APPLIED ECONOMICS
Application of Supply
and Demand
LESSON 1: LAW OF SUPPLY AND DEMAND, AND HOW
EQUILIBRIUM PRICE AND QUANTITY ARE DETERMINED
APPLIED ECONOMICS
Application of Supply
and Demand
THE MARKET
A market is any activity for business set-up.
APPLIED
ECONOMICS
It is where consumer buys and the seller sells.
It is categorized as local, national and international markets. .
Application of Supply
and Demand
Some involves face-to-face contact between demander and
supplier, others are impersonal, with buyer and seller never
seeing or knowing each other.
DEMAND
Demand is the value of goods and services that buyers are
APPLIED
willing to purchase
in everyECONOMICS
price.
A demand schedule depicts the different quantities the
consumer is willing to buy at numerous prices.
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
At price P10, Juan is willing to buy one empanada for a given
period. As price goes down to P8, the quantity he is willing to
APPLIED ECONOMICS
buy goes up to two . At price of P2, he will buy five. There is
an indirect relationship between the price of a commodity
and the quantity
demanded forof
that
good. The lower price
Application
Supply
allows the consumer to buy more, but as price rises, the
and
Demand
amount the consumer can afford to buy tends to go down.
THE LAW OF DEMAND
The law of demand is the basic principle of economics. After
observing the behavior
of price
and quantity demanded in the
APPLIED
ECONOMICS
above schedule, we can now state the Law of Demand. Using the
assumption “ceteris paribus”, meaning all other things being
constant, there is an inverse relationship between the price of a
good and the quantity demanded for that good. The higher price
consumers will demand a lower quantity of a good. The low price
of the good influences the consumer to buy more.
Application of Supply
and Demand
SUPPLY
Supply describes
the
total
value
of
a
good
or
service
APPLIED ECONOMICS
that is available to customers.
The supplyApplication
schedule illustrates
different quantities
of Supply
the seller is keen to sell at various prices.
and Demand
The supply function shows the dependence of
supply on various determinants that affect it.
Assuming that the supply function is given as
Qs = 100+5P and is used to determine the quantities
supplied at the given
prices.ECONOMICS
APPLIED
Application of Supply
and Demand
As can be seen in Table 1.2, the relationship between the price of
Rice and the Quantity that James is willing to sell is direct. The
greater the price, the higher the quantity supplied.
THE LAW OF SUPPLY
APPLIED ECONOMICS
Application of Supply
and Demand
Supply and Demand: MARKET EQUILIBRIUM
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Supply and demand are essential in the market economy. Supply and demand influenced
each other and does impact the prices of consumer goods and services within an
economy. Rising and decreasing in commodities prices, abundance and limited supply is
well understood by analyzing the impact of the factors affecting demand and supply.
Sellers and consumers play a crucial role as to how prices are determined. As sellers, it is
important to know what are the factors affecting consumers’ demand and to come up
with better strategies in delivering good quality products and services to consumers to
ensure good value for money. As buyers, it is important to know how sellers priced their
products based on the factors affecting supply and demand. Better understanding of this
aspect helps the consumers on making wise buying decisions. In general, both sellers and
buyers will have a better understanding and grasp as to how buying and selling activities
Application of Supply
and Demand
affects the economy as a whole.
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
The non-price factors once ceteris paribus assumption is dropped are now allowed
to influence Supply. Cited below are the non-price factors affecting Supply:
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Buyers and sellers play a significant role in the marketplace. A lot of studies have been
published regarding how demand and supply affect the commodities prices. In this
module, we are more focused on discussing and analyzing how the prices of different
commodities impact the consumers. Prices of commodities can go up, stabilized or go
down. Learning an idea of the basic knowledge on “how and why” the price of good
and services increase and decrease in our country. It widened your understanding on
what are the factors that affect the prices of commodities and how this affects the
buying behaviour and purchasing power of the consumers. Furthermore, there are
some activities that capture your interest to better understand the lesson. These
activities will measure your decision making and learning to approve judgment in a
particular situation. It will also give you practical scenarios that will help you in your
buying decisions.
Application of Supply
and Demand
Price of basic commodities
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
Market Structures (perfect competition, monopoly,
oligopoly, and monopolistic competition)
APPLIED ECONOMICS
What is a Market Structure?
Application of Supply
and Demand
Market structure (also called market forms) describes the state
of a market with regards to competition or the actual settings in
the market.
It also refers to the organizational characteristics that establish
interrelationships between the buyers and sellers of a particular
market. Thus, the participation of buyers and sellers are vital.
Market Structures (perfect competition, monopoly,
oligopoly, and monopolistic competition)
APPLIED
ECONOMICS
Competition
is rivalry among many sellers in a particular market. As a
student we are always competing each other like sports, quiz
bees and other school related competition activities. Thus
competition may help motivates us to perform well to achieve
our goals in life.
Market has impersonal competition among sellers who
compete to sell their goods and services among purchasers who
use their purchasing power to acquire the availability of
products.
Application of Supply
and Demand
MARKET FORMS
Perfect Competition
APPLIED ECONOMICS
This is a type of market form in which there are more firms that
sell the same products or render services and no one has enough
market power to be able to set prices on the product or service
without losing business as the conditions for perfect competition
are strict, there are only a few markets that are considered to be
perfectly competitive thus this market form only exist to compare
with other market forms.
Application of Supply
and Demand
MARKET FORMS
Perfect Competition
APPLIED ECONOMICS
A perfectly competitive market assumes a huge number of
companies to sell the same products. We call these companies
"price takers" because they have no market power or ability to
control prices.
Application of Supply
and Demand
MARKET FORMS
Perfect Competition
APPLIED ECONOMICS
Application of Supply
and Demand
MARKET FORMS
Imperfect Competition
APPLIED ECONOMICS
in other markets, one or more of the assumptions of perfect
competition will not be met; thus, the market becomes
imperfectly competitive.
Application of Supply
and Demand
MARKET FORMS
TYPES OF IMPERFECTLY COMPETITIVE
MARKETS
APPLIED
ECONOMICS
1. MONOPOLY
 It exists when a single firm that sells in that market has no
close substitutes .
 the existence of monopoly depends on how easy it is for
consumers to substitute the products for those of other sellers.
 consumers tend to have a bad image of a monopoly.
Application of Supply
and Demand
MARKET FORMSTYPES OF
IMPERFECTLY COMPETITIVE MARKETS
ECONOMICS
MONOPOLY CAN APPLIED
EXIST FOR
THE FOLLOWING REASONS
 A single seller has control of entiRe supply of raw materials
 ownership of patent or copyright is invested in a single seller.
 the producer will enjoy economies of scale, which are savings
from a large range of outputs.
 grant of government franchise to a single firm.
Application of Supply
and Demand
MARKET FORMSTYPES OF
IMPERFECTLY COMPETITIVE MARKETS
ECONOMICS
DISADVANTAGES APPLIED
OF MONOPOLY
 nO MARKET POWER, because it faces indirect competition for
consumers’ money for all goods
 quantity of output will be lower to enable him to set the price
higher.
 more barriers like government restrictions, patents and
copyrights.
 downward sloping demand curve. meaning the lower the
price, the higher the quantity that will be bought by the
consumers.
Application of Supply
and Demand
MARKET FORMSTYPES OF
IMPERFECTLY COMPETITIVE MARKETS
APPLIED ECONOMICS
2. MONOPOLISTIC COMPETITION
 PRODUCTS ARE DIFFERENTIATED AND ENTRY AND EXIT IS EASY.
 a blend of competition and monopoly
 firms sell differentiated products which are highly
substitutable but are not perfect substitutes
 many sellers offer heterogenous or differentiated products,
similar but not identical and satisfy the same basic need
 changes in product characteristics to increase appeal using
brand, flavor, consistency and packaging as means to attract
customers.
Application of Supply
and Demand
MARKET FORMSTYPES OF
IMPERFECTLY COMPETITIVE MARKETS
APPLIED ECONOMICS
2. MONOPOLISTIC COMPETITION
 there is free entry and exitin the market that enables the
existence of many sellers
 similar to monopoly
Application of Supply
and Demand
APPLIED ECONOMICS
Application of Supply
and Demand
What is Purchasing Power?
 Purchasing power is the equivalent rate of a currency
APPLIED
ECONOMICS
expressed in terms
of the value
of goods or services that a unit
of money can buy. Price increases reduce the purchasing power
of money that in turn has an adverse impact on consumers'
welfare. It is vital because, all else being equal, inflation
decreases the amount of products or services you would be
able to purchase. Purchasing power of people is always
affected in a community with a contemporary issue such as
migration, unemployment, fluctuation in the exchange rate,
peace and order, etc.
Application of Supply
and Demand
Migration
 To move from one country , place or locality to another.
APPLIED
 Economic migration
forms aECONOMICS
large part of the reason why
people migrate. Discretions to transfer can be influenced by
high poverty in the country or area of origin. Through the
social systems, people receive information from people who
already migrated to other cities or countries.
Application of Supply
and Demand
What are the causes of migration?
 Poverty
APPLIED ECONOMICS
 2. Unemployment
 3. Improve standard of living
 4. Higher Salary
 5. Economic Security
Application of Supply
and Demand
Unemployment
 Unemployment is a condition of not being currently employed.
APPLIED
ECONOMICS
Those not employed
will encounter
a reduction in their living
standards, as their income decreases. The jobless person will
have less purchasing power, and less disposable income. Thus,
for people with the little means of living, they will also adjust
their spending. They will look forward to any opportunity of
help from others and limiting their purchasing power not same
good as before. Lastly people having no means at all they will
become more aggressive and worried from coming
opportunities in life.
Application of Supply
and Demand
Fluctuations in exchange rate
 EXCHANGE RATE - the ratio at which the principal unit of two
APPLIED
currencies may be
traded. ECONOMICS
 The value of the exchange rate is important in creating
national policies especially in open economies. It is also
important in guiding the exporting and exporting of a country.
Application of Supply
and Demand
 For example, the Philippine peso (PHP) in a United States dollar
(USD) in 2018 was almost P53.1424 per $ 1. The peso rate of a
Japanese yen (JPY) in 2018 was almost P0.46787 per ¥ 1. The
pesos rate of Thailand (baht) in 2018 was almost 1.6259 per
TBH.
Oil Price Increases
 During big-time oil price increases in the country, you can hear
APPLIED
ECONOMICS
everyone complaining
about
how harder it will be to make
ends meet. Some will go to the extent of politicizing the price
increase just to be able to throw some blames to the President.
It’s more than a peso increase per liter. People are complaining
because whenever there is an increase in gasoline there is a
tendency of decreasing purchasing power and spend less on
the disposal of income.
Application of Supply
and Demand
Peace and Order
 Peace and order is a vital element in maintaining economic
APPLIED
ECONOMICS
development, social
order and
political firmness. Through the
help of the executive orders of the government, it helps in
maintaining social order, political stability.
Application of Supply
 A condition of peace and order enables the growth of funds,
and
Demand
generates more employment opportunities and attracts more
tourists. Peace is the absence of aggression and is
characterized by healthy social and international connections,
fairness and parity.
APPLIED ECONOMICS
Application of Supply
and Demand