Lesson 4 of Microeconomics

THE DEMAND CURVE

DEMAND - is a relation showing the quantities of a good that consumers are

willing and able to buy per period at various prices, other things constant. The law of
demand states that the quantity of a good demanded per period relates inversely or
negatively to its price, other things constant. Thus, the higher the price, the smaller the
quantity demanded. The lower the price, the greater the quantity demanded.

EFFECT - change in relative price- the price of one good relative to the prices of
other goods- causes the substitution effect.

INCOME EFFECT - Your money income is simply the number of pesos you
receive per period.
Income effect of a price change
Because of the income effect, consumers typically increase their quantity demanded
after a price decrease.
Because of the income effect of a price increase, consumers typically reduce their
quantity demanded after a price increase.

MARGINAL UTILITY - refers to the change in total utility resulting from one
unit change in consumption of a good.

The law of diminishing marginal utility states that the more of a good an
individual consumes per period, other things constant, the smaller the marginal utility
of each additional unit consumed. Consumers buy things to increase their satisfaction.
In deciding what to buy, people make rough estimates about the marginal utility, or
marginal benefit, they expect from the good or service.
Based on this marginal benefit, people then decide how much they are willing and
able to pay. This is why it takes a decrease in price for you to increase your quantity
demanded.

DEMAND SCHEDULE AND

DEMAND CURVE
DEMAND AND QUANTITY DEMANDED
Quantity demanded refers to a specific amount of the good on the demand schedule or
the demand curve whereas demand refers to the entire demand schedule or demand
curve.

INDIVIDUAL DEMAND AND MARKET DEMAND

Individual demand is the demand of the individual consumer while market demand is
the sum of the individual demands of all consumers in the market.

MARKETS AND PRICES

A market exists when buyers and sellers interact. This interaction determines market
prices and thereby allocates scarce goods and services.

CRITICAL THINKING
Many students would like to own an iPhone X. is this considered demand? Why or
why not?
Impoverished people need formal education. Is this considered demand? Why or why
not?

Draw the demand curve for the given demand schedule.

Lesson 5: THE SUPPLY CURVE

SUPPLY - It is the relation showing the quantities of a good producers are willing and
able to sell at various prices during a given period, other things constant.

LAW OF SUPPLY - The quantity of a good supplied during a given period of time is
usually directly related to its price, other things constant.

SUPPLY CURVE - A curve, or line, showing the quantities of a particular good

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

SUPPLY CURVE
A higher price of a good makes supplying that good more profitable and attracts
resources from lower-valued uses. Higher prices also increases the producer's ability
to supply the good. A higher price makes producers more willing and more able to
increase quantity supplied.

SUPPLY & QUANTITY SUPPLIED - Supply is the entire relation between

price and quantity supplied. Quantity supplied refers to the amount offered for sale at
a specific price. It is the quantity supplied that increases with a higher price, not
supply.

ELASTICITY OF SUPPLY - Prices are signals to both sides of the markets

about the relative scarcity of products. High prices discourage consumption but
encourage production. Low prices encourage consumption but discourages
production. Elasticity of supply measures how responsive consumers are to a price
change. Likewise, it measures how responsive producers are to a price change.

ES = percent change in quantity supplied

percent change in price

ES > 1.0, elastic

ES = 1.0 unit elastic
ES < 1.0 inelastic

DETERMINANTS OF SUPPLY ELASTICITY

LENGTH OF ADJUSTMENT PERIOD - Supply becomes more elastic over

time as producers adjust to price changes. The longer the adjustment period under
consideration, the more easily the producers can adapt to price changes. The elasticity
of supply is typically greater the longer the period of adjustment.

DETERMINANTS OF SUPPLY

CHANGE IN THE COST OF RESOURCES - An increase in supply, that is

a rightward shift of the supply curve means that the producers are willing and able to
supply more of a product at each price.

CHANGE IN THE PRICE OF OTHER GOODS - A change in the price of

a good that resources could produce affects the profit incentives for makers of another
good.
Example: flour for pizza & spaghetti

CHANGE IN TECHNOLOGY - Technological change lowers the cost of

producing goods that involve computers, from automobile manufacturing to document
processing. Improvements in technology make firms willing and able to supply more
of a good at each price. The supply curve shifts to the right.

CHANGE IN PRODUCER EXPECTATIONS - If a supplier of a good

expect the price to increase in the future, some may expand their production capacity
now. Expecting higher prices in the future might prompt some producers to reduce
their current supply while awaiting the higher price. An expectation of a higher price
in the future could either increase or decrease current supply, depending on the good.

CHANGE IN THE NUMBER OF SELLERS

Government regulations may influence market supply.

A change in PRICE causes a MOVEMENT ALONG the supply curve.

A change in one of the DETERMINANTS of supply other than the price causes a
SHIFT OF a supply curve to the right or left.
SUPPLY AND DEMAND
 The demand curve is a schedule that shows the level of consumption at
alternative prices at a given point in time. The demand curve of a commodity
summarizes the benefits derived by the consumers from the purchase of a good or
service.
 The supply curve shows the amount of output producers are willing to sell at
alternative prices at a given point in time. The supply curve incorporates the
sacrifices and costs incurred by the seller in producing a commodity.

1. To the buyer, the price is his payment for the purchase of a commodity. His
willingness to purchase the commodity at the market price implies that the additional
satisfaction he derives from the consumption of the commodity is equivalent to the
market price.
2. When the supplier accepts the price as payment for the sale of a commodity, it
implies that the price can compensate for the additional costs incurred in producing a
unit of a commodity.
3. Thus, the price agreed upon in the market is an indicator of marginal benefits to the
buyers and at the same time marginal costs to sellers.

DEMAND CURVE

OTHER
FACTORS
AFFECTING THE DEMAND OF A COMMODITY
 INCOME
A higher level of income will give him higher capacity to consume while a lower
income will give him limited purchasing power. As a result, richer families have
higher levels of consumption while poorer families have lower and limited
consumption.
 PRICES OF OTHER COMMODITIES
The demand for a good or service may also be influenced by the prices of other goods
and services. When the price of beef increases, the demand for chicken will increase
since beef and chicken may be considered as substitute goods. On the other hand, if
the other good is a complementary good, a decrease in its price will impact positively
on the demand of the good being investigated. When the price of bread decreases, the
demand for butte may increase since butter and bread are complementary goods.
 EXPECTATIONS
The expectation or prospect on what is going to happen to the price can influence the
demand for the commodity. If you believe that the price of gasoline will increase
tomorrow, there is a tendency for consumers to increase their consumption today.
Similarly, if there is a prospect that the price of US dollars will decline tomorrow,
people will postpone their purchase of US dollars.
 TASTE
The formation of taste is influenced by several factors. Some of them can be shaped
by cultural values, others through peer pressure or the power of advertising. On the
celebration of New Year’s Eve, it is customary for families to have round fruits at
their fruit plate to attract good luck. This tradition was influenced by Chinese
Filipinos.
 MARKET
The size and characteristic of the market also influence the demand for a commodity.
An increasing population can contribute to the expansion of existing markets for
various commodities. A lower birth rate coupled with an ageing population may alter
the composition of demand by shifting the demand toward the needs of the elderly
away from goods and services that target the youth.

DEMAND CURVE
The demand curve shows a negative relationship between the price of the goods and
the quantity demand. As the price of a commodity declines, the quantity demand
increases and when the price increases, the quantity demand declines.

SUBSTITUTION AND INCOME EFFECTS OF A PRICE

CHANGE
 As the price of mangoes increases, the consumer will make a choice of
consuming cheaper papayas and bananas to substitute for mangoes. As a
consequence of the substitution effect, there will be a decrease in the
consumption of mangoes as the price of the mangoes increases.
 Income effects refers to the modification of the consumption of a commodity due
to the change in the purchasing power of the consumer resulting from a price
change. An increase in the purchasing power will enable the consumer to buy
more of the good while a reduction in purchasing power will reduce its capacity
to purchase. A decline in price will result in increase in quantity demand because
the purchasing power of the consumer’s income has expanded, and he can buy
more of the commodity whose price has declined.

PRINCIPLE OF DIMINISHING MARGINAL UTILITY

 As a buyer continues to consume a good his total satisfaction or utility increases,
however, the additional marginal satisfaction decreases as a buyer consumes an
additional unit of the good. Diminishing marginal utility implies that the
additional satisfaction provided by an additional commodity consumed is lower
than the additional satisfaction given by the previous level of consumption of the
commodity.
CHANGES IN DEMAND CURVE
 MOVEMENT ALONG THE DEMAND CURVE refers to the change in
quantity demand resulting from the change in the price of the commodity. As the
price of the commodity decreases, the movement along the curve will lead to an
increase in the quantity demand of the commodity. Similarly, an increase in the
price will result in the decrease in quantity demand.
 SHIFT IN DEMAND CURVE are changes in demand curve cause by any of the
factors beside the price of the commodity. Taste, price of other goods, income,
and other factors may affect the demand of a commodity positively or negatively.
A positive affect will shift the demand curve to the right. A negative impact of
these other factors on the demand for a commodity will shift the demand curve to
the left implying a decrease in the demand for the commodity in each point.
 An increase in income will shift the downward sloping demand curve to the right
since it increases the level of quantity demand at all alternative prices.