Law of Supply & Demand

Basic Elements of Demand & SupplyThe fundamental economic problem calls for making definite decisions on what goods to produce, how they shall be produced, and for whom they shall be produced. The Market market e!ists when buyers wishing to e!change money for a good or ser"ice are in contact with sellers wishing to e!change goods or ser"ices for money.#t is also where the forces of demand and supply interact.How a Market FunctionsMarkets a re strictly made up of buyers and sellers.The actions and decisions of buyers constitute demand for a product or ser"ice, while the sellers decisions and actions constitute supply.Markets are important because they act as the mechanism by which resources are allocated.$or instance, when a buyer decides on purchasing a certain commodity on a regular basis, he is sending a signal to the seller to produce the wanted commodity on a regular basis.Market Demand -%efers to the buyers willingness and ability to pay a sum of money for some amount of a particular good or ser"ice.&owe"er the 'uantity demanded of a good or ser"ice will depend on factors such as needs, preferences, income level, expectations about the future, prices of commodities,the buyers situation, etc.The most important consideration, howe"er is the price.The relationship between price & 'uantity demanded is the sub(ect of the law of demand.Stated in simple terms, the law of demand indicates that the 'uantity of any good which buyers are ready to purchase "aries in"ersely with the price of the good.This means that the people will tend to buy more of a product as its price decreases, assuming that all other factors influencing demand remain constant. &ypothetical Demand Schedule of Beef per Month in Manila Price of Beef (Per kilo)Quantity Demanded (in kilos)) *++.++ ,+ -.+.++ 60 -,+.++ 90 -/+.++ 110 --+.++ 130 -++.++ 160$rom the foregoing, it is shown that an indi"idual would tend to buy more when its is low than when the price is high.t a price of )*++.++, 'uantity demanded by the consumers is ,+ kilos while a decrease of price to )-++.++ increases the 'uantity demanded of the consumers to -0+ kilos.Demand Means the desire for a particular good backed up by sufficient purchasing power.Demand is also the schedule of "arious 'uantities of commodities which buyers are willing to purchase at "arious prices in a gi"en time and place.)otential Demand1demand does not mean mere need or desire, which is not backed up by the ability to pay or no purchasing.Effecti"e Demand1 the demand, which is backed up by the ability to pay.Demand then refers to the actual purchase of a good or ser"ice.Determinants of Demand#ncome 2 people buy more goods and ser"ice when their income increases, but will buy less if their income decreases, thus, affecting the demand for goods and ser"ices.n increase in demand will either increase or decrease demand depending upon the kind of community.)opulation 2 more people means more demand for goods and ser"ices. That is why, there are more buyers in the city stores than in the barrio stores.Conversely, less population means less demand for goods and ser"ices.bviously, business is poor in the rural areas compared to business in the urban areas.Tastes and )references 2 demand for goods and ser"ices increases when people like or prefer them.Such tastes or preferences are greatly influenced by ad"ertisement or fashion.3n the other hand, if a certain product is out of fashion, the demand for it decreases.)rice E!pectations 1 4hen people e!pect the prices of goods, especially basic commodities like rice, soap, cooking oil or sugar to increase tomorrow or ne!t week, they will buy more of these goods. #n the same manner, they decrease their demand for each product if they e!pect price to decline tomorrow or in the a few days.The reason for such consumers beha"ior is to economi!e.)rices of %elated 5oods1 when the price of a certain good increases, people tend to buy substitute products.$or e!ample, if the price of 6olgate increases, consumers buy less of 6olgate and more of the close substitute like 6lose1up or &apee.This means, the demand for 6olgate decreases while the demand for substitutes increases."his means if the price of one #ood increases,the demand for the other #ood increases.The 7aw of Demand may be stated as the 'uantity of a commodity which buyers will buy at a gi"en time and place will "ary in"ersely with the price.This means that as price increases, 'uantity demanded decreases, and as price decreases, 'uantity demanded increases other things are constant .#ncome Effectt lower prices, an indi"idual has a greater purchasing power.This means, he can buy more goods and ser"ices.But at higher prices, naturally, he can buy less.Substitution Effect6onsumers tend to buy goods with lower prices.#n case the price of a product that they are buying increases, they look for substitutes whose prices are lower."hus, the demand for hi#her priced #oods $ill decrease.Ceteres Paribus assumptionThe law demand states that as price increases, 'uantity demanded decreases and as price decreases, 'uantity demanded increases.%uch theory is true if $e apply the Ceteres paribus assumption $herein it assumes that all otherthin#s e&ual or constant.'8on1)rice Determinants-. "erage #ncome of 6onsumers 2)ersons basically purchase the necessities with their income.s their income increase, howe"er, they tend to buy more of the things they like to buy.( family $ith a car, for e.#., may purchase a second unit.( person $ith t$o pairs of shoes may buy another pair.2Si9e of the Market1 the demand cur"e is affected by the number of people li"ing in a gi"en area. market with a big population like Metro Manila tends to buy more appliances and electricity than a less populated region like 6agayan :alley. /. price and a"ailability of related goods 1 goods that are related tend to influence each others demand.%elated goods & ser"ices are of two types;substitutes and complementsSubstitutes 2 are goods that compete with each other such as meat and fish.6omplements 2 are goods that are used (ointly, like cement and steel bars.