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MARKET - place where transactions between

buyer (demand) and seller (supply) take place


DEMAND -how much (quantity) of a product or
service is desired by buyers at various prices
-can be illustrated through:
-demand schedule table
-demand curve
-demand function

Demand Function
-is a function of price
-representation of the inverse relationship of price
and demand; and is not a formula
-(P) Price is an independent variable
-(Qd) Quantity Demanded is a dependent variable
*linear function (constant/equal)
( )

Demand Schedule Table - shows various demand


of a product with a given series of prices
a = intercept; b= slope
P (price)
0
2
4
6
8

Q (quantity demanded)
50
40
30
20
10

*Quantity Demanded specific amount of a good


needed at a specific price

Example:
P (price)
0
2
4
6
8

Demand Curve shows change in quantity


demanded at specific prices

Demand Curve
10

Qd

8
6
4

Qd

2
0
10

20

30

40

50

Change in demand:
-demand increase shift to the right
-demand decrease shift to the left
Law of demand shows the inverse relationship
between price and demand
( price : quantity demanded)
( price : quantity demanded)

Qd

Qd

= 50 5(P)
=50-5(0)
=50-0
= 50
= 50 5(P)
=50-5(2)
=50-10
= 40

Q (quantity demanded)
50
40
30
20
10

Determinants of Demand
(Non-price determinants)
1) Taste or Preferences
2) Number of Buyers
3) Income (of buyers)
D = superior good (goods/services that are
the first to be bought when income increases
D = inferior good (goods/services that
were not bought when income increases or
will be subsequently bought after the
purchase of superior goods)
4) Price of Related Goods
Substitute Goods serves as a
replacement; positive relation; proportional;
increase of price decreases the demand, and
increases the demand of the substitute good
Complementary Goods goods that
require the presence of another good;
negative relation; inversely proportional
5) Expectations consumers are expecting that
the demand will increase (therefore supply
will decrease) e.g. panic buying
Law of Demand (explained by 3 principles)
1) Common Sense
2) Law of Diminishing Marginal Utility
3) Substitution Effect (cheaper goods are
considered being bought, without the
presence of change in price of other goods)
and Income Effect (absence of change in
income, but change in the price of goods
have an effect on purchasing power)

Supply -how much (quantity) of a product or


service the seller can supply at various prices
-can be illustrated through:
-supply schedule table
-supply curve
-supply function
Supply Schedule Table - shows various supply of
a product with a given series of prices
P (price)
0
2
4
6
8

Q (quantity supplied)
10
20
30
40
50

*Quantity Supplied supply of a good at a


specific price
Supply Curve shows change in quantity supplied
at specific prices

Supply Curve
10
8
6
4
2
0
10

20

30

40

Change in supply:
- increase in supply shift to the right
- decrease in supply shift to the left
Law of supply shows the direct/positive
relationship between price and quantity
( price : quantity supplied)
( price : quantity supplied)

50

Supply Function
-is a function of supply
-representation of the positive relationship of price
and supply; and is not a formula
-(P) Price is an independent variable
-(Qd) Quantity Supplied is a dependent variable
*linear function (constant/equal)
( )

c = intercept; d= slope

Example:
P (price)
0
2
4
6
8

Qs

Qs
Qs

Qs

= 10 + 5(P)
=10 + 5(0)
=10 + 0
=10
= 10 + 5(P)
=10 + 5(2)
=10 + 10
= 20

Q (quantity supplied)
10
20
30
40
50

Determinants of Supply
(Non-price determinants)
1) Resource Price (new materials) (-)
(RP = Cost of Production (CoP) = S)
2) Technology (adoption of new tech.) (+)
(CoP = S)
3) Taxes & Subsidies (received by firms/
production that have an important role in the
economy *e.g. farmers & fisheries)
(Tax = CoP = S) (-)
(Subsidies = CoP = S) (+)
4) Price of other goods (goods of the same
material; made in the same equipment
producing the goods)
5) Number of Sellers
(NoS = S)
6) Expectations - suppliers are expecting that
the demand will increase (therefore supply
will decrease) e.g. hoarding

EQUILIBRIUM
- supply and demand are equal (when the supply
function and demand function intersect)
- the allocation of goods is at its most efficient
because the amount of goods being supplied is
exactly the same as the amount of goods being
demanded

Equilibrium Function
Equilibrium Price (Pe):

Example:

Equilibrium
Price &
Quantity

P
0
2

Qd
50
40

Qs
10
20

30

30

6
8

20
10

40
50

( )
( )
( )

( )
( )

Equilibrium Quantity (Qe):

10
8

Example:

Surplus

( )
( )

( )
( )

Shortage
0
10

20

30

40

Qs Qd = 0 (equilibrium)
Qs Qd = (-) (shortage)
Qs Qd = (+) (surplus)
Example:
P@6
P@2

= 40-20
= 20 (surplus of 20 units)
=20-40
= -20 (shortage of 20 units)

50

*When Pe (Equilibrium Price) is either too


expensive for the buyers or too cheap for the
suppliers, the government declares a:
Price Ceiling highest price to be charged by
the seller; protects buyers; sells goods lower
than the Equilibrium Price; happens when there
is shortage (government controls distribution)
Price Floor lowest price to be charged by
sellers; protects sellers; sells goods higher than
the Equilibrium Price; happens when there is
surplus (commonly happens after calamities/
there are instances when the government buys
the goods)
Black Market sells at an illegal price (either high
than price ceiling or lower than price floor)

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