1. CHAPTER 5: BASIC OF DEMAND AND SUPPLY

3. price and quantity demanded are inversely proportional
illustrates the negative relationship between price and quantity demanded.

4. DESIRE TO HAVE THE GOOD/ SERVICE
DEMAND
DESIRE TO HAVE THE GOOD/ SERVICE
WITH PURCHASING POWER

5. POTENTIAL EFFECTIVE w/o purchasing power With purchasing power
2 KINDS OF DEMAND
POTENTIAL
w/o purchasing power
EFFECTIVE
With purchasing power

7. PRICE AND QUANTITY DEMANDED ARE INVERSELY PROPORTIONAL
DEMAND CURVE
PRICE AND QUANTITY DEMANDED ARE INVERSELY PROPORTIONAL

8. AS PRICE INCREASES: QUANTITY DEMANDED DECREASES

9. INCOME EFFECT SUBSTITUTION EFFECT
price and quantity demanded are inversely proportional
2 reasons
INCOME EFFECT
SUBSTITUTION EFFECT

10. INCOME EFFECT
At lower prices, an individual has a greater purchasing power
buy more goods and services.
At higher prices, he can buy less

11. SUBSTITUTION EFFECT
In case the price of a product that they are buying increases,
they look for substitutes whose prices are lower.
Thus, the demand for higher priced goods will:
decrease

12. DETERMINANTS OF DEMAND
INCOME
POPULATION
TASTES AND PREFERENCES
PRICE EXPECTATIONS
PRICE OF RELATED GOODS

13. INCREASE IN INCOME = INCREASE IN DEMAND

14. MORE PEOPLE = INCREASE IN DEMAND
POPULATION
MORE PEOPLE = INCREASE IN DEMAND

15. TASTES AND PREFERENCES
DEMAND INCFREASES AS INFLUENCED BY FASHION/ ADVERTISEMENT

16. DEMAND INCREASES = PRICE IS EXPECTED TO INCREASE IN THE FUTURE
PRICE EXPECTATION
DEMAND INCREASES = PRICE IS EXPECTED TO INCREASE IN THE FUTURE

17. PRICES OF RELATED GOODS
INCREASE IN PRICE = INCREASE IN DEMAND FOR SUBSTITUTE PRODUCTS

18. CETERIS PARIBUS ASSUMPTION OF DEMAND
“assuming that the determinants of demand are constant, price and quantity demanded are inversely proportional to each other.”

19. DEMAND CURVE SHIFT & DETERMINANTS OF DEMAND
INCREASE IN DEMAND = CURVE SHIFT IS WHERE?
DECREASE IN DEMAND = CURVE SHIFT IS WHERE?

20. WILLINGNESS OF SELLERS TO PRODUCE & SELL
PRICE AND QUANTITY ARE PROPORTIONAL TO EACH OTHER

21. THE SUPPLY SCHEDULE

22. PRODUCER IS WILLING TO SUPPLY MORE PRODUCTS = INCREASE IN PRICE
SUPPLY CURVE
PRODUCER IS WILLING TO SUPPLY MORE PRODUCTS = INCREASE IN PRICE

23. DETERMINANTS OF SUPPLY
TECHNOLOGY
COST OF PRODUCTION
NUMBER OF SELLERS
TAXES AND SUBSIDIES
WEATHER

24. TECHNOLOGY
ENHANCES THE INCREASE IN SUPPLY
REDUCES COST OF PRODUCTION

25. COST OF PRODUCTION HIGH COST OF PRODUCTION = DECREASE OR INCREASE IN SUPPLY?

26. NUMBER OF SELLERS

27. CAN YOU THINKOF A PRODUCT THAT YOU ARE THE ONLY SELLER?

28. INCREASE IN TAX = DECREASE IN PRODUCTION
TAXES AND SUBSIDIES
INCREASE IN TAX = DECREASE IN PRODUCTION

29. Tax incentives are granted to foreign investors in order to increase:
foreign investment in the country

31. SUPPLY INCREASES = DEMAND SEEN ON WEATHER CHANGES

32. CETERIS PARIBUS ASSUMPTION OF SUPPLY
This means, the law of supply is valid if the determinants of supply (cost of production, technology, number of sellers, etc.) are held constant

33. SHIFT OF SUPPLY CURVE TO THE RIGHT = INCREASE IN SUPPLY

36. QUANTITY SUPPLIED & QUANTITY DEMANDED ARE EQUAL
MARKET EQUILIBRIUM
QUANTITY SUPPLIED & QUANTITY DEMANDED ARE EQUAL

37. just equal to the amount that sellers want to sell.
MARKET EQUILIBRIUM
where quantity supplied and quantity demanded are:
equal.
the amount that buyers want to pay is:
just equal to the amount that sellers want to sell.

41. ELASTICITY OF SUPPLY AND DEMAND
Price elasticity of demand
Buyers are willing and able to purchase more goods and services at lower prices than at higher prices
Price elasticity of supply
Producers or sellers tend to sell more goods and services when prices are higher

43. ELASTICITY
measure used in response to changes in the determinants of demand and supply.

44. PRICE ELASTICITY
A measure used in determining the percentage change in quantity against the percentage change in price

47. INCOME ELASTICITY
The percentage change in quantity compared to the percentage change in income.

48. CROSS ELASTICITY
The percentage change in quantity of one good compared to the percentage change in the price of related goods.

49. PRICE ELASTICITY OF DEMAND
Buyers tend to reduce their purchases :
as price increases
Buyers tend to increase their purchases:
as price falls

50. FORMULA: PRICE ELASTICITY OF DEMAND
Q2 – Q1 Q1 ______________ = P2 –P1 P1 P1 Q1 P2 Q2

51. INVERSE RELATIONSHIP OF PRICE AND QUANTITY DEMANDED
DISREGARD THE SIGN!

52. What is the meaning of your answer?
When an elasticity value is less than one, the demand is inelastic.
When it exceeds 1, it is elastic.
0.35

53. EVERY 1 % INCREASE IN PRICE = .35% DECREASE IN QUANTITY SOLD

54. The elasticity coefficient is more than 1.
TYPES OF ELASTICITY
Elastic
change in price leads to a proportionally greater percentage change in quantity demanded.
The elasticity coefficient is more than 1.

55. INELASTIC
lesser change in price evokes less than one percent change in quantity demanded
The coefficient of elasticity is less than 1

56. UNITARY
change in price leads to a proportionately equal percentage change in quantity demanded.
The coefficient of elasticity is equal to 1.

57. PERFECTLY ELASTIC
At a given price, percentage change in quantity demanded can change infinitely

58. The coefficient is zero.
PERFECTLY INELASTIC
A percentage change in price creates no change in quantity demanded.
The coefficient is zero.

59. PRICE ELASTICITY OF SUPPLY
Qs2 – Qs1 Qs1 _________________ P2 – P1 P1
QS1 P1 P2
QS2

60. DIRECT PROPORTIONALITY OF PRICE & QUANTITY SUPPLIED
1.12
ELASTIC

61. What is the meaning of your answer?
Positive answer:
direct proportionality of price and demand
If it is greater than 1, it is an elastic supply curve
If it is less than 1, it is inelastic

62. EFFECT OF ELASTICITY ON MARKET EQUILIBRIUM
FOR DEMAND:
The more elastic the new demand is,
decrease in price
Increase in quantity sold
The less elastic the new demand is,
Increase in price
Decrease in quantity sold

63. EFFECT OF ELASTICITY ON MARKET EQUILIBRIUM
FOR SUPPLY
The less elastic supply is,
the higher the increase in price
Decrease in quantity sold
The more elastic supply is
Decrease in price
increase in quantity sold.

67. INCOME ELASTICITY 3 INCOME QUANTITY DEMANDED P 1000 (Y1) 200 (Q1)
ie = percentage change in quantity
percentage change in income
Q2 –Q1 Q1
__________
Y2 –Y1_ Y1 3

68. INTERPRETATION: INCOME ELASTICITY
for every 1% increase in income, quantity demanded will increase by 3%
If quantity demanded is greater than one, income is elastic and the good is superior.
If quantity demanded is lesser than one, income is inelastic and the good is inferior

70. ANSWER IS POSITIVE
ANSWER IS NEGATIVE

72. COMPLEMENT OR SUBSTITUTE?

75. CROSS ELASTICITY OF DEMAND
responsiveness of the demand for a good to a change in the price of another good.
ec = percentage change in QD of Good A
percentage change in price of Good B
= Q2A – Q1A
Q1A
____________
P2B – P1B
P1B
Where:
QA: quantity demanded of Good A
PB: price of Good B

76. EXAMPLE = Q2A – Q1A Q1A ____________ P2B – P1B P1B Example:

77. INTERPRETATION
This means that for every 1% increase in the price of Good B, there is an increase in the QD of Good A by 0.4%
Substitutes: if the coefficient of cross elasticity is positive, Goods A and B are substitutes.
An increase in the price of Good B will cause consumers to purchase more of Good A, the substitute good, thus causing the quantity of Good A to increase.
Complements: if cross elasticity is negative:
Goods A and B are complements and are used together.
If the price of Good B increases, the demand for B and A decreases.