Chapter 2

Demand & Supply

Demand & Supply - Demand
Demand is defined as the ability and willingness to buy certain
quantities of goods in a given period of time at a particular price
Components :
1. Abiity
Need to have sufficient $$$ to buy. Else, it is just
a desire or wish
2. Willingness
Willing to part with the $$$ to acquire the good
The Law of Demand states that price and demand of a product is
inversely related, ceteris paribus.
Demand & Supply Law of Demand
Price Quantity Demanded
Ceteris Paribus simply means everything remains unchanged :
1. Tastes and preference of consumers remain unchanged
2. Consumers income remains the same
3. Price of related goods (complement or substitutes) should remain unchanged
4. Goods should not have prestige or perceptual value
Demand & Supply Demand Curve
Price
Quantity
Demanded
1. To draw a Demand Curve, Price is always on
the Y axis and Quantity Demanded is always
on the X axis.
2. The Demand Curve is always downward
sloping as Price and Quantity Demanded is
inversely related
3. The slope of the curve states the amount of
price need to be reduced in order to increase
demand by 1 unit
Ind_DD
1
Ind_DD
2
MKT_DD

1
2
_ = Ind_DD
1
+ Ind_DD
2
= MKT_DD
Market demand is basically the aggregate
of all individual demands
Demand Curve only map out relationship between price and quantity demanded.
However, demand is influenced by many other factors other than Price
In fact, it is not possible to list down all possible factors that may affect the demand other than
prices.
The common ones are listed in the next slide
Important !!
Other than Price, any factor that changes the demand will shift the demand curve either outwards
or inwards
Demand & Supply Demand Curve Determinants
Demand & Supply Demand Curve Determinants
Determinants Changes In Demand Shift in Demand Curve
Price increase for
substitute goods e.g.
coffee for tea, bus ride for
LRT, yogurt for ice-cream
Quantity demanded for certain product
increases when price for its substitute goods
increase.
Because demand for the substitute goods
will drop with the price increase. Thus,
causing a demand surge for that product
Price increase for
complimentary goods
e.g. lens and camera,
sugar and tea, car and
petrol
Quantity demanded for certain decreases
when price for its complimentary goods
increase.
Because demand for the complimentary
goods will be reduced with increase price.
Thus, causing a drop in demand for that
product.
P
QD
P
QD
Demand & Supply Demand Curve Determinants
Determinants Changes In Demand Shift in Demand Curve
Income Changes for
Inferior Goods
Income Changes for
Normal Goods
Income Inferior Goods
Income Normal Goods
P
QD
P
QD
Demand & Supply Demand Curve Determinants
Determinants Changes In Demand Shift in Demand Curve
Expectations in regards
to the future
Expectation on Future Income
Expectation on Future Prices
No of Buyers in the
market
Expectation Demand
Expectation Demand
No of Buyers Demand
P
QD
P
QD
P
QD
Demand & Supply Demand Curve Determinants
Determinants Impact on Demand
Fashion and Tastes of the consumers
As there are two components in demand i.e:
1. Affordability
2. Willingness to buy
Prices and Income explain about affordability, while fashion and
tastes explain about willingness to buy.
Because of taste if consumers prefer certain product, demand for
that particular product will rise significantly
Festive seasons and climate
throughout the year
During certain festive season or climate, certain items are more in
demand e.g. mandarin oranges during Chinese New Year
Other determinants are as below:
Demand & Supply Practical
Price
Qtty
Demanded
100 0
80 1
60 2
40 3
30 4
20 5
10 7
Draw the market demand curve for the below:
100
90
80 X
70
60 X
50
40 X
30 X
20 X
10 X
0 1 2 3 4 5 6 7 8 9 10
a)
Quantity Demanded
Price
100 x
90 x
80 x
70 x
60 x
50 x
40 x
30 x
20 x
10 x
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Price Ind A Ind B Ind C Total
100 0 0 1 1
90 0 1 2 3
80 1 2 3 6
70 1 3 4 8
60 2 4 5 11
50 2 5 6 13
40 3 5 6 14
30 3 6 7 16
20 4 6 7 17
10 4 6 8 18
b)
Demand & Supply Practical
Price
Quantity Demanded
Demand & Supply Supply
Supply is defined as the ability and willingness to produce and
sell goods in a given period of time at a particular price, ceteris paribus.
Components :
1. Abiity
Need to have sufficient resources to produce and
sell.
2. Willingness
Willing to part with the goods and sell the goods in
the market
Demand & Supply Law Of Supply
The Law of Supply states that price and quantity supplied are positively
correlated, ceteris paribus. The higher the price of the product, the greater is the quantity supplied.
While the lower the price, the lower is the quantity supplied.
Price Quantity Supplied
Ceteris Paribus simply means everything remains unchanged :
1. Costs of Production remains unchanged
2. Numbers of sellers remain the same
3. Price of related goods (complement or substitutes) remain unchanged.
4. Availability of factors of production remains unchanged.
Demand & Supply Supply Curve
Ind_SS1
Ind_SS1
Mkt_SS
Price
Quantity
Supplied
6 7 13
P
1

1
2
_ = Ind_SS
1
+ Ind_SS
2
= MKT_SS
Market Supply is basically the aggregate
of all individual supply
1. To draw a Supply Curve, Price is always on
the Y axis and Quantity Supplied is always
on the X axis.
2. The Supply Curve is always upward sloping as
Price and Quantity Demanded is positively
correlated
3. The slope of the curve can tell the amount of
quantity supplied reduced / increased with a
RM1 reduced / increased of prices
Demand & Supply Supply Curve Determinants
Supply Curve only map out the positive relationship between price and quantity supplied.
However, Supply is influenced by many other factors other than Price
In fact, it is not possible to list down all possible factors that may affect the Supply other than
prices.
The common ones are listed in the next slide
Important !!
Other than Price, any factor that changes the Supply will shift the Supply curve either left (supply
decrease) or right (supply increase)
Demand & Supply Supply Curve Determinants
Determinants Changes In Supply Shift in Supply Curve
Price increase for
substitute goods e.g.
coke and pepsi, KFC and
Kenny Rogers
Quantity Supplied for product A decreases
when price for its substitute goods increase.
Because price for the substitute goods
increases, producers will switch to produce
substitute goods. Thus, causing the quantity
supplied for product A to drop.
Price increase for
complementary goods
e.g. lens and camera,
sugar and tea, car and
petrol
Quantity Supplied for product A increases
when price for its complimentary goods
increase.
Because price for the complementary goods
increases, quantity supply increases. Thus,
causing a surge of supply for product A too.
P
QS
P
QS
Demand & Supply Supply Curve Determinants
Determinants Changes In Supply Shift in Supply Curve
Cost of Production i.e.
costs incurred for factors
of production
Number of Sellers in the
market
Cost of
Production
Quantity
Supplied
Number of Sellers Quantity Supplied
P
QS
P
QS
Demand & Supply Supply Curve Determinants
Determinants Changes In Supply Shift in Supply Curve
Taxes in the formof
government policies
Subsidies in the form of
government policies
Taxes Quantity
Supplied
Subsidies Quantity Supplied
P
QS
P
QS
Demand & Supply Supply Curve Determinants
Determinants Changes In Supply Shift in Supply Curve
Taxes in the formof
government policies
Subsidies in the form of
government policies
Taxes Quantity
Supplied
Subsidies Quantity Supplied
P
QS
P
QS
Demand & Supply Supply Curve Determinants
Determinants Changes In Supply Shift in Supply Curve
Techonology
advancement
Future Prices as expected
by the economic agents
Taxes Quantity
Supplied
Future Prices Quantity Supplied
P
QS
P
QS
Note : Refer to the current quantity supplied
ME
Demand & Supply Market Equilibrium
Price
Qtty Demanded
/ Supplied
ME = Market Equilibrium, where DD = SS at Price, P
0
and
Quantity, Q
0
,
where :
1. P
0
is known as Equilibrium Price
2. Q
0
is known as Equilibrium Quantity.
At Price P
1
, where P
1
> P
0
:
Q
b
Q
a
= Market Surplus due to excess Supply by
producers.
At Price P
2
, where P
2
< P
0
:
Q
ii
Q
i
= Market Shortage due to excess Demand by
buyers.
In a free market and ideal mechanism, demand and supply
always adjust so that the market is always in equilibrium, where:
The quantity of goods that buyers are willing and able to buy
exactly balances the quantity that sellers are willing and able
to sell
DD
SS
P
0
Q
0
P
1
Q
a
Q
b
P
2
Q
i
Q
ii
Demand & Supply Market Equilibrium After Shift in DD
ME
Price
Qtty Demanded
/ Supplied
DD
SS
P
0
Q
0
P
1
Q
b
ME
1
ME
2
P
2
Q
c
DD
1
DD
2
When demand increases regardless of prices, a new
equilibrium will be achieved at ME
1
, at higher price of
P
1
and Quantity Demanded, Q
b.
When demand decrease regardless of prices, a new
equilibrium will be achieved at ME
2
, at higher price of
P
2
and Quantity Demanded, Q
bc
Demand & Supply Market Equilibrium After Shift in SS
ME
Price
Qtty Demanded
/ Supplied
DD
SS
P
0
Q
0
P
1
Q
b
ME
1
P
2
Q
c
SS
1
SS
2
When Supply Decreases regardless of prices, a new
equilibrium will be achieved at ME
1
, at higher price of
P
1
and Quantity Demanded, Q
c.
When Supply Increases regardless of prices, a new
equilibrium will be achieved at ME
2
, with higher output
at Q
b
but lower price at P
2 ME
2
Shortage of Factors of Production
Demand & Supply Market Equilibrium Analysis
ME
Price
Qtty Demanded
/ Supplied
DD
SS
P
0
Q
0 Q
b
ME
1
P
2
Q
c
SS
1
ME
2
DD
1
P
1
1. There is a large increase of Demand.
2. Without increasing the Supply, Price is increased to
P
2
to clear the market.
3. To meet the excess Demand, producers increase
Supply to SS
1
4. However, due to the shortage of Factors of
Production, the increase of Supply is minimal as
compared to Demand.
5. Thus at the final equilibrium, ME
2
price is still much
higher at P
2
compared to P
0
, though it is already
lower than P
1
.
Tutorial / Practical
Price Supply Demand
0 0 20
5 2 16
10 4 12
15 6 8
20 8 4
25 10 0
Question 1
a) Base on Demand and Supply schedule below, plot the Demand and Supply Curve.
b) Identify the Price and Quantity Equilibrium
Question 2
Show in your Demand and Supply diagram, the Market Surplus when Price = 20 and also to compute the quantity
surplus
Question 3
Show in your Demand and Supply diagram, the Market Shortage when Price = 10 and also to compute the
quantity shortage
25 x x
20 x x
15 x x
10 x x
5 x x
0 x x
0 2 4 6 8 10 12 14 16 18 20
ME
P
E
Q
E
Price
Quantity
DD
SS Q1b : So what is P
E
and Q
E
?
See the workings below:
Supply Curve : = 0 + 2.5()
Demand Curve : = 25 1.25

As Supply equals Demand, therefore :

25

= 25 1.25

3.75

= 25

=
25
/
3
.
75

=
6
.
75
Apply Q
E
into the Supply Curve:
= 0 + 2.5 6.75
= 17
Q2 : At P = 20, Market Surplus = 8 4 = 4 units
Q3 : At P = 10, Market Shortage = 12 4 = 8 units