Application Of Demand And Supply

APPLICATION OF DEMAND AND SUPPLY

MARKETS

An institutional arrangements that enables buyers and sellers to exchange goods and services. A market cannot only be found in one physical location. Some markets could function through advertisements, letters, telephone calls, computer networks, personal relationships and face to face discussions in various places. It is a design in order for the buyer and seller exchange goods and services

TWO THINGS AS COMMON IN MARKETS Demand by all the people for products or the resources that make them. A willingness by producers to supply those products or resources

DEMAND

Is defined as the different quantities of a resource, good or service that consumers are willing and able to buy or purchase at any given time at various possible prices. MARKET DEMAND Is the sum of all individual demand,

LAW OF DEMAND

The law of demand shows the inverse relationship between price and quantity demanded. As the price increases, the demand decreases. QUANTITY DEMAND

Is the number of good that individuals are willing and able to buy at a particular price during a particular period of time.

DEMAND SCHEDULE

Is a table showing the quantities of a product that would be purchase at various prices at a given time and place. Price

Quantity Demanded

Php. 300. 00 Php. 250. 00 Php. 200. 00 Php. 150. 00 Php. 100. 00

10 20 30 40 50

DEMAND SCHEDULE The survey results explain the law of demand. According to the demand schedule, the number of commodities that a person willing and able to purchase was greater at lower price that n a higher prices.

DEMAND SCHEDULE The survey results explain the law of demand. According to the demand schedule, the number of commodities that a person willing and able to purchase was greater at lower price that n a higher prices.

Price

300 250 200

150 100

Quantity Demand

10

20

30

40

50

CHANGES IN QUANTITY DEMANDED Quantity demanded refers to the number of units of a good that individuals are willing and able to buy at a particular price. Changes in quantity demanded is the movement from one point to another point on the same demand curve caused by a change in the price of a certain product.

CHANGES IN DEMAND

The demand curve reflects the relationship between price and quantity purchases of a certain product during the given period of time. But the price is not the only thing that change that influence the buyer’s willingness to purchase. When it occurs, demand changes, it increases or decreases.

DETERMINANTS OF DEMAND CONSUMER TASTES AND PREFERENCES A change in tastes and preferences in favour of a commodity will mean that at each price, more will be demanded than previously. On the other hand a change in tastes and preferences away from a commodity will mean that at each price, less will be demanded than previously.

CONSUMER’S INCOME The increasing and decreasing of an income will affect an individuals demand for a particular good that may cause to whether rise or fall. POPULATION

Population growth affects quantity demanded in more or less the same way as increases in average incomes. A larger population will increase demand and fewer population will decrease demand for a particular product.

PRICES RELATED GOODS

A. SUBSTITUTE GOODS When the price of a particular item increases, the consumer will shift in the demand for a substitute or alternative. A. COMPLEMENTARY GOODS Items that often purchased together. A demand of a certain commodity that needs a corresponding match in order to function or be used. In accordance with it, if the price of a certain product falls, the demand for its match will decrease too.

EXPECTATIONS OF FUTURE PRICES

Future expectations may affect the demand for goods and services. A consumer who expects that price of necessity goods will increase during times of calamities, presumably demand for necessity goods will increase.

If any of these factors occur, the demand schedule and the demand curve will change so that the quantity at any particular price would be loess that in the original demand schedule. If the demand increases the curve shifts to the right, and if demand decrease, the curve shifts to the left.

ELASTICITY OF DEMAND

Elasticity describes how much a change in price affects the quantity demanded. DETERMINANT OF THE ELASTICITY OF DEMAND LUXURIES VS. NECESSITIES The demand for necessities tends to be inelastic; the demand for luxuries tends to be elastic.

PROPORTION OF INCOME Other things being equal, the larger a commodity shares in one’s budget, the greater will be the demand elasticity for it. SUBSTITUTABILITY

The more substitutes there are for a commodity, the greater the elasticity of demand. TIME The longer the interval of time considered, the more elastic the demand for the commodity.

PRICE ELASTICITY OF DEMAND Price elasticity of demand or elasticity of demand is defined as the ratio of the percentage change in quantity demanded to the percentage change in price that brings about the change in quantity demanded. Elasticity of Demand = Percentage Change in Quantity Demand or Price Remember that when the demand for an item is inelastic, a change in price will have a relatively small effect on the quantity demanded. On the other hand, when the demand for an item is elastic, a change in price will have a relatively large effect on the quantity demanded

SUPPLY

Is defined as the number of items that sellers are willing and able to sell in the market at different prices during some specified period or time. MARKET SUPPLY Is the sum of all individual supply.

SUPPLY SCHEDULE Is a table showing the quantity of an item seller would offer for sale at different prices. Price

Quantity Demanded

Php. 300. 00 Php. 250. 00 Php. 200. 00 Php. 150. 00 Php. 100. 00

50 40 30 20 10

SUPPLY CURVE A supply curve is a graph of the supply schedule. It shows the relationship between the price of an item and the number of the unit sellers will offer. It slopes upward, from left to right.

Price

300 250 200

150 100

Quantity Demand

10

20

30

40

50

LAW OF SUPPLY As the supply schedule shows, the seller would be willing to sell more items at high prices than at lower price. The law of supply states that sellers will offer more of an item at high price and less at low price.

To make profit. The higher the price of a certain commodity , the more a seller will be encouraged to sell to earn a profit. Law of supply simply shows the direct relationship between price and quantity supplied.

QUANTITY SUPPLIED The Number of goods that individuals are willing and able to sell at a particular price during a particular period of time. CHANGES IN QUANTITY SUPPLIED A change in quantity supplied refers to a movement along a supply curve. The only factor that can directly cause a change in quantity supplied of good is a change in the price of a certain product, or own price.

CHANGES IN SUPPLY A change in supply refers to a shift in the supply curve. Like demand, supply in a market typically responds to different factors other than price. TECHNOLOGICAL PROGRESS Inventions and innovations tend to make it possible to produce more or better products with the same resources. NUMBER OF SELLERS

Increase in the number of sellers will increase the supply of goods and services in the market.

COST OF PRODUCTION Changes in input prices also changes the supply of goods. Increase in minimum wage of workers will increase the price of input and some producers cannot afford to pay the increase in wages, supply will decrease due to decrease in the number of workers.

EXPECTATIONS OF FUTURE PRICE If producers expect prices to increase in the future, they may increase they production now to gain profit when prices of that particular goods increases. If prices are expected to decrease in the future, producers may reduce production.

If any of these factors occur, the supply schedule and the supply curve will change so that the quantity supplied at any particular price would be less that in the original supply schedule. If the supply increases, the curve shifts to the right, and if supply decrease, the curve shifts to the left.

ELASTICITY OF SUPPLY Is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. High elasticity indicates the supply is sensitive to changes in prices, low elasticity indicates little sensitivity to price changes, and no elasticity means no relationship with price. Also called price elasticity of supply.

PRICE ELASTICITY OF SUPPLY Measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes. ELASTICITY OF SUPPLY = Percentage Change in Quantity Supplied/Percentage Change in Price

While the coefficient for elasticity of supply is positive in values, it may range from 0, perfectly inelastic, to infinite, perfectly elastic. Consider the following example: A firm’s market price increases from Php. 1.00 to Php. 1.10, and the supply increases from 10 units to 12.5 units. ṢE = (12.5 – 10.0/10) / (1.10 – 1.00/1.00) = (2.5/10) / (.10/1.00) =.25/.1 =2.5

If a change in price has little effect on the quantity of a good or service offered for sale, the supply is inelastic. When a small change in price produces a large change in the quantity offered for sale, then the supply of the good or service is elastic.

DETERMINANTS OF THE ELASTICITY OF SUPPLY LIMITED AMOUNT OF RAW MATERIALS The limited amount of raw materials could limit the amount of a goods that can be produced. DIFFICULTY OF PRODUCING GOODS

If the good is very difficult to produce to the producer, it becomes more inelastic.

TIME PERIOD MARKET PERIOD It is a period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply. SHORT RUN It is a period of time too short to allow or adjustments to plant (fixed plant assumptions). More labour can be applied, but plant and equipment are fixed.

LONG RUN Producer has sufficient time respond to increase in price, manufacturing firms can build new facilities, allow entry and exit from an industry. The elasticity of supply becomes more elastic.

PRODUCTION SURPLUS

A producer with unused capacity will respond immediately when price changes. INVENTORIES A producer with a large number of goods can quickly increase the amount of supply it delivers to the market.

SUPPLY AND DEMAND: MARKET EQUILIBRIUM Market equilibrium refers a condition where a market price is established through competition such that the amount of goods or services purchased by buyers is equal to the amount of goods or services produced by sellers.

To illustrate, the following table combines the demand and supply schedules for T-shirts. Table 3 Demand and Supply of T- shirts Quantity Demanded

Price

Quantity Supplied

Qs – Qi (+surplus; shortage)

10

300.00

50

+40

20

250.00

40

+20

30

200.00

30

0

40

150.00

20

-20

50

100.00

10

-40

Table 3 and Figure 6 shows that the market price would be Php200.00 because at that price the quantity of T-shirts demanded and the quantity supplied are exactly equal. Once an equilibrium price is established, prices will go up and down some, but they seldom stray far from equilibrium.

EXCESS QUANTITY DEMANDED

Supposes T- shirts sold for Php150.00. according to the Demand and Supply Schedule (Table 3), at that price consumers would be willing and able to buy 40 shirts. But you would not be willing to sell T- shirts at low price. You would supply only 20 shirts at that price. At Php150.00 demand is greater than supply. There would be an excess demand of 20 shirts.

You would sell your T- shirts at higher price until the quantity that you were willing to supply equalled the quantity consumers were willing and able to buy. An excess quantity demanded will lead to price increases which will continue until demand and supply are equal.

EXCESS QUANTITY SUPPLIED Suppose you began selling T-shirts at Php250.00 each. At that price (see Table 3) only 20 students would be interested in a shirt. However, you hope to sell 40 shirts. There would be an excess supplied of 20 shirts. You would sell your T-shirts at lower price until the quantity supplied exactly equalled the quantity demanded.

WHAT CAN CHANGE EQUILIBRIUM PRICE AND QUANTITY? EQUILIBRIUM PRICE AND QUANTITY are determined by supply and demand. Whenever price changes, supply changes, or both change, equilibrium price and quantity change. The following figure illustrates the different changes in supply and demand, where either supply or demand changes:

DEMAND INCREASES, SUPPLY REMAIN CONSTANT The demand curve shifts rightward from D1 to D2 and supply curve does not move as a result of increase in demand and constant supply, the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2.

DEMAND DECREASES SUPPLY REMAIN COMSTANT The demand curve shifts leftward from D1 to D2 and supply curve does not move as a result of decrease in demand and constant supply, the equilibrium price decrease from P1 to P2, and the equilibrium quantity decrease from Q1 to Q2.

SUPPLY INCREASES, DEMAND REMAIN CONSTANT The supply curve shifts rightward from S1 to S2 and demand does not move as a result of increase in supply and constant demand, the equilibrium price increase from P1 to P2, and the equilibrium quantity increase from Q1 to Q3.

SUPPLY DECREASES, DEMAND REMAIN CONSTANT The supply curve shifts leftward from S1 toS2 and demand curve does not move as a result of decrease in supply and constant demand, the equilibrium quantity decrease from Q1 to Q3.

DEMAND INCREASES, SUPPLY DECREASES The demand curve shifts rightward from D1 to D2, and supply curve shifts leftward from S1 to S2 by an equal amount. As a result, the equilibrium price rises from P1 to P2, and the equilibrium quantity remains constant at Q1.

DEMAND DECREASES, SUPPLY INCREASES The demand curve shifts leftward from D1 to D2, and supply curve shifts rightward from S1 to S2 by an equal amount. As a result, the equilibrium price decrease from P1 to P2, and the equilibrium quantity is constant at Q1.

DEMAND INCREASES BY A GREATER AMOUNT, SUPPLY DECREASES BY A SMALLER AMOUNT The demand curve shifts rightward from D1 to D2, and the supply curve shifts leftward from S1 to S2. As a result, the equilibrium price increase from P1 to P2, and the equilibrium quantity increases from Q1 to Q2.

DEMAND INCREASES BY A SMALLER AMOUNT, SUPPLY DECREASES BY A GREATER AMOUNT The demand curve shifts rightward from D1 to D2 and the supply curve shifts leftward from S1 to S2. The equilibrium price increases from P1 to P2, and the equilibrium quantity decreases from Q1 to Q4.

BASIC CONSUMER GOODS IN THE PHILIPPINES Oil Products like gasoline, diesel, liquefied petroleum gas (LPG) Processed and Manufactured Commodities Canned goods Processed milk Instant noodles Bread Commercial rice Sugar Cooking oil Meat and poultry Fish vegetables Basic medicines

WHAT CAUSES COMMODITIES PRICE TO CHANGE?

1. When supply exceeds demand, prices fall and when demand is greater than supply prices rise. When people’s income increases, their purchasing power increases and result to greater demand for commodities to make their life comfortable.

Demand for crude oil and gasoline increase as more people buy automobiles; demand for gold increase because of greater demand for jewelleries, and greater demand for commercial rice, meat, poultry products, sugar, and coffee, among others.

Changes in technology and decrease in production costs, output increases. With the increase in supply of goods, the company needs to decrease their price to sell their surplus.

2. Natural disasters can also cause prices to change like the El Nino and La Nina climate phenomenon, volcanic eruptions, earthquakes, typhoon, and landslides, among others. 3. Production costs can also cause price to rise or fall like the implementation of Salary Standardization Law and Minimum Wage Law, and the shifting of production from human to technology.

WHAT ARE THE ADVANTAGES OF RISING AND FALLING OF PRICES OF COMMODITIES? 1. Consumers will benefits from low prices in the form of cheaper gas or diesel, cheaper utilities and lower inflation. 2. Consumers will benefits from low prices of goods and services. 3. Industries like manufacturing, mining and trade will benefits due to decrease in production costs.

3. Producer’s profit will increase due to increase in the price of their output. 4. Government income in the form of taxation will increase due to increase in business and employment opportunities from both private and public sectors.

WHAT ARE THE DISADVANTAGES OF RISING AND FALLING OF PRICES OF COMMODITIES? 1. Falling oil prices will hurt the economies of oil producing countries Brazil, Middle East, and Russia. 2. Low prices will discourage investors/producers to invest/produce.

3. Government will be affected by falling prices of oil in the Middle East. The Overseas Filipino Workers (OFW) remittances will decline due to freeze hiring or outright layoffs. 4. Unemployment will increase and government income will be affected when the OFW’s working in the oil producing countries return to their mother country.

WHEN CAN BE DONE TO STABILIZE PRICES OF BASIC COMMODITIES?

1. Maintain an adequate food stocks in the local, regional and national levels. 2. More investments on the infrastructure projects that promote irrigation in the local and regional levels. 3. Implementation of House Bill No. 24190 (“An Act Granting Stand-By Power to the President of the Philippines to Control and Stabilize Prices of Prime Commodities in times of Shortage, Emergency and/or Calamity).