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Supply, Demand and Price
Supply, Demand and Price
Supply, Demand and Price
3.
4.
Supply
Law of supply
Law of supply states that other
factors remaining constant, price and
quantity supplied of a good are
directly related to each other.
Shift in supply
Example 1
Activity 1
Demand
Law of Demand
Shift in Demand
Example 2
If the price for a nasi lemak was
$2 and the quantity of nasi lemak
demanded increased from Q1 to
Q2, then there would be a shift
in the demand for nasi lemak.
Shifts in the demand curve imply
that the original demand
relationship has changed, meaning
that quantity demand is affected
by a factor other than price. A
shift in the demand relationship
would occur if, for instance, nasi
lemak suddenly became the only
type of food available for
consumption.
1. Increase in demand
Increase in price at the same quantity
Increase in quantity at the same price
2. Decrease in demand
Decrease in price at the same quantity
Decrease in quantity at the same price
Eg. Tea and coffee are substitutes goods but pen and ink are
complementary commodities.
Activity 2
Where
P0 = initial price
P1 = current price
Q0 = initial quantity
Q1 = current quantity
Where
E > 1, ( )
E < 1, ( )
= 1, ( )
3.
Nature of goods
Availability of substitutes
Proportion of income spent
Activity 3
Do you think the price elasticity of demand for Toyota
Prius will increase, decrease, or remain the same when
each of the following events occurs? Explain your answer.
1. Other car manufacturers, such as Proton, decide to
make and sell Hybrid cars.
2. Hybrid cars produced in foreign countries are banned
from the Malaysian market.
3. The time period over which you measure the elasticity
lengthens. During that longer time, new models such as
super-hybrid cars appear.
Economic equilibrium
Disequilibrium
Disequilibrium occurs whenever the price or quantity is not
equal to P* or Q* (crossing point between supply and
demand).
a) Excess Supply
If the price is set too high,
excess supply will be created
within the economy and there
will be allocative inefficiency.
At price P1, the quantity of
goods that the producers wish
to supply is indicated by Q2 and
the quantity that the consumers
want to consume is at Q1.
Q2 > Q1, which indicates that
too much is being produced and
too little is being consumed.
b) Excess Demand
When price is set below the
equilibrium price, excess demand will
be created because the price is too
low.
At price P1, the quantity of goods
demanded by consumers at this price
is Q2 and producers are willing to
produce at this price is Q1.
Due to the low cost, many
consumers want to buy goods but
producers are not producing enough
goods. However, as consumers
compete with each other to buy the
good at this price, the demand will
push the price up, making suppliers
want to supply more and bringing
the price closer to its equilibrium.
Summary
Questions
1. Explain the relationship between supply and demand.
2. If there is an excess supply in market, what will happen to supply and demand?
3. If there is an excess demand in market, what will happen to supply and demand?
4. If technology improved in market, what will happen to supply curve in market?
5. If the income of people increased, will it affect demand of wants in market?
Explain.
6. Supply and demand of Needs in markets wont be affected by any factors. Explain.
7. If the supply curve in economy equilibrium graph shift to right, what will happen
to the price and quantity in the graph?
8. If the demand curve in economy equilibrium graph shift to left, what will happen to
the price and quantity in the graph?
9. By referring to the figure below, calculate the price elasticity of demand for frozen
orange juice between the prices of $1.00 and $1.50. Is the demand elasticity elastic
or inelastic?