THE MARKET:

DEMAND, SUPPLY
AND EQUILIBRIUM

Glenda C. Bas APPLIED ECONOMICS

 Introduction

Demand identifies the needs and wants of the

consumers while the supply determines the good or
service produces by the producers. The consumers
and producers/sellers interact in the market for the
exchange of goods and services at a given price.
When a consumer and producer/seller do not agree
with the quantity demanded and quantity supplied
respectively for the price of a product or service, how
do the demand and supply determine the market
price?
Objectives:

At the end of the lesson, you will be able to:

1. Learn the concept of market demand, market
supply; and market equilibrium.
2. Discuss and explain the factors that affect
demand and supply to the consumers and
producers respectively,
3. Analyze the effect of change in demand and
supply;
4. Apply the principles of demand and supply to
illustrate how prices of commodities are
determined.
Vocabulary List:
 Complementary Goods – two goods for which an
increase in the price of one leads to a decrease in the
demand for the other.
 Demand – pertains to the quantity of a good or service
that people are ready to buy at a given price within a
given period.
 Demand Curve – a graph of the relationship between
the price of a good and the quantity demanded.
 Demand Schedule – a table that shows the
relationship between the price of a good and the
quantity demanded.
Vocabulary List:

 Equilibrium – a situation in which supply and demand

have been brought into balance.
 Equilibrium Price – the price that balances supply and
demand.
 Equilibrium Quantity – the quantity supplied and the
quantity demanded when the price has adjusted to
balance supply and demand.
 Law of Supply and Demand – the claim that the price
of any good adjusts to bring the supply and demand
for that goods into balance.
Vocabulary List:

 Market – refers to a place where a group of buyers

and sellers of a particular good or service interacts.
 Quantity Demanded – the amount of a good that
buyers are willing and able to purchase.
 Quantity Supplied – the amount of a goods or
services that sellers are willing and able to sell.
 Shortage - a situation in which quantity demanded
is greater than quantity supplied.
 Vocabulary List:

 Substitute Goods – two goods for which an increase in

the price of one leads to an increase in the demand for
the other,
 Supply – refers to how much of a product a business
owner can supply to buyers and at what price.
 Supply Curve – a graphical representation shows the
relationship between the price of the product sold or
the factor of production and the quantity supplied per
period.
 Surplus – a situation in which quantity supplied is
greater than quantity demanded.
 Choose the letter of your correct
PRE-TEST: answer

1. The quality of goods demanded per period

is inversely related to its price, other things
constant.

A.) Demand
B.) Law of demand
C.) Law of supply
D.) Supply
 Choose the letter of your correct
PRE-TEST: answer

2. A line showing the quantities of a particular

supplied at various prices during a given
period, other things constant.

A.) Supply
B.) Supply curve
C.) Supply function
D.) Supply Schedule
 Choose the letter of your correct
PRE-TEST: answer

3. The quantity of a product demanded is NOT

equal to the quantity supplied.

A.) Disequilibrium
B.) Equilibrium
C.) Shortage
D.) Surplus
 Choose the letter of your correct
PRE-TEST: answer

4. It shows the relationship between demand

for a commodity and the factors that
determine or influence this demand.

A.) Demand
B.) Demand Function
C.) Demand Curve
D.) Demand Schedule
 Choose the letter of your correct
PRE-TEST: answer

5. The government’s specification with

minimum or maximum current price of a
particular good or service that disadvantageous
to the producer or consumer.

A.) Price ceiling

B.) Price control
C.) Floor price
D.) Surplus
MARKET DEMAND

What
determines
the quantity
as individual
demands?
MARKET DEMAND

When you buy goods or rendered services, what

factors affect in your decision? Here are the answer
you might give:
1. Price
When you buy a product or render a service, your
concern is whether it is expensive or inexpensive. If
the price of a particular product or service rises, you
buy less, and if the price fall, you buy more. Hence,
you might conclude that the quantity demanded is
negatively related to the price. As the quantity
demanded of a product or service increases, the price
falls and decreases as the price rises.
MARKET DEMAND

2. Income
What would happen to your family's demand for
groceries, if your father gets promoted, and his salary
increases? Most likely, it would rise. It is because an
increase in an individual's income, generally, increases
his/her purchasing power to demand more goods or
services that one is not able to purchase in a low income.
On the other hand, an individual with low income
reduces purchasing power which makes the demand for
goods and services decline.
MARKET DEMAND

3. Price of related Goods

When a particular price of product increases, you
tend to look closely at related commodities or
substitute goods. Substitute goods are generally
offered at a lower price, thus, making it more
attractive to you as a buyer to buy such products,
sample butter to margarine.
MARKET DEMAND

4. Tastes and Preference

Your buying decision-making affects your likes and

dislikes about the product. Your tastes and
preferences as a consumer, frequently, decide
whether you will buy or not, or how many quantities
you will buy for a product.
MARKET DEMAND

5. Expectation of the Future Prices

Your forecast about the probability to happen in the
future may affect your demand for a product or service
today. For example, you are planning to give your best
friend a perfume on his birthday next month. However,
the SM Department Store announced a 50% markdown
on the price of perfume next week. If you have enough
money, you may be more willing to buy the perfume
next week rather than next month.
MARKET DEMAND

6. Occasional or Seasonal Products

There are products which sellable for a short time
during the event only are called occasional or seasonal
products. For example, during Christmas season,
demand items are Christmas decors, hams, and quezo de
bola, while on Valentine’s Day, demand rises for red
roses and chocolates. However, after such events, the
demand for these products go to its original level.
MARKET DEMAND

7. Population Change
Another way to determine for the quantity demanded on
some type of goods and services is through the size of a
population in a certain area. This means that the quantity
demanded of a good and service is measure by the
number of demands of people residing in the area. When
a population increases, the more goods and services are
demanded, because of the rising population. Inversely, a
decrease in population results to decline the demand.
Shift in the Demand Curve

Whenever any determinant of demand changes,

other than the good’s price, the demand curve
shifts. Any change that increases the quantity
demanded at every price, shifts the demand curve
to the right. Similarly, any change that reduces
the quantity demanded at every price, shifts the
demand curve to the left.
Shift in the Demand Curve

Demand Curve Shift to the Right (Increase)

Shift in the Demand Curve

Demand Curve Shift to the Left (Decrease)

MARKET SUPPLY

What
determines
the quantity
as individual
supplies?
MARKET SUPPLY

What determines the quantity of a products the sellers

are willing to produce and offer for sale? Here are
some of the possible answer.
1. Price
The sellers sell more products at a higher price than at a
lower price. This is because higher sales result in higher
profits. If your family has farmland and a mini-grocery
store and you are selling rice, you are more willing to
sell rice at a high price because selling it is profitable.
By contrast, when the price of rice is low, you sell less
rice because your family business is less profitable.
MARKET SUPPLY

2. Input Prices
The cost of production of rice, like the cost of
seeds, equipment, and fertilizer, affects the
price of rice. Hence, when the price of one or
more of these inputs rises, your store becomes
less profitable; consequently, your store supplies
less rice. If input prices rise substantially, your
family might stop or sell no rice at all. Hence,
the quantity supplied and the input prices of
production have a negative relationship.
 MARKET SUPPLY

3. Technology
New technology makes increases the
production of a product. Using harvest
automation and autonomous tractors
technology makes farms more efficient and
productive. By reducing production costs, the
advance in technology raised the supply of rice
in the market.
 MARKET SUPPLY

4. Future Expectation
This factor impacts sellers as much as buyers. If
you foresee an increase in the price of rice, you
may decide to discontinue the current supply to
take advantage of the future rise in price, thus
decreasing market supply. If you, however, expect
a decline in the rate of rice, you will increase the
current quantity supplied of rice.
 MARKET SUPPLY

5. Number of Seller
The number of sellers is another determinant to
determine the quantity supplied in the market. If
you are more sellers there are in the market, the
more the supply of goods and services will be
available. If more farmers plant rice instead of
other crops, then the quantity supplied of rice in
the market will increase due to an increase in
production, assuming that no destructive calamities
strike the country.
 MARKET SUPPLY

6. Weather Conditions
Natural disasters – typhoons, drought, and others –
reduce the supply of agricultural commodities
while good weather has an opposite impact. If
your farm or rice land destroys by a calamity, the
quantity supplied of rice in the market will
decline.
 MARKET SUPPLY

7. Government Policy
The government also influences the market supply
through policies like trade agreements, farm
subsidies, tariffs, property taxes, and conservation
programs. For instance, through government
programs like the Conservation Reserve Program
(CRP), your family can be paid not to plant crops
for a certain number of years. The more number of
acres enrolled in CRP will reduce the supply of the
commodities commonly grown in your land.
Shift in the Supply Curve

Whenever there is a change in any

determinant of supply, other than the good’s
price, the supply curve shifts. Any change
that raises the quantity supplied at every
price shifts the supply curve to the right.
Similarly, any change that reduces the
quantity supplied at every price shifts the
supply curve to the left.
Shift in the Supply Curve

Supply Curve Shift to the Right (Increase)

Shift in the Supply Curve

Supply Curve Shift to the left (Decrease)

MARKET EQUILIBRIUM
 MARKET EQUILIBRIUM

You will notice that the two lines have intersected across the
point, and this is called the Market Equilibrium. The price at
which the demand and supply curve meet is called the
Equilibrium Price and the quantity is called the Equilibrium
Quantity.

At the equilibrium price, the quantity of the good that buyers

are willing and able to buy is the same as the quantity that
sellers are willing and able to sell. The equilibrium price
sometimes called the market-clearing price because, at this
price, everyone in the market has been satisfied. Buyers have
bought all they want to buy, and the sellers have sold all they
want to sell. (N. Gregory Mankiw)
 MARKET EQUILIBRIUM

The behavior of buyers and sellers naturally

drives markets toward their equilibrium. When
the market price is above the equilibrium price,
there is a surplus of the good, which causes the
market price to fall. When the market price is
below the equilibrium price, there is a
shortage, which causes the market price to rise.
(N. Gregory Mankiw)
 MARKET EQUILIBRIUM

Three Steps to Analyze Changes in

Equilibrium
To analyze how any event influences or how the determinants
of demand and supply affect the market, you have first to draw
the demand curve and the supply curve at the same graph.
Then, examine how the event affects the equilibrium price and
the quantity by performing the following three (3) steps:
1. Decide whether the event shifts the supply curve or the
demand curve (or both).
2. Decide which direction the curve shifts – (right or left)
3. Compare the new equilibrium with the old equilibrium.
 MARKET EQUILIBRIUM

Illustration:
Suppose that one summer the weather is very hot. How does
this event affect the market for the ice cream?

To answer this question, you must draw a demand and supply

curve and apply the following step to analyze changes in
equilibrium:
1. The hot weather affects the demand curve by Price changing
people’s taste for ice cream. That is, the weather changes the
amount of ice cream that people want to buy at any given
price. The supply curve is unchanged because the weather
does not directly affect the firms that sell ice cream.
 MARKET EQUILIBRIUM

2. Because hot weather makes people want to eat more

ice cream, the demand curve shifts to the right. The
increase in demand as the shift in the demand curve to
the right indicates that the quantity of ice cream
demanded is higher at every price.

3. The increase in demand raises the equilibrium price

and the equilibrium quantity. In other words, the hot
weather increases the price of ice cream and the quantity
of ice cream sold.
MARKET EQUILIBRIUM
 MARKET EQUILIBRIUM

What Happens to Price and Quantity

When Supply or Demand Shifts?

The table shows the predicted outcome for any

combination of shifts in the demand curve and
supply curve. In order to answer the above question
for any certain situation, pick an entry in this table
and make sure you can explain to yourself why the
table contains the prediction it does.
MARKET EQUILIBRIUM
 MARKET EQUILIBRIUM

MARKET EQUILIBRIUM: A MATHEMATICAL APPROACH

There are three (3) ways to determine the market
equilibrium: using the table/schedule, graphical
representation, and the mathematical approach.
You can also determine the market equilibrium by using your basic
knowledge in algebra or using the mathematical approach. To do this,
you need the three (3) sets of equations as follows:

1. Demand Equation:
2. Supply Equation:
3. Equilibrium Equation:
 MARKET EQUILIBRIUM

MARKET EQUILIBRIUM: A MATHEMATICAL APPROACH

= quantity demanded at a particular price
= intercept of the demand curve

= slope of the demand curve

= price of the good at a particular time

period

= quantity supplied at a particular price

c = intercept of the supply curve

d = slope of the supply curve

= Price of the good sold

MARKET EQUILIBRIUM: A MATHEMATICAL APPROACH

Complete the table below by solving the quantity demanded, quantity

supplied, market equilibrium, surplus, and shortage. Show your solution
on a separate paper.