Applied Economics Lesson 2 Law of Demand and Supply

12
ABM7
SENIOR HIGH SCHOOL DEPARTMENT
QUARTER 3 MODULE|2ND SEM|SY: 2023-2024
Applied Economics
Lesson 2:
Law of Demand and Supply
At the end of this course, the learners will demonstrate
• Explain the law of demand and supply

• Discuss the factors that affect demand and supply
• Apply the principles of demand and supply to illustrate how prices of commodities are
determined
Market
Is an interaction between buyers and sellers of
trading or exchange
Types of Market
1. Goods Market
2. Labor Market
3. Financial Market
Demand
• The ability and willingness to buy specific quantities
of goods in a given period of time at a particular
price, ceteris paribus
• It is not only desiring, wishing, or wanting to buy
the goods. The person must also have the ability to
buy the goods and he must be willing to pay the
price of the goods
Demand Function
Shows how the quantity demanded of a good depends on its determinants
A mathematical equation which expresses the demand of a product or service as a

function of its price and other factors
1
Supply
• Quantity of goods that a producer is able and

willing to sell at a certain price in a given
period of time
The Supply Schedule shows the different quantities the

seller is willing to sell at various prices.
The Supply Function shows the dependence of supply on

the various determinants that affect it
Non-Price Determinants
1. Cost of Production
2. Technology
3. Raw Materials
4. Resources
5. Price of Related Goods
Non-Price Determinants can cause an

upward or downward change in the
entire supply of the product and this
change is referred to as a shift of the
supply curve
Market Equilibrium
▪ If the forces of demand and supply operate together, we can show how price is determined in a
market economy
▪ Equilibrium is a state of balance when 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 buy for a price.
▪ Market equilibrium is attained at the point of intersection of the demand and supply curves
Equilibrium Price
✓ The price at which demand

and supply are equal
2
Now, let us take a look with the illustration of how the law of demand and supply works.
Table 1. Hypothetical Demand Schedule of Mara for Vinegar (in bottles)

Price Number of Bottles
Qd = 6 – P/2
0 6 This signifies that the quantity demanded for a
2 5 good is dependent on the price of that good. The
4 4 quantity demanded is determined at each price
6 3 with the given demand function
8 2
10 1
At a price of ₱10 per bottle, Martha is willing to buy one bottle of vinegar for a given month. As price
goes down to ₱2, she will buy five bottles. There is a negative relationship between the price of a good
and the quantity demanded for that good. A lower price allows the consumer to buy more but as price
increases, the amount of consumer can afford to buy tends to go down.
Figure 1. Hypothetical Demand Curve of Mara for Vinegar for One Month
12
10
8
Price
6
0
1 2 3 4 5
Quantity (in bottles)
The demand curve is a graphical illustration of the demand schedule, with the price measured on the
vertical axis (Y) and the quantity demanded measured on the horizontal axis (X). the values are plotted
on the graph and are represented as connected dots to derive the demand curve. The demand curve
slopes downward indicating the negative relationship between the two variables which are price and
quantity demanded.
Note:
1. The downward slope of the curve indicates that as the price of vinegar increases, the demand
for this good decreases. The negative slope of the demand curve is due to income and
substitution effect.
2. Non-Price determinants can cause an upward or downward change in the entire demand for
the product and this change is referred to as shift of the demand curve.
The Non-Price Determinants
a. Income d. Price of Related Goods
b. Taste e. Population
c. Expectation
3
Figure 2 Shift of Marich’s Demand Curve for Mango due to Change in Income
9
8
7
6
5
Price4
3
2
1
0
1 2 3 4 5
Quantity
When a change in the price of a good causes the quantity demanded for that good to change, this is
illustrated on the same demand curve. For Example, if the price goes down from ₱5 to ₱4, quantity
demanded will increase from 10 to 15 pcs, this is illustrated on the same demand curve. But if the change
in demand is caused by a non-price determinant, this will involve a change in the entire demand curve.
For example, the demand curve will shift to the right to reflect an increase in demand due to higher
income and to the left to show a decrease in demand due to less income.
Assuming that the supply function is given as: Qs = 100 +5P and is used to determine the
quantities supplied at the given prices.
Table 2 Supply Schedule of Pedro for Fish in One Week

Price of Fish (per kilo) Supply (in kilos)
20 200 As can be seen in the Table, the relationship between
40 300 the price of fish and the quantity that Pedro is willing
to sell is direct. The higher the price, the higher quantity
60 400
supplied.
80 500
100 600
Note: We derive a supply curve that is upward sloping, indicating the direct relationship between
the price of the good and the quantity supplies of that good.
Figure 3 Supply Curve of Fish of Marich for One Week

120
100
80
Price 60
40
20
0
1 2 3 4 5
Supply (in kgs.)
4
Determination of Market Equilibrium
Market equilibrium is attained when the quantity demanded is equal to the quantity
supplied.
Assuming that the demand function for Good X is Qd = 60 – P/2 and the supply function for
Good X is Qs = 5 + 5P
Applying the equations, we derived the following demand and supply schedules given the
following prices:
Price Demand Schedule Supply Schedule of

of Good X Good X
0 60 5
2 59 15
4 58 25
6 57 35
8 56 45
10 55 55
12 54 65
14 53 75
16 52 85
Equilibrium quantity is attained where Qd = Qs

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12

At the end of this course, the learners will demonstrate

• Explain the law of demand and supply

A mathematical equation which expresses the demand of a product or service as a

• Quantity of goods that a producer is able and

The Supply Schedule shows the different quantities the

The Supply Function shows the dependence of supply on

Non-Price Determinants can cause an

✓ The price at which demand

Table 1. Hypothetical Demand Schedule of Mara for Vinegar (in bottles)

Quantity (in bottles)

Table 2 Supply Schedule of Pedro for Fish in One Week

Figure 3 Supply Curve of Fish of Marich for One Week

Supply (in kgs.)

Price Demand Schedule Supply Schedule of

Equilibrium quantity is attained where Qd = Qs

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