DEMAND AND SUPPLY 1

Psychologists sometimes use a technique called "word association" to learn more about
their patients. The psychologist says a word, then the patient says the first word that comes into
his or her head: morning, night: boy, girl; sunrise, sunset. If a psychologist ever happened to say
"supply" to an economist, the response would undoubtedly be "demand." To economists, supply
and demand go together. Supply and demand have been called the "bread and butter of economics.
In this chapter, we discuss them, first separately and then together.

ACTIVITY NO.1 – PARADOX OF VALUE

Watch the TEDEd video entitled “The Paradox of

Value” available at https://bit.ly/3rotIjE. Reflect on
these following questions:
• Analyzing this scenario, as of today,
these are the prices of the following:
Price of gasoline/liter = 0.38 USD/ 19.91 PHP
Price of water/1.5 liter = 0.56 USD/29.34 PHP.
Explain the price difference between water and
gasoline in Saudi Arabia and what do you think are the
factors that have caused this?
• How do you think prices are set or dictated?
• What relationship do buyers and sellers have?

DEMAND

Demand refers to the amount of good and services consumers are willing to purchase
given certain price. If the price of the good is low, the quantity demanded for the good is
high, considering that the other factors that might affect the willingness of buyers to
purchase the goods are held constant. There is an inverse relationship between price and
quantity because a decrease in price makes a product attractive to consumers, while a
price increase makes a product less attractive to consumers.

Table 1. Demand Schedule of Rice

Figure 1. Demand Curve of Rice

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Table1 shows the quantity of rice a consumer is willing to buy at certain prices. We see
that the consumer is willing to buy 200 kilos at ₱40/kilo. The consumer, however, will
reduce his or her consumption to 100 kilos if the price increases to ₱60/kilo. As price
increases, quantity demand or the willingness to buy the product decreases, holding all
other factors constant. This is known as the law of demand.

Shifts in Demand and Its Determinant

Quantity demand is dictated by a change in price. However, there are also other factors
that influence demand. There are cases when the demand curve shifts either to the right
or to the left. A demand shift indicates an entirely different demand schedule. The
following are the determinants of demand:

1. Income. Most of the time, an increase in income yields an increase in demand

for certain goods. We call these “normal goods.” There are also what we consider luxury
and basic goods. For example, if your income increased by 20% and you increase your
consumption for meat by 50%, then meat for this consumer is a luxury-normal. Given
the same example, an increase in income by 20% and you increased your consumption
for rice by 20%, then rice for this consumer is basic normal.
For some goods, an increase in income yields a decrease in consumption, which means
the consumer tends to give up this good to get a preferred good. The goods that are
given up are called “inferior goods”. For example, your income increases by 10% and
your consumption of dried fish or “tuyo” decreased by 50% because you replaced it with
meat.

2. Tastes and Preferences. A change in tastes and preferences can shift the
demand curve to be right. An example is when you prefer chocolates and roses on
Valentine’s Day. All things being constant, the demand curve for these goods will shift to
the right
3. Price of related goods like substitutes and complements. Let us say that A
and B are substitutes and price of A increases, quantity demanded for B will increase. If
price of good A decreases, then quantity demanded for B decreases. Let us say that A
and B are complements, and price of A increased, then quantity demanded for B will
decrease.
4. Change in speculation. Consumer’ speculations determines changes in demand.
The H1N1 flu virus caused people to purchase flu vaccines. If the spread of the disease
was abated, the demand for vaccines would also decrease. In this case, the demand
curve would shift to the left.
5. Population. Like income, population size also influences demand. Population
growth means an increase in the size of the market demand and a decline in population
means a decrease in demand. For example, an increase in the number of families in
Metro Manila results in greater demand for goods, like bread even if the prices do not
change.

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Figure 2. A shift of the Demand Curve to the Right or an Increase in Demand

Figure 2 shows a shift of the Demand Curve to the right results in an increase in quantity

Figure 3. A shift of the Demand Curve to the Left or a Decrease in Demand

Figure 3 shows a shift of the Demand Curve to the left results in a decrease in quantity.

SUPPLY

Supply centers on the relationship between price and quality supplied. All things being
constant, supply refers to the willingness of sellers to produce and sell a good at various
possible prices. Since producers or sellers seek more profit, we can, therefore, say that
based on the Law of Supply, the price and quantity supplied have a direct relationship.
This means that if the price of a particular good is high, the quantity supplied or the
amount that producers would be willing to sell will be high, considering all other factors
being constant.

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Table 2 . Supply Schedule of Rice

Figure 4 . Supply Curve of Rice

Table 7 suggests that the quantity of rice a producer is willing to sell. We see that the
seller is willing to sell 200 kilos at ₱40/kilo. He/she will increase his/her quantity supply
by 100 kilos if prices increase by ₱20/kilo. As price increases, Qs or willingness to sell the
product also increases holding all other factors constant. This is known as the Law of
Supply.
Shifts in Supply and Its Determinants

Quantity supplied is dictated by a change in price. However, there are also other factors
that influence Supply. There are cases when the Supply curve shifts either to the left or
to the right.

1. Prices of inputs or cost of producing the good. If one or more input to price
decreases, the supply curve shifts to the right because it is cheaper to produce the said
product. Ten years ago, SIM cards cost around ₱1,500 but they now cost less that ₱50
because of cheaper input costs.
2. Technology. Efficient production through the use of state-of-the-art equipment
shifts the supply curve to the right because of an increase in output. For example, during
the 1980s a printing press can produce calling cards around ₱1 to ₱2 each depending
on the colors used by one until the entire set is finished. Today, you can print out your
own calling cards using a computer and a printer which is very cheap because the process
is done faster and more efficiently.
3. Taxes and subsidies. Sin taxes add to the cost of producing cigarettes, spirits
and liquors, which will shift the supply curve to the left. On the other hand, subsidies and
tax exemptions shifts the supply curve to the right. For example, it is more expensive to
smoke cigarettes in Singapore than in the Philippines because Singapore has stricter laws
on health and cleanliness, which makes their cigarettes more expensive.
4. Number of seller or firms in the industry. If firms decide to increase their size
or add more stores or outlets, then this will, in the long run, shift the supply curve to the
right. Examples of these are food stalls which are now considered a “fad”. There was an

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increase in the popularity of food like shawarma and milk tea and people lined up to get
a taste of these products. As a result, business people began to increase the number of
stalls to provide the product to those who are curious and interested in trying it.

Figure 5. A shift of the Supply Curve to the Right

Figure 5 shows that a shift of the Supply Curve to the right increases the quantity.

Figure 6. A shift of the Supply Curve to the Left

Figure 6 shows that a shift of the Supply Curve to the left decreases the quantity.

MARKET EQUILIBRIUM
The operation of the market depends on the interaction between buyers and sellers. An
equilibrium is the condition that exists when quantity supplied and quantity demanded are
equal. At equilibrium, there is no tendency for the market price to change.

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Figure 7. Market Demand Curve

Only in equilibrium is quantity supplied equal to quantity demanded. At any price level
other than P0, the wishes of buyers and sellers do not coincide.

Surplus, Shortage, and Government Intervention

In a competitive market, a surplus or shortage may occur when there are

movements or changes within the same supply and demand schedule. A surplus is
experienced when price of a good is above the equilibrium price. A surplus may also
be experienced when government sets a price floor above the equilibrium price.

Consider the Figure below:

Figure 8. Setting a Price Floor Resulting in Surplus

In Figure 8, the government sets a price floor at P2, which is above the Equilibrium
Price, P1, creating a surplus.

Example: If the government sets a price floor for palay at P2, that is higher than
P1 then there would be suppliers willing to produce and sell the said
commodity. But since Qd = 200 and Qs = 400, then surplus = 200.

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On the other hand, a shortage occurs when the quantity demanded exceeds the
quantity supplied. This happens when the price is below the equilibrium level. When
a shortage exists in the market, the consumers cannot buy as much of the good as
they would like. A shortage may also be experienced if government sets a price
ceiling below the equilibrium price.

Consider the Figure below:

Figure 9. Setting a Price Ceiling Resulting in Shortage

Figure 9 shows a price ceiling of P15, below the equilibrium price. This intervention
results in a shortage.

Elasticity
The law of demand states that price and quantity demanded are inversely related, ceteris
paribus. But it doesn't tell us by what percentage the quantity demanded changes as price changes.
Suppose price rises by 10 percent. As a result, quantity demanded falls, but by what percentage
does it fall? The notion of price elasticity of demand can help answer this question. The general
concept of elasticity provides a technique for estimating the response of one variable to changes
in another. It has numerous applications in economics.

ACTIVITY NO.3 – GROUP DISCUSSION

The class will be divided into four groups

and tasked to research one of the following:

1. Elasticity and its relationship with

demand including degrees of elasticity
2. Price Elasticity of Demand PED
3. Income Elasticity of Demand YED
4. Cross Price Elasticity of Demand XED

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Criteria for Scoring:

Progressing Progressed Progressive

Mastery and No eye 2 Eye contact 4 Eye contact 5

Presentation contact was was observed was observed
observed and and the Power and the
the Power Point content Power Point
Point content was discussed content was
was read and not read discussed and
not read. The
Power Point
was also well
made making
it a
supplement in
learning.

Content and Limit the 2 Content was 3 Content was 5

Information information not limited not limited
from the book from the book from the book
and included
easily
understandabl
e examples
and scenarios

ACTIVITY NO.4 – Reflection Paper

To see how supply and demand works in the real world,

watch a film about illegal trade and why is has
a high demand regardless for it being illegal.
Big Game, Big Money: Inside the illegal wildlife trade
at https://bit.ly/3eeM576

Afterwards, answer the following questions in Quipper Essay:

1. Why do you think there is such a huge demand

Rhino Horn in Oriental Countries?
2. Do you think making the good illegal
can increase its face value?
3. Do you think the government has to intervene with
the actions of the market specifically those of illegal trade?
4. We know for a fact that the exchange of illegal
goods is wrong but how come people still support
illegal trade and why is it also one of the most lucrative forms of business?

References:
Arnold R. (2012). Principle of Economics. Pasig City, Cengage Learning Asia Pte Ltd.
Manapat, C. (2018). Applied Economics for Senior High School. Quezon City, C & E Publishing, Inc.
McEachern W. (2013). Applied Economics. Quezon City. Abiva Publishing House, Inc.

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