DEFINITION OF DEMAND
PUBLIC GOODS
Public goods are goods that
are for common use and will
benefit everyone.
LAW OF DEMAND
Law of demand states that the higher the price of a good, the
lower is the quantity demanded for that good and the lower
the price, the higher is the quantity demanded, ceteris
paribus.
P Qdd
P Qdd
NEGATIVE
RELATIONSHIP
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Demand Schedule
Price
Price
Quantity
10
Demand Curve
DD
Qty
0
2
10
Quantity (Units)
10
DD
2
1
Quantity
0
2
10
Individual 1
Individual 2
Market
Demand
12
15
10
18
Individual 1
Market Demand
Individual 2
3
2
10
7 8
9 12 15
18
Consumers
Consumers
income
income
Price
Price of
of
related
related goods
goods
Population
Population or
or
number
number of
of
buyers
buyers
Supply
Supply of
of
money
money in
in
circulation
circulation
Level
Level of
of taxation
taxation
Tastes
Tastes and
and
trends
trends
Expectation
Expectation
about
about future
future
prices
prices
Festive
Festive
seasons
seasons and
and
climate
climate
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Ch. 2: 11
CHANGES IN DEMAND
Price
Price
DD
D1
Quantity
constant
Upward movement Decrease in
quantity demanded (Contraction)
Downward movement Increase in
D0
Quantity
EXCEPTIONAL DEMAND
Exceptional Demand is the opposite of the
Law of Demand where as price increases,
demand will also increase and vice versa.
SPECULATION
EMERGENCIES
STATUS SYMBOL GOODS
HIGHLY-PRICED GOODS
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
INTER-RELATED DEMAND
Price of pizza
DD
Negative relationship exists
between complement
goods
P2
P1
P2
P1
DD
Q1
Q2
Joint Demand
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Q1
Q2
Quantity of
soft drinks
Competitive Demand
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Ch. 2: 15
DEFINITION:
Measures the
sensitivity/responsiveness of
the quantity demanded due to a
change in its price.
FORMULA:
d
% Quantity Demanded
% Price
d
Q 2 Q1 x
Q1
P1
P2 P1
DEGREE OF ELASTICITY
Price (RM)
d =0
d < 1
not changeofaschange
the price
changes.
A large percentage
in the
price of a good
will only affect a small percentage of change in the
quantity
demanded.
Elastic
Demand
d =
d = 1
Quantity Demanded
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Existence
Existence of
of
substitutes
substitutes
Proportion
Proportion of
of the
the
expenditure
expenditure on
on aa
product
product
Frequently
Frequently
purchased
purchased
products
products
Complementary
Complementary
goods
goods
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Nature
Nature of
of
goods
goods
Income
Income level
level
Habits
Habits
Time
Time
dimension
dimension
RELATIONSHIP TO TOTAL
REVENUE
Total Revenue (TR) = Price
Price
DEMAND IS ELASTIC
RM30
Total Revenue
RM20 x 10 = RM200
RM20
10
Quantity Demanded
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Ch. 2: 20
RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price
Price
DEMAND IS INELASTIC
Total Revenue
RM2
RM1 x 15 = RM15
If seller increases price to RM2
RM1
15
Quantity Demanded
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Ch. 2: 21
RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price
Price
Total Revenue
RM1 x 20 = RM20
RM2
= RM2 x 10 = RM20
TR = 0
D
10
20
Quantity Demanded
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Ch. 2: 22
DEFINITION:
Measures the sensitivity/responsiveness
of the quantity demanded due to a
change in income.
FORMULA:
Y
% Quantity Demanded
% Income
d
Q 2 Q1 x
Q1
Y1
Y2 Y1
RESPONSES OF INCOME
ELASTICITY
Elastic Income
Income
y =0
Inelastic Income
-Type of good: Normal goods such as food
and clothing
0<
y < 1
y > 1
y< 0
Quantity Demanded
DEFINITION:
Measures the sensitivity/responsiveness of
the quantity demanded of one product due to
a change in the price of a related product.
FORMULA:
X = % Quantity Demanded of good X
% Price of good Y
x
Qx2 Qx1 x
Py1
Qx1
Py2 Py1
RESPONSES OF CROSS
ELASTICITY
Price of Good X
x =0
x > 0
x < 0
Quantity Demanded
of Good Y
DEFINITION OF SUPPLY
LAW OF SUPPLY
Law of supply states that the higher the price of a good, the
greater is the quantity supplied for that good and the lower the
price of a good, the lower is the quantity supplied, ceteris paribus.
P Qss
P Qss
POSITIVE RELATIONSHIP
Supply Schedule
Price
Price
Quantity
10
Supply Curve
Supply
Qty
0
2
10
INDIVIDUAL SUPPLY
The relationship between the quantity of a product
supplied by a single seller and its price.
MARKET SUPPLY
The relationship between the total quantity of a
product supplied by adding all the quantities
supplied by all sellers in the market and its price.
Cost
Cost of
of
production
production
Expected
Expected
future
future price
price
Price
Price of
of
related
related goods
goods
Technological
Technological
advancement
advancement
Improvement
Improvement in
in
infrastructure
infrastructure
Government
Government
Policies
Policies
Number
Number of
of
sellers
sellers
CHANGE IN SUPPLY
Price
Price
s0
s1
SS
Quantity
constant
Downward movement Decrease in
quantity supplied (Contraction)
Upward movement Increase in
quantity supplied (Expansion)
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Quantity
EXCEPTIONAL SUPPLY
Exceptional Supply is the opposite of the Law of
Supply where as price increases, the quantity supplied
decreases and vice versa
Wage Rate
20
Income Effect
(Exceptional Supply
Curve)
15
10
Substitution Effect
Labour
DEFINITION:
Measures the sensitivity/responsiveness of
the quantity supplied due to a change in the
price of a product or service.
FORMULA:
ss
= % Quantity Supplied
% Price
SS
Q 2 Q1 x
Q1
P1
P 2 P1
DEGREE OF ELASTICITY
Elastic Supply
A small percentage of change in the price of a good will lead to
larger percentage of change in the quantity supplied.
Price (RM)
Inelastic Supply
ss =0
ss < 1
ss = 1
ss =
ss > 1
Quantity Demanded
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Time
Time Period
Period
Technology
Technology
improvements
improvements
Availability
Availability and
and
mobility
mobility of
of
factors
factors of
of
production
production
Perishability
Perishability
Nature
Nature of
of the
the
market
market