demand, supply, and market equilibrium point
TRANSCRIPT
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DEMAND FUNCTION
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DEMAND It is the quantity of goodsthat a consumer would be
willing and able to buy atdifferent prices duringsome specified period of
time.
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DEMAND Once the particular price
of a commodity goes
down, consumers’ demandfor that commodity goesup. When price of
commodity goes up,consumers’ demand goes
down.
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DEMAND FUNCTION It is the number of units x
that consumers are willing
to purchase at a givenprice per unit y of commodities.
The equation can be written in the form:
= ( )
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DEMAND FUNCTION Based on the law of
demand, the relationship
between prices (denoted by y) and the quantity demanded (denoted by x )
is most often inverse, thus,its demand function is a
decreasing line.
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Select-O Company analyzed its sales andfound out that their ice cream sales increases
by 200 gallons for every P10 reduction inprice. Customers buy 800 gallons at a price
of P1,000.
EXAMPLE
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To identify the demand equation, we will use the formula:
=
1000 =10
200800
=−
+ 1040
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Graphing the said equation…
0, 1040
20800, 0
-200
0
200
400
600
800
1000
1200
0 5000 10000 15000 20000 25000
Price
Quantity Demanded
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The y-intercept means thatthe highest price to be paidfor the ice cream is P1,040
and the x -intercept meansthat the largest quantity that will be demanded is
20,800 gallons of ice cream.
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SUPPLY FUNCTION
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SUPPLY It is the quantity of goodsthat a producer would be
willing and able toproduce to make availablefor sale in the market at various prices during a
specified period of time.
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SUPPLY As price of commodity
goes up, quantity supplied
goes up, too. When theprice of commodity goesdown, producers tend to
keep or reduce supplies of commodity.
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SUPPLY FUNCTION It is the relationship
specifying the amount of
any commodity thatmanufacturers or sellerscan make available in themarket at various prices.
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Select-O Company is willing to supply themarket 1,200 gallons of ice cream at P1,000per gallon. At a price of P1,500 per gallon of
the same ice cream, the company will supply
the market 2,000 gallons.(Assume that the supply equation is linear)
EXAMPLE
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To identify the supply equation, we will use again the formula:
=
1000 = 1500 10002000 1200 1200
1000 =500
800
1200
=58
+ 250
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Graphing the said equation…
0, 250
1200, 1000
2000, 1500
0
200
400
600
800
1000
1200
1400
1600
0 500 1000 1500 2000 2500
Price
Quantity Supplied
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The y-intercept means that
the lowest price the supplier would sell the ice cream is
P250.
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SPECIALCASES
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SPECIALCASES The line is either a
demand or a supply
function if the line ishorizontal or vertical andit passes at Quadrant I.
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EXAMPLES
0
100
200
300
400
500
600
0 200 400 600 800 1000 1200
Price isconstant at
varyingquantity of
goodsdemanded /supplied.
y = b
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0
200
400
600
800
1000
1200
0 100 200 300 400 500 600
Quantity demanded / supplied is
constant while the price varies
x = a
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NOTE: A line is neither ademand nor a supply function if
the line is outside the Quadrant I.
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These lines have equations with:a) A negative slope with a y-
intercept of either zero or anegative number.
b) A zero slope (horizontal line) with a y-intercept of eitherzero or a negative number.
c) Undefined slope (vertical line) with an x -intercept of either
zero or a negative number.
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M ARKETEQUILIBRIUM A market is said to have
reached its equilibriumpoint when the quantity
demanded is equal toquantity supplied at a
certain price per unit of commodity and there are
no internal forces tosudden change.
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M ARKETEQUILIBRIUM Illustrating this situationin a Cartesian Plane, the
supply and demand curveintersects and this
intersection is called themarket equilibrium point
(MEP).
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EQUILIBRIUM PRICE It is the price that
balances quantity suppliedand quantity demanded.
On a graph, it is the priceat which the supply and
demand curves intersect.
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EQUILIBRIUM Q UANTITY It is the quantity supplied
and the quantity demanded at the
equilibrium price.On a graph, it is the
quantity at which thesupply and demand curves
intersect.
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SOLVING FOR THE MEP Algebraically, the marketequilibrium point (MEP)can be solved by solving
demand and supply equations simultaneously.
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EXAMPLE
From our given example on demand andsupply, we arrived at the following
equations:
D: =−
+ 1040
S: = + 250
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To solve this, we will use theelimination method:
From the given equations, sinceit’s easier to eliminate y, we will
subtract the two equations.
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=−
+ 1040
= + 250
0 =−
+ 790
= 790 = 1170.37
The market eqm. quantity is 1170 units.
_______________
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To get the market equilibriumprice, simply substitute the valueof x to any of the two equations:
= + 250
= 1170.37 + 250
= 981.48
The market equilibrium price isP981.48 .
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Graphing the two equations…
0
200
400
600
800
1000
1200
1400
1600
0 5000 10000 15000 20000 25000
P
rice
Quantity Demanded / Supplied
MEP (1170.37, 981.48)Surplus
Shortage
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Excess supply, or surplus, is thecondition that exists whenquantity supplied exceeds
quantity demanded at the currentprice.
Excess demand, or shortage, isthe condition that exists when
quantity demanded exceedsquantity supplied at the current
price.
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SOLVING FOR THE M.E.P.(NON-LINEAR EQUATIONS )
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Determine which is the demand and thesupply function and find its MEP.
16 + 9 = 144
9 4 = 36
NON-LINEAR
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Since the second equation has apositive slope, we can say that itis the supply function and the
other one is the demand function.
D: 16 + 9 = 144
S: 9 4 = 36
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Observing the two givenequations, we can say that we canuse the elimination method since
there are similar terms betweenthe two.
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Let’s now apply the eliminationmethod:
9 + 16 = 144
9 4 = 36
20 = 108 =
= 5.40 = 2.32
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Substitute the value of x to any of the two equations.
9 4 = 36
9 4 =36
9 = 36 + 21.6
=.
=.
= P2.53
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Graphing the two equations…
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0 1 2 3 4 5 6
P
rice
Quantity Demanded / Supplied
MEP (2.32, 2.53)
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