2.

0 Demand and Supply

2.1 Theory of demand
Demand describes a consumers desire, willingness and ability to obtain
goods and services at a particular price in a given period of time.

Law of demand
- States that when the price of a good rises, the quantity demanded
decreases and when its price decreases, quantity demanded increases,
ceteris paribus.
- There is an inverse relationship between the price of the product and the
quantity demanded.

Demand schedule and demand curve

A. Individual
- Demand schedule is a Iist or table of the different amounts of the
commodity that are purchased in the market at different prices per unit
of time.
Price (RM)
60
50
40
30
20
10
-

Quantity
demanded
5
10
15
20
25
30

The table shows the expected quantity demanded at a given price level.
Demand curve is a graphical representation of the demand schedule.
Each price-quantity combination is plotted as a point on the graph and
when these points are joined, it shows the individual demand curve for
shirts.
The demand curve slopes downward from left to right.
This negative slope shows that the two variables price and quantity work
in opposite direction.

B. Market
- A market schedule refers to quantities of goods and services that all
individuals in a market would want at each price level
- It is the horizontal summation of the individuals demand for a
commodity at various possible prices in market.
Price Quantity Quantity
Quantity
Quantity Total Quantity
(RM) Demande Demanded Demanded Demanded Demanded Per
d
Week
First
Second Buyer Third Buyer
Fourth
Buyer
Buyer
10
8
6
4
2

10
15
25
40
60

13
20
30
35
50

6
9
10
15
30

11
16
20
30
40

40
60
85
120
180

Market demand curve for a commodity is the horizontal sum of individual

demand curves of ail the buyers in a market.
The market demand curve is negatively sloped, showing the inverse
relationship between the quantity demanded and its price.

2.2 Change in quantity demanded and change in demand

- Quantity demanded is a specific quantity that buyers are willing and
able to buy at a specific price. It is ONE point on a demand curve.
- A change in quantity demanded is the movement along the demand
curve and is caused by a change in its price.
-

Demand refers to the range of quantities that buyers are willing and
able to buy at a range of prices. Therefore, it is ALL points that make up
a demand curve.
A change in demand means shifting the entire demand curve.
A shift in demand is caused by a change in the determinants of demand

2.3 Determinants of demand

- Determinants of demand are also known as demand shifters. They result
in the leftward (decrease) or rightward (increase) shifts in the demand
curve.
a) Tastes or preferences of consumers
- Psychological reasons for liking or disliking a particular product
- It is highly subjective and is often influenced by personal factors
- The more we like a good, the greater is the demand for it while a
decreased taste in a product decreases its demand.
b) Number of consumers in the market / population
- A change in population will affect the size of the market
- If there are more consumers, there is more market demand
c) Income of consumers
- Determines the consumers purchasing power and spending patterns
- For most goods, an increase in income will cause demand to also
increase (normal/superior goods)
- Goods whose demand varies inversely with income are known as
inferior goods
- Demand for essential/basic goods are not affected by changes in
income.
d) Prices of other goods
- All goods are interrelated where changes in price of one good will affect
the demand for another good
- A substitute good is a good that can replace the function of another
good. When two goods are substitutes, the price of one good and the
demand for another good is directly related
- Complementary goods are goods that are used together. For these
goods, the price of one good and the demand for another good is
inversely related
- Independent/unrelated goods have no relationship with one another. A
change in price of one good will not affect the demand of another
good.

e) Consumer expectation
- Consumer expectations about the future prices, income and product
availability will affect current demand
- If consumers expect price to increase in near future, current demand
will increase and vice versa
Summarizing:
- The demand for a given good will rise if:
Incomes rise for a normal good or fall for an inferior good
The price of a complement fall
The price of substitute rises
People like the product better
People expect the price to rise soon
People expect the product not to be available soon
People expect their incomes to fall in the near future
There are more buyers
- The opposite will cause the demand for the product to fall.
2.4 Exceptional demand
- States that as the price of a good increases, the quantity demanded will
also increase
- Price and quantity demanded are positively related. Thus, the
exceptional demand curve will have a positive slope
- Occurs in the following instances:
a) Giffen goods
- Giffen goods are basic good items (broken rice, barley, grain etc)
consumed in bulk by the low income group
- When prices of Giffen goods decrease significantly, then a particular
household will be able to buy better quality goods. Thus, a decrease in
price of Giffen goods will result in a decrease in their demand.
b) Status symbol good
- Some expensive commodities (diamonds, precious stones, famous
paintings) are used as status symbols to display ones wealth.
- The more expensive these commodities become, the higher their value
as a status good and hence, the greater the demand for them
- The amount demanded of these commodities increase with an increase
in their price and decrease with a decrease in their price
c) Speculation
- If a household expects the price of a good to increase, demand for the
good will also increase.
- If a household expects the future prices to decrease, current demand
for the good will be less.
d) Emergencies
- War and natural disasters cause people to buy more goods (basic
necessities) even though the prices are high
e) Highly priced goods
- A consumer usually perceives highly priced goods as superior goods of
high quality

- Therefore, when price is high, consumers will buy more and decrease
the demand when price is low.
2.5 Theory of supply

Supply is defined as the ability and willingness to sell or produce a product

and service at a particular price in a given period of time.

Law of supply
- States that the quantity supplied for a good increases as the price
increases and the quantity supplied will decrease as price falls, ceteris
paribus
- This direct relationship explains the positive slope of the supply curve

Supply schedule and supply curve

A. Individual
- An individual supply schedule shows the various quantities of a good
supplied at possible prices over a period of time by a seller where the
expected quantity supplied at a given price level can be determined by
the table
- A supply curve will show how quantity supplied responds to changes in
prices
- It will have a positive slope as price and quantity supplied are positively
related
B. Market
- A market schedule refers to quantities of goods and services that all
sellers would sell at each price level in the market
- A market supply schedule is obtained by adding all the quantities
supplied by all sellers in the market

2.6 Change in quantity supplied and change in supply

- Supply refers to the range of quantities that sellers are willing and able
to sell at a range of prices. Therefore, it is ALL points that make up a
supply curve.
- A change in supply means shifting the entire supply curve.
- A shift in supply is caused by a change in the determinants of supply
-

Quantity supplied is a specific quantity that sellers are willing and able
to sell at a specific price. It is ONE point on a supply curve.
A change in quantity supplied is the movement along the supply curve
and is caused by a change in its price.

2.7 Determinants of supply

- These factors affect supply and a change in these factors will cause the
supply curve to shift to the right (increase in supply) or shift to the left
(decrease in supply).
a) Changes in resource prices.
- The prices paid for the use of labor, capital, land and entrepreneurship
affect production cost and the ability to supply a good. If resource
prices increase, then production cost is higher and the sellers are
inclined to offer less of the good for sale. If resource prices decrease,
then production cost is lower and the sellers are inclined to offer more
of the good for sale.

b) Changes in technology
- Technology is what producers know about the ways to combine inputs
into the production of outputs. Production techniques affect the ability
to supply a good. If an improvement in technique takes place in a
particular industry, it will help in reducing the cost of production. This
will result in greater production and so an increase in the supply of the
commodity. The supply curve will shifts to the right.
- A decline in technology means producers sell less of a good as
production costs increase.
c) Government policies
- Government can influence supply through taxes and subsidies.
- If a government levies heavy taxes, the supply of these commodities is
reduced as cost of production will increase.
- Conversely if the taxes on output in the country are low, cost of
production will decrease. Supply will increase and will shift the supply
to the right of originals supply curve
- Subsudies given by the government helps to lower the production cost
Thus, increasing the supply of a good.
d) Number of sellers
- When the number of sellers increases, the supply should increase (shift
to the right)
- When the number of sellers falls, the supply should decrease (shift to
the left).
e) Prices of other goods
- The supply for one good is based on the prices paid for other goods
that use the same resources for production.
- For example, wheat and corn can be grown on the same land; they are
substitutes for the seller. So are avocados and oranges or Coca Cola
and Diet Coke (because they are produced by the same company).
- An increase in the price of a substitute motivates sellers to sell more of
this good and less of the substitute good.
- For example, if the good in question is wheat and the price of corn
rises, sellers will produce less wheat (and more corn).
- On the other hand, if the price of the other good falls, the supply of this
good will rise (shift to the right).
f) Sellers expectations
- The decision to sell a good today depends on expectations of future
prices. Sellers seek to sell the good at the highest possible price.
- If sellers expect the price to decline in the future, they are inclined to
sell more now (shift to the right).
- Conversely, if sellers expect the price to rise, they will want to sell less
today (shift to the left) and wait for the price to rise later.
In summary, supply will shift to the right (increase in supply) if:

Resource prices decrease

Improvement in technology

Imposition of lower tax and higher subsidies

the number of sellers increases

the price of another good produced by the same seller falls

sellers expect the price of the product to fall in the near future.

The opposite will cause the supply for the product to fall (supply curve
shift to the left)

2.8 Exceptional supply

-

States that as the price of a good increases, the quantity supplied will
decrease; vice versa
Price and quantity supplied are inversely related. Thus, the exceptional
supply curve is negatively sloped.
Occurs in the supply of labour and is known as the backward bending
labour supply curve
Graphically:

Wage rate (RM)

S1
W2
W1

O
-

Q2

Q1

Labour (Hrs)

At wage level OW, an individual is willing to work OQ hours

When wage level increases to OW1, working hours will also increase to OQ1
(normal supply curve)
Assume that the maximum wage rate that an individual plans to get is
OW1.
When wage level increases further to OW2, he is unwilling to work more
hours (as he has already reached his maximum wage) and thus, reduced
his working hours to OQ2 (exceptional supply curve)

Practice Quiz
In

each of the following cases, state whether:

there is a movement along the demand curve for Malaysian cars
there is a movement along the supply curve for Malaysian cars
the demand curve for Malaysian cars will shift to the right
the demand curve for Malaysian cars will shift to the left:
the supply curve for Malaysian cars will shift to the right
the supplycurve for Malaysian cars will shift to the right

1. The price of petrol rises ________________________

2. The price of Malaysian cars rises ________________________

3.
4.
5.
6.

The price of Japanese automobiles rises ________________________

The price of engine components for Malaysian cars increases _________________
Buyers' incomes fall ________________________
Malaysian car producers expect the price of Malaysian cars to decrease next year.
___________
7. Government increases the amount of subsidies given to Malaysian car producers.
____________
8. Buyers find that Malaysian cars are of higher quality __________________
9. Mexican automobile buyers are now able to buy Malaysian cars _________
10. Buyers expect that the price of Malaysian cars will rise next year _________

Multiple choice
1.
If the price of DVDs fell and, as a result, the demand for DVD recorders fell, we
could conclude that VHD recorders and DVDs are
a.
b.
c.

d.
2.

Which of the following would cause the demand for petrol to shift to the right?
a.
b.
c.
d.

3.

price of the product

income
price of a substitute
price of a complement

If peoples tastes change so that they like the product better, this can be shown
by
a.
b.
c.
d.

5.

an increase in the price of automobiles by $1000

the price of petrol falls
for health reasons, people desire to bicycle more
all of the above

To find the quantity people will buy, we move along the demand line if what
changes?
a.
b.
c.
d.

4.

normal goods
substitutes
complements
Unrelated

shift the demand curve to the right

shift the demand curve to the left
movement upwards on the demand curve
movement downwards on the demand curve

If buyers expect the price of a product to rise greatly very soon

a.
b.
c.

the demand curve will shift to the right

the demand curve will shift to the left
the point on the demand curve will move upwards

d.
6.

the point on the demand curve will move downwards

The law of supply states that, other things being unchanged,

a.
b.
c.
d.

as
as
as
as

the
the
the
the

price rises, the quantity supplied rises

price rises, the quantity supplied falls
supply rises, the price falls
demand rises, the supply falls

7.
Which of the following would cause the supply curve of wheat to shift to the
right?
a.
b.
c.
d.

8.

Movement along the supply curve is caused by

a.
b.
c.
d.

9.

the price of the product

the cost of production
the number of sellers
all of the above

As new firms enter an industry

a.
b.
c.
d.

10.

an increase in wages paid to agricultural workers

technological changes which lower the costs of production
a decrease in the number of wheat growers
an increase in the price of corn

the market supply curve shifts to the left

the market supply curve shifts to the right
there is an increase in quantity supplied
there is a decrease in quantity supplied

In the book market, the supply of books will decrease if any of the following
occur except:
a.
b.
c.
d.

a decrease in the number of book publishers

an increase in the future expected price of a book
an increase in the price of paper
an increase in the price of a book