the law of supply and demand

The Law of Supply and Demand

by Jean Lee C. Patindol, c2011-12

Demand and Supply Determinants

Price of the good Non-price determinants:

Taste or level of desire for the good by the buyer

Income of the buyer Prices of related products

Substitute products (directly competes with the good in the opinion of the buyer)

Complementary products (used along with the good in the opinion of the buyer

Future expectations Expected income of the buyer Expected price of the good

For the total demand: the number of buyers in the market

Price of the good Non-price determinants:

Changes in number of producers

Resource prices (prices of the inputs necessary to produce the good)

Technological changes Prices of other goods

Substitute Complementary

Expectations of future prices Natural bounty/ calamity Government

incentives/disincentives: Subsidies Taxes


The Law of Demand, The Law of Supply

As the price of a good decreases/increases, ceteris paribus, the quantity of that good that consumers are willing and able to buy increases/decreases

There is an inverse relationship between price and quantity demanded.

Consumers want the lowest price possible.

As the price of a good decreases/increases, ceteris paribus, the quantity of that good that producers are willing and able to sell increases/decreases

There is a direct relationship between price and quantity supplied.

Producers want the highest price possible



P

Q

D

S

Pe

Qe


The Law of Supply and Demand At any price except one (Pe), the amounts that buyers are willing to buy

and the amounts that sellers are willing to sell are unequal.

It is only at the price where the amount that buyers are willing to buy and the amount that buyers are willing to sell are equal that there is market equilibrium (“the market clears”).

The intersection of supply and demand curves determines the equilibrium price and quantity.

In a competitive market, price functions to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity.

Any point above the equilibrium price and quantity is a surplus (B in next diagram) ; any point below the equilibrium price and quantity is a shortage (A in next diagram). Therefore, price floors and price ceilings become ineffective over the long term.



Price floor

Price ceiling


Demand increases/decreases; Supply is constant More consumers Decrease in taste

P

Q

D

S

Pe

Qe

D1

P1

Q1

D2

P2

Q2


Demand is constant; Supply increases/decreases

P

Q

D

S

Pe

Qe

S1

P1

Q1

S2

P2

Q2


More workers Less workers

Demand increases; Supply increases Family incomes increase from OCW remittances More home depots

P

Q

D

S

Pe

Qe

D1

S1

P1

Q1


Demand decreases; Supply decreases

Consumers tighten buying due to rising oil prices Producers curb production due to rising resource costs from rising oil prices; moving towards

recessionP

Q

D

S

Pe

Qe

D1

S1

P1

Q1


Demand increases; Supply decreases

Speculation and fears of scarcity drives people to consume more fuel Nigerian bomb blast of two major fuel plants decreases world fuel supply

P

Q

D

S

Pe

Qe

D1

S1P1

Q1


Demand decreases; Supply increases

Due to climate change consciousness, people consume less fuel Due to oil deregulation law; Producers produce more fuel

P

Q

D

S

Pe

Qe

D1

S1

P1

Q1


the law of supply and demand

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