply Curve
Weather conditions
Favorable weather increases the productivity of all firms.
Shift of the Supply Curve
Number of sellers
As new producers enter the industry, the supply of the goods
increases.
Shift of the Supply Curve
Taxes, subsidies, and regulations
If the government would increase the tax imposed on the
producers of goods, this increases the cost of producing the goods
and shift the supply curve to the left.
It is a situation in which two sides of
the market balance each other.
Market It happens when the price balances
Equilibrium the amount that consumers plan to
buy and the amount that producers
plan to sell.
Equilibrium The quantity bought and sold at the
Quantity equilibrium price.
Equilibrium It is the price at which quantity
Price demanded equals quantity supplied.
Supply and Demand
Schedule
Price (pesos Quantity Quantity
per unit) Demanded Supplied
(units per (units per
week)
week)
0 100 0 D0 S0
10 90 10
Eq. Price = P50
20 80 20 EQP Eq. Qty. = 50 units
30 70 30
40 60 40
50 50 50
60 40 60
70 30 70
80 20 80
90 10 90
100 0 100
Price Market Shortage or Excess Demand
Adjustments - It is a situation in which the quantity
and Market demanded is greater that the quantity
Equilibrium supplied
Suppose that the price
Market
of a unit of hamburger is
Shortage P40. At this price, the
Sample quantity demanded is
Illustration
60,000 and the quantity
supplied is 40,000.
Supply and Demand
Schedule
Price (pesos Quantity Quantity
per unit) Demanded Supplied
(units per (units per
week)
week)
D0 S0
0 100 0
10 90 10
20 80 20 EQP
30 70 30
40 60 40
50 50 50
60 40 60
70 30 70
80 20 80 Market Shortage = Qd < Qs
90 10 90
Market Shortage at P40 = 20 units
100 0 100
It is a situation in which the quantity
Market Surplus supplied is greater than the quantity
demanded.
Suppose that the price of a
unit of hamburger is P60.
Market At this price, buyers want
Surplus
Sample to purchase 40,000
Illustration hamburgers--- less than the
60,000 hamburgers, sellers
are willing to offer.
Supply and Demand
Schedule
Price (pesos Quantity Quantity
per unit) Demanded Supplied
(units per (units per
week)
week)
D0 S0
0 100 0
10 90 10
Eq. Price = P50
20 80 20 EQP Eq. Qty. = 50 units
30 70 30
40 60 40
50 50 50
60 40 60
70 30 70
80 20 80 Market Surplus = Qd > Qs
90 10 90
Market Surplus at P60 = 20 units
100 0 100
