Applied Economics Chapter 2 Lesson 1

APPLIED ECONOMICS
CHAPTER II
Lesson 1
LAW OF SUPPLY AND DEMAND, AND HOW EQUILIBRIUM PRICE AND QUANTITY
ARE DETERMINED
Have you tried buying goods on demand? Have you asked yourself why the price is too
high or too low? Do you believe that these form part in the fundamental economic
principle? In this lesson, you will discover why price rises, goods fall down and vice-versa.
Economics helps us solve the problem on excess supply and excess demand, and lead
it to a balanced supply and demand. In our needs, we do not want oversupply. It means
wastage of income. For entrepreneurs, it is not efficient if their stocks or supplies are
greater than the actual demand. It is a loss not revenue.
In economics, there are terms that you must learn to understand the better market
situations. A demand or the amount of good or service consumers are willing to purchase
at each price. If customers cannot pay for it, there is no effective demand. Price is what
a buyer pays for a unit of the specific good or service. The total number of units purchased
at that price is called the quantity demanded.
THE MARKET
A market is any activity for business set-up. It is where consumer buys and the seller
sells. It is categorized as local, national and international markets. Some involves face-
to-face contact between demander and supplier, others are impersonal, with buyer and
seller never seeing or knowing each other. The concept of market is important because
it is where a person who has excess goods can dispose them to those who need them.
This collaboration should lead to an integral agreement between buyers and sellers on
volume and price. A purely competitive market is known to be as unique way of
competition in which there are many competing firms selling identical products or
services.
DEMAND
Demand is the value of goods and services that buyers are willing to purchase in every
price. A demand schedule depicts the different quantities the consumer is willing to buy
at numerous prices. It centers on unlimited wants.
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, thus, the
equation :
Qd = f(p)
This denotes that the quantity demanded for a good is reliant on the price of that good.
Presented in Table 1 is a hypothetical monthly demand schedule for an ice candy for
one individual, Judy. The quantity demanded is determinable in each price with the
following demand function:
Qd = 6-P/2
Table 1 Hypothetical Demand Schedule of Judy for Ice Candy

Price per Ice Candy Quantity Demanded
₱0 6
2 5
4 4
6 3
8 2
10 1
At price P10, Judy is willing to buy one ice candy for a given period. As price goes
down to P8, the quantity he is willing to buy goes up to two. At price of P2, he will buy
five. There is an indirect relationship between the price of a commodity and the quantity
demanded for that good. The lower price allows the consumer to buy more, but as price
rises, the amount the consumer can afford to buy tends to go down.
LAW OF SUPPLY AND DEMAND

The law of supply and demand explains the interaction between the sellers of a product
and the buyers. It shows the relationship between the availability of a particular product
and the desire (or demand) for that product has on its price.
THE LAW OF DEMAND

The law of demand is the basic principle of economics. After observing the behavior of
price and quantity demanded in the above schedule, we can now state the Law of
Demand. Using the assumption “ceteris paribus”, meaning all other things being constant,
there is an inverse relationship between the price of a good and the quantity demanded
for that good. The higher price consumers will demand a lower quantity of a good. The
low price of the good influences the consumer to buy more.
If all other factors remain equal, the higher the price of a good, the fewer people will
demand that good.
“the higher the price, the lower the quantity demanded” and vice versa.
The amount of a good that buyers purchase at a higher price is fewer because as the
price of good goes up, the opportunity cost of buying the good also is less.
Consumers will avoid buying a product.
For example, if the price of video game drops, the demand for games may increase as
more people want the games.
Factors Affecting Demand

a) income of buyers
b) number of potential buyers
c) preferences
d) complementary products
The demand curve is always downward sloping due to the law of diminishing marginal
utility.
SUPPLY
Supply describes the total value of a good or service that is available to customers. The
supply schedule illustrates different quantities the seller is keen to sell at various prices.
The supply function shows the dependence of supply on various determinants that affect
it. Assuming that the supply function is given as Qs = 100+5P and is used to determine
the quantities supplied at the given prices.
Table 1.2 Hypothetical Supply Schedule of Jette for chicken in a week

Price of chicken in per kilo Supply in kilos
₱20 6
40 5
60 4
80 3
100 2
As can be seen in Table 1.2, the relationship between the price of chicken and the
Quantity that Jette is willing to sell is direct. The greater the price, the higher the quantity
supplied.
THE LAW OF SUPPLY

The schedule shown above represents a positive or direct relationship that prevails
between price and quantity supplied. As price increases, the quantity supplied rises; as
price decreases, the quantity supplied falls. This relationship is called the LAW OF
SUPPLY. It demonstrates the quantities that will be sold at a given price. A supply
schedule tells us that the firms will produce and offer for sale more of their product at a
high price than a low price.
Price is the value that consumers exchange to obtain a desired product. It is an obstacle
from the viewpoint of the consumer or buyer, who is on the paying end. The greater the
price, the less the consumer will purchase. But the supplier or seller is on the receiving
end of the product’s price. To a seller, price represents income, which serves as an
incentive to produce and sell more products. The greater the price, the higher this
incentive and the higher the quantity supplied.
The higher the price, the higher the quantity supplied and vice versa.
Producers supply more at a higher price because selling at higher quantity at a higher
price increases revenue.
Factors Affecting Supply
a) Production capacity,
b) production costs such as labor and materials
c) the number of competitors
d) Ancillary factors such as
e) material availability,
f) weather, and
g) reliability of supply chains
The law of supply says ……………….

” ―as the price of a product increases, companies will produce more of the Product.”
When graphing the supply vs. the price, the slope rises.
How Do Supply and Demand Create an Equilibrium Price?
Equilibrium price or market-clearing price, is the price at which the producer can sell
all the units he wants to produce and the buyer can buy all the units he wants.
Supply and demand are balanced, or in equilibrium.
the demand curve is downward sloping. This is due to the law of diminishing marginal
utility.
The supply curve is a vertical line; overtime, supply curve slopes upward; the more
suppliers expect to be able to charge, the more they will be willing to produce and bring
to market.
In the Equilibrium point, the two slopes will intersect. The market price is sufficient to
induce suppliers to bring to market that same quantity of goods that consumers will be
willing to pay for at that price.
SUPPLY AND DEMAND: MARKET EQUILIBRIUM

Demand and supply can identify how the buying decisions of households and the selling
decisions of businesses interact in determining the price of a product and the quantity
actually purchased and sold. Market equilibrium is a condition where 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 purchase for a price. As a market experience,
equilibrium is the stability of market demand, supply and price. It is also an agreement
between how much buyers and sellers are willing to transact. Equilibrium price is the price
in the market at which demand and supply are equal. A shortage occurs when quantity
demanded surpasses quantity supplied. While a surplus occurs when quantity supplied
exceeds quantity demanded.
CONCLUSION
 A demand curve shows the relationship between quantity demanded and price in a
given market on a graph.
 The law of demand states that a higher price typically leads to a lower quantity
demanded.
 A supply curve shows the relationship between quantity supplied and price on a graph.
 The law of supply says that a higher price typically leads to a higher quantity supplied.
 The equilibrium price and equilibrium quantity occur where the supply and demand
curves cross.
 The equilibrium occurs where the quantity demanded is equal to the quantity supplied.
 If the price is below the equilibrium level, then the quantity demanded will exceed the
quantity supplied.
 Excess demand or a shortage will exist. If the price is above the equilibrium level, then
the quantity supplied will exceed the quantity demanded

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APPLIED ECONOMICS

Table 1 Hypothetical Demand Schedule of Judy for Ice Candy

LAW OF SUPPLY AND DEMAND

THE LAW OF DEMAND

Factors Affecting Demand

Table 1.2 Hypothetical Supply Schedule of Jette for chicken in a week

THE LAW OF SUPPLY

The law of supply says ……………….

How Do Supply and Demand Create an Equilibrium Price?

Supply and demand are balanced, or in equilibrium.

SUPPLY AND DEMAND: MARKET EQUILIBRIUM

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