Basic Elements of Demand and Supply

The fundamental economic problem calls for making definite decisions on

what goods to produce, how they shall be produced, and for whom they
shall be produced. To address the problem, the market is used as the
principal mechanism

THE MARKET
A market exist when “buyers wishing to exchange money for a good or services for
money.” It is where people are left alone to make their own transactions. It is also where the
forces of demand and supply interact. The meeting of these two opposing forces paves way to
providing answers to what good to produce, how they shall be produced, and for whom they
shall be produced. These happens because it is through the market where “buyers make known
their decisions to buy or not to buy and on hat terms, and sellers make known their willingness
and ability to sell or not to sell and on what terms.”

How a Market Functions. Markets are strictly made up of buyers and sellers. The actions and
decisions of buyers constitute demand for a product or service, while the sellers’ decisions and
actions constitute supply. Markets are important because they act as the mechanism by which
resources are allocated. For instance, when a buyer decides on purchasing a certain commodity
on a regular basis, he is sending a signal to the seller to produce the wanted commodity on a
regular basis. The collective desires of buyers to purchase a commodity constitute demand for
the commodity. If the sellers accede to the demand, economic resources will be forwarded to
the resource owners. The higher the demand is for product and services, the higher will be the
demand for economic resources.

Market Demand. Market demand refers to “the buyers” willingness and ability to pay sum of
money for some amount of a particular good or service. However, the quantity demanded of a
good or service will depend on factors such as needs, preferences, income level, expectations
about future, the prices of related commodities, the buyer’s situation, etc. The most important
consideration, however, is the price. The relationship between price and quantity demanded is
the subject of the law of demand.
Stated in simple terms, the law of demand1 indicates that, “ the quantity of any good
which buyers are ready to purchase varies inversely with the price of the good.” This means that
people will tend to buy more of the product as its price decreases, assuming that all other
factors influencing demand remain constant.

The Demand Curve. The demand schedule may be presented in graphic form. The price per
unit is represented in the vertical axis, while the quantity demanded for each price level is
indicated in the horizontal axis. Each amount in the “price” column of the demand schedule is
paired with the corresponding figure in the “quantity demanded” column. Each pair is, then,
marked by a point in the graph. When the points are connected by a line, a slope becomes
visible. This slope represents the change in one variable when another variable changes.

1
The table indicates that at P5, 000 per unit, the total quantity demanded for bicycles is 10, 000 units. A
change in price, however, affects demand. At P10, 000 per unit, demand goes down to 5, 000 units. This
means that a certain period in a given market, people will buy more of a product or service if its price is
lowered. Lower prices not only motivate current buyers to buy more of the commodity but also attract new
buyers to buy.
 Basic Elements of Demand and Supply
The graph shows a curve representing the inverse
relationship between prices of goods and services and the
quantity of goods and services demnded, which in this case
refers to bicycles.this curve is reffered to as the demand
curve. It will be noted that the slope of the demand curve in
the brpah is in a downward direction indicating that as price of
bicycles decreases, demand for bicycles in increases., and
vice versa.

EFFECTS OF CHANGES IN NONPRICE DETERMINANTS OF

DEMAND2
The law of demand applies only when all the factors
NonPrice
influencing demand remain constant. A change in any of the
Determinants of
nonprice factors influencing demand remain constant. A change in any
Demand
of the nonprice factor of demand may affect the original set of demand
1. Average income
for a ceratin product or service. The demand for bicycle (as indicated in
of consumers
Table 1) is such because the price of the presumed substitute, the
2. Size of the Market
motorbike, remains constant. If the motorbike is really a substitute,
a. Subs
then a change in its price will affect the demand for bicycles. Table 2
titutes
shows the adjusted demand schedule for bicycles when there is a
b. C
change in the price of motorbikes.
omplem
ents
SHIFTS IN THE DEMAND CURVE
3. Price and
When in the demand schedule is plotted in a graph, the original
availability of
demand curve (c1) will shift to the left(c2) when there is a decrease in
related goods
demand, and shift to the right (c3) when there is an increase in
4. Preferences or
demand.
Shifts in demand curve happen not only when there are changes in
income but also when there are changes in the other factors.
Table 2SCHEDULE FOR
ADJUSTED DEMAND
BICYCLE
Price Origin Demand for
per al Bicycles
Unit Dema
If price of motorbike
(Php) nd
is
Increase Decreas
d ed

(units) (units)

5, 10, 11, 000 9, 000

000 000
6, 9, 000 10, 000 8, 000
000
7, 8, 000 9, 000 7, 000
000
8, 7, 000 8, 000 6, 000
000
9, 6, 000 7, 000 5, 000
000
10, 5, 000 6, 000 4, 000

2
Medina, Roberto G. Principles of Economics. Manila: Rex Bookstore, 1986
 Basic Elements of Demand and Supply
000
MARKET SUPPLY
Supply constitutes the one side of the market
equation of which the other one is demand. Supply may
be defined as “the quantity of a good or service which
sellers desire to sell at a given price.”
The supply situation may be presented in two
ways:
1. The supply schedule
2. The supply curve

Supply Schedule. The supply schedule is a tabular

presentation showing the relationship between a
commodity’s market price and the amount of that
commodity that producers are willing
to produce and sell, other things held
equal. Suppliers are encouraged to
produce and sell more of a particular
commodity if a higher price idn paid
SHIFTS IN THE DEMAND CURVE FOR for it by the buyers. The higher the
BICYCLES price, therefore, the higher the
quantity supplied. A hypothetical
supply schedule is shown in Table 3.
Supply Curve. The supply curve is
the graphical illustration of the
supply schedule. The supply curve moves in an
upward, sloping direction, indicating the direct
relationship between price and quantity supplied.
The supply curve is manifestation of the law of supply which is stated simply as follows. As price
goes up, the quantity of goods and services under consideration tends to increase. Inversely, as
the price goes down, the quantity supplied tends to decrease.
NonPrice Effects of Changes in the NonPrice Determinants of Supply
Determinants of ADJUSTED SUPPLY SCHEDULE FOR
Supply BICYCLE
1. Cost of Production Price Origin Demand for
2. Number of per al Bicycles
suppliers Unit Dema
If price of motorbike
3. Prices of goods (Php) nd
is
and services
Increase Decreas
related in
d ed
production
(units) (units)

5, 5, 000 4, 000 3, 000

000
6, 6, 000 5, 000 4, 000
000
7, 7, 000 6, 000 5, 000
000
8, 8, 000 7, 000 6, 000
000
9, 9, 000 8, 000 7, 000
000
 Basic Elements of Demand and Supply
10, 10, 9, 000 8, 000
000 000
To a certain, price will determine the quantity that firms will be willing to sell in the
market. The nonprice determinants, however, also have some effects in the quantity supplied. A
change in a factor like taxes, for examples, will result to a corresponding change in supply. When
taxes applied to bicycles have been increased, firms will be demotivated to sell more and the
supply of bicycles will tend to decrease. Inveresely, when taxes are decreased, the supply of
bicycles will tend to increase. Table 4 is an illustration of this relationship.

SHIFT IN THE SUPPLY CURVE. Plotting the adjusted supply schedulein a graph will show that
the original supply curve (S1) shifts to the left (S2) when taxes increased, and to the right (S3)
when taxes are decreased. This relationship is shown in the nest figure.
Shifts in the supply will happen not only when there are changes in taxes, but also when
there are changes in the other factors.

MARKET EQULIBRIUM
Supply and demand are opposing forces that must
be considered in the determination of prices of
commodities in the market. When the individual
schedules of supply and demand are put together, there
will be a price where quantity buyers want to buy exactly
equals the quanity which sellers are offering to sale.
The price which supply and demand are equal is
the equilibrium price is forty pesos.
SUPPLY AND DEMAND
SCHEDULE FOR ONIONS
Price Quantit Quantity
per y Demand
Kilo Supplie ed (Kg)
d (Kg)
(Php)
10 5, 000 11, 000
20 6, 000 10, 000
30 7, 000 9, 000
40 8, 000 8, 000
50 9, 000 7, 000
60 10, 000 6, 000
The hypothetical supply and demand schedule for onions indicate the quantity supplied
and demanded at variuos prices. At the price of 40 pesos per kilo, firms are willing to supply the
market with 8, 000 kg, which is exactly the same quantity demanded by buyers at the same
price.
The equilibrium price of forty pesos and equilbrium quantity of 8, 000 kg, however, will
only be good for the short term. When there are changes in the demand or supply, a new
equilibrium quantity will emerge.
When onions are sold at prices above forty pesos, there will be a surplus of onions in the
market as there will be less buyers. This situation will force the seller to lower his price until the
equilibrium price of forty pesos is reached. This action clears the market of onions.
 Basic Elements of Demand and Supply
When onions are sold at prices below forty pesos,
more buyers will be interested to buy, creating a
shortage. When buyers are willing to pay forty pesos,
supply will move up to the point of equilibrium with
demand this action also clears the market of onions.
The above-cited statements confirm the
law of supply and demand which is briefly stated as
follows:
“ The amount of a product which is available
is relative to the needs of the possible customer.”
The figure above is a graphic illustration of the market equilibrium process. Equilibrium is
set at the point where the quantity demanded (line Qd) intersects the quantity supplied (line
Qs). A condition of surplus will occur at prices above forty pesos, (the equilibrium price) because
the quantity demanded is less than the quantity supplied. Inversely, a condition of shortage
occurs at prices below forty pesos because the quanity demanded is greater thatn the quantity
supplied.