demand, supply, and market equilibrium point

7/30/2019 Demand, Supply, And Market Equilibrium Point

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DEMAND FUNCTION

DEMAND It is the quantity of goodsthat a consumer would be

willing and able to buy atdifferent prices duringsome specified period of

DEMAND Once the particular price

of a commodity goes

down, consumers’ demandfor that commodity goesup. When price of

commodity goes up,consumers’ demand goes

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:

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.

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

To identify the demand equation, we will use the formula:

1000 =10

200800

+ 1040

Graphing the said equation…

0, 1040

20800, 0

0 5000 10000 15000 20000 25000

Quantity Demanded

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.

SUPPLY FUNCTION

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.

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.

SUPPLY FUNCTION It is the relationship

specifying the amount of

any commodity thatmanufacturers or sellerscan make available in themarket at various prices.

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

To identify the supply equation, we will use again the formula:

1000 = 1500 10002000 1200 1200

1000 =500

Graphing the said equation…

0, 250

1200, 1000

2000, 1500

0 500 1000 1500 2000 2500

Quantity Supplied

The y-intercept means that

the lowest price the supplier would sell the ice cream is

SPECIALCASES

SPECIALCASES The line is either a

demand or a supply

function if the line ishorizontal or vertical andit passes at Quadrant I.

EXAMPLES

0 200 400 600 800 1000 1200

Price isconstant at

varyingquantity of

goodsdemanded /supplied.

0 100 200 300 400 500 600

Quantity demanded / supplied is

constant while the price varies

NOTE: A line is neither ademand nor a supply function if

the line is outside the Quadrant I.

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.

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.

M ARKETEQUILIBRIUM Illustrating this situationin a Cartesian Plane, the

supply and demand curveintersects and this

intersection is called themarket equilibrium point

(MEP).

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.

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.

SOLVING FOR THE MEP Algebraically, the marketequilibrium point (MEP)can be solved by solving

demand and supply equations simultaneously.

EXAMPLE

From our given example on demand andsupply, we arrived at the following

equations:

D: =−

+ 1040

S: = + 250

To solve this, we will use theelimination method:

From the given equations, sinceit’s easier to eliminate y, we will

subtract the two equations.

+ 1040

= + 250

0 =−

= 790 = 1170.37

The market eqm. quantity is 1170 units.

_______________

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 .

Graphing the two equations…

0 5000 10000 15000 20000 25000

Quantity Demanded / Supplied

MEP (1170.37, 981.48)Surplus

Shortage

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.

SOLVING FOR THE M.E.P.(NON-LINEAR EQUATIONS )

Determine which is the demand and thesupply function and find its MEP.

16 + 9 = 144

9 4 = 36

NON-LINEAR

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

Observing the two givenequations, we can say that we canuse the elimination method since

there are similar terms betweenthe two.

Let’s now apply the eliminationmethod:

9 + 16 = 144

9 4 = 36

20 = 108 =

= 5.40 = 2.32

_________________________-

Substitute the value of x to any of the two equations.

9 4 = 36

9 4 =36

9 = 36 + 21.6

= P2.53

Graphing the two equations…

0 1 2 3 4 5 6

Quantity Demanded / Supplied

MEP (2.32, 2.53)

demand, supply, and market equilibrium point

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