CHAPTER 2

Demand and Supply

 Definition of Demand
• refers to the willingness and ability of buyers to
purchase different quantities of good at different
prices during a specific time period.

Law of Demand (P Qd )
• the price of good rises, the quantity demanded of the
good falls, ceteris paribus.
• price of good and the quantity demanded of good are
inversely related.
• demand curve is negatively slope because when prices
increase, the quantity demanded will decrease.
Demand Schedule Demand Curve
Demand schedule - table of Demand curve - the
numbers that shows the relationship between the
relationship between price price of a good and the
and quantity demanded by a quantity demanded.
consumer, ceteris paribus
(Other thing remain constant). Price (RM)
When price increase,
quantity demanded
will decrease
10
Price (RM) Qty Demanded
8
10 20
6
8 40
4
6 60
2
4 80 DD
0
2 100 20 40 60 80 100 Qty DD
The Individual Demand Curve

• The individual
demand curve shows
the relationship
between the price of
a good and the
quantity that a single
consumer is willing
to buy, or quantity
demanded.
 Market Demand
• Market demand is the sum of all the quantities
of a good or service demanded per period by
all the households buying in the market for that
good or service.
• Market DD = Ali DD + Abu DD + Ahmad DD
• Market demand curve - curve showing the
relationship between price and quantity
demanded by all consumers, ceteris paribus.
 From individual DD to Market DD
Quantity of Pizza Demanded
Price (RM) Ali DD Abu DD Ahmad DD Market DD
8 4 2 1 7
6 7 4 2 13
2 10 6 3 19
4 13 8 4 25
Table 1.1 From Individual to Market Demand

Ali DD + Abu DD + Ahmad DD = Market DD

P P P P

6 6 6 6

DD

DD DD DD
7 Qty 4 Qty 2 Qty 13 Qty
 Determinants of Demand
1) Price determinants - Price of the goods
2) Non-Price determinants
i.Price of related goods – substitute and
complementary
ii.Consumers income
iii.Taste and preference
iv.The number of buyers and population
v.Expectation about the future price
vi.Seasonal
IMPORTANT –
know the difference between a change in
the quantity demanded and a change in
demand
 Change in Quantity Demanded

Changes in Quantity
1) Movement along the demand
curve.
Upward – decrease in qty demanded

Demanded Downward – increase in qty

demanded
2) Caused by a change in the price
Price of Ice- of the product, other factors
constant.
Cream 3) Example: when P increase from P0
to P1, Qd decrease from Q0 to Q1

B
P1

Po A

D
0 Q1 Q0 Quantity of Ice-Cream
 Changes in Demand

When something changes

other than price, what
happens?

The whole curve shifts, there

is a change in demand
 Changes in Demand
1)The whole curve shifts
Shift to the right from D0 to D1 Changes in Demand
 
refer to increase in Demand. P
D1
D0
Shift to the left from D0 to D2 D2

refer to decrease in Demand.

P0

2) Caused by a changes in non

price determinants. Q2 Q0 Q1 Q

3) Example: change in Number of

buyers, if number of buyers
increase, demand for goods will
increase, therefore demand curve
shift to the right from D0 to D1.
SHIFTS IN THE DEMAND CURVE
 changes in factors of demand are factors that
cause shifts in the demand curve

Prices of related goods

Income

Tastes

Expectations
Number of buyers
 Shifts in the Demand Curve
• Recall our assumption
– hold other things constant – ceteris paribus
allow only price to change – change in quantity
demanded.

• But what if other factors do change?

– change in demand
– shift to a new demand curve, either to the left
(DD decrease) or right (DD increase).
 Changes in Demand, Shifts in Demand Curve

• The demand for a good increases if people are willing

and able to buy more of the good at all prices. (a)
• The demand for a good decrease if people are willing
and able to buy less of the good at all prices. (b)
P (RM) P (RM)

A B B A
60 60

D1
D2 D2
D1
0 600 900 QTY 0 600 900 QTY

(a) (b)
 1) Prices of Related Goods
• There are two type of related goods.
• Two goods are substitutes if they satisfy similar
needs or desire. (Corn chips and Potato Chips).
• Two goods are complements if they are consumed
jointly. (Tennis racket and tennis ball).
• If the two goods are complements, a fall in the price
of one good increases the demand for another good.
• If the two goods are substitutes, a fall in the price of
one good reduces the demand for another good.
 Substitute Goods
• Two goods are substitutes if they satisfy similar needs or
desire. (Corn chips (cc) and Potato Chips (pc)).
• If the two goods are substitutes, a increase in the price of
one good increase the demand for another good.
Pcc - QDcc - DDpc

P (RM) P (RM)

B
P2 P
A SUBSTITUTES
P1

Dpc2
DCC Dpc1
0 Qd2 Qd1 QTY 0 Qpc1 Qpc2 QTY
 Complementary Goods
• Two goods are complements if they are consumed jointly.
(Tennis racket (TR) and tennis ball (TB)).
• If the two goods are complements, a increase in the price
of one good decrease the demand for another good.
PTR - QDTR - DDTB

P (RM) P (RM)

P2 P
P1 COMPLEMENTS

DTB1
DTR DTB2
Qd2 Qd1 QTY QTB2 QTB1 QTY
 2) Income
 When income increase, a person will buy more of any
particular good at a given price.
 But, the ability to buy more good does not necessarily imply
the willingness to do so.
 This can be explain by using normal goods and inferior goods.
 For normal goods, an increase in income will increase
demand for normal goods. E.g: Bag, cloth and shoes.
 For inferior goods, an increase in income will decrease the
demand for inferior goods. E.g: second hand goods.
 Normal Good
Price of Blue
Jeans (RM)

3.00 An increase in income

will increase in
2.50 demand for normal
good
Increase
2.00 in demand

1.50

1.00

0.50 D2
D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Blue Jeans
 Inferior Good
Price of Blue
Jeans (RM)

3.00

2.50 An increase in income

will reduce the demand
for inferior good
2.00
Decrease
1.50 in demand
1.00

0.50
D2 D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Blue Jeans
 3) Number of Buyers and Population
• The more buyers, the higher the demand.
• The number of buyers can be affected by the size of
population and demographics which is age, gender
and race.
• Increase – higher birth rate and increased
immigration.
• Decrease – higher death rate, war and migration
from one region of the country to
another.
P

D1
D
D2
Qd
 Buyer expectations
• Buyers can expect change in
– future income
– future prices
and act to change demand today
• If you expect your income to rise, you may consume
more now. Demand will increase.
(D D1)
• If you expect prices to fall in the future, you may put
off purchases today. Demand will decrease. (D D 2)
P

D1
D
D2
Qd
 Tastes and Preferences
• What do we want to buy?
• People’s preferences affect the amount of good they are willing
to buy at a particular price.
• A change in preferences in favor of a good shifts the demand
curve rightward. P
Example : if people prefer
economics book than other
book, demand for
economics book will
increase.
D
1
(D D1) D
Qd
A Change in Demand Versus a Change
in Quantity Demanded
To summarize:
Change in price of a good or service
leads to

Change in quantity demanded

(Movement along the curve).

Change in income, preferences, or

prices of other goods or services
leads to

Change in demand
(Shift of curve).
 The Exceptional Demand Curve
• Normal dd curve is always downward sloping: showing inverse
relationship between price of a good and quantity demanded
• However, there is a possibility that price increases, the
quantity demanded also increases, vice versa.
• Divided into 2
• Regressive at high prices
– Happens to luxury goods like antique and jewellery items
– Bought by the rich to show off their status
– Higher price  more goods would be demanded

• Regressive at low price

– Happens to inferior goods like broken rice and salted fish
– Lower the price offered, fewer would be demanded by the poor 
substitute the existing goods to better quality goods
 Luxuries goods
Exceptional dd curve • Those products that
regressive at high price have an income
P elasticity of demand
d
greater than 1.
• The more expensive
the goods, the greater
will be the demand.
• Jewellery, antique
furniture, picture of
Mona Lisa etc
Q
 Giffen Goods
Exceptional dd curve
regressive at low price • The demand curve
P d for giffen goods is
normally upward
sloping.
• Purchasing power
has increase, which
allowed people to
replace with better
quality goods

Q
 Definition of Supply
• Supply is the amount of a particular product or service that
a firm would be willing and able to sell at a particular price
during a given period of time, ceteris paribus.

Law of Supply (P Qs )
• the price of good rises, the quantity supplied of the
good rises, ceteris paribus and vice versa.
• price of good and the quantity supplied of good are
positively related.
• supply curve is positively slope because when prices
increase, the quantity supplied will increase.
 Supply Schedule

Example: The supply of Eggs

Price (RM) Quantity (Units)
0.16 80
0.14 60
0.12 50
0.10 40
 SUPPLY CURVE
Price EGGS
(RM) S
$0.16

$0.14

$0.12

$0.10

40 50 60 80 Q (Kg)
 Individual Supply VS Market Supply
Individual Supply: Market Supply:
• It shows the relationship • The sum of quantity
between the price and supply by all seller in
quantity of a product the market at different
supplied by a single prices
seller.
 Determinants of Supply
1. Price determinant : price of goods
2. non- price determinants :
i. The price of related goods – substitute /
complement
ii. Resources Price / The cost of production
iii. Government policies – taxes / subsidies
iv. Number of suppliers
v. Technological change
vi. Expected future price
 1)The Price of Related Goods
Mutton Cattle
P S2
P
S S1
P1
P2

P0

Q0 Q1 Q Q2 Q3 Q
Substitute goods (mutton and cattle)
When produce 1 good, the other good cannot be produced.
Assume there is an increase in price for Mutton from P0 to P1.
 Increase in price, increase its supply from Q0 to Q1 because the producer
that previously produce Cattle will switch to the production of Mutton.
 The effect: supply curve for Cattle will shift to the left from S1 to S2
at price P2 & quantity Q2
 Complementary Goods
– When produce 1 good, will supply the other good too
– Eg: producer that sell mutton will also sell its skin
– Increase in P for mutton  increase qty supply at the same time
will increase supply for its skin (even though P does not change)
– supply curve shift to the right from S1 to S2 .

Mutton Skin
P
P S S1
S2
P1
P2
P0

Q0 Q1 Q Q2 Q3 Q
 2)Change in Cost of Production
• A rise in costs will reduce profits & lead some
firms to cut back on output  a rise in costs of
production will lead to a decrease in supply.
• Supply curve will shift to the left from S1 to S2.
Qty supplied will decrease from Q1 to Q2.
P S2
S1
P1

Q2 Q1 Q
 3)Number of Suppliers
• More suppliers mean more output can be
produced in the market  supply curve shifts
to the right – increase supply.

4)Technological Change
• Increase in technology  supply of goods also
increases (SS curve shift rightward), vice versa
 5)Change in Government Policy
• A rise in indirect taxation (same effect as a rise
in costs of production). Reduce profit &
increase the cost of production  shift the
entire supply curve to the left by the full
amount of the tax – decrease supply.

• Subsidy has exactly the opposite effect  shift

the supply curve to the right by the full
amount of the subsidy – increase supply.
 A Change in Quantity Supplied
VS
a Change in Supply
Change in Supply
Change in Qty Supply
 Referring to a movement  Referring to the shift of the
along the same supply entire supply curve due to
curve due to the change in the change in other factors
it’s own price while other such as price of other goods,
thing remain the same. price of raw material, etc
(Ceteris peribus)  The price itself remain
 The curve will move either unchanged.
upward or downward.  The curve will shift either to
the left or to the right.
 Change in Qty Supply Change in Supply
Price Price
SS S3 S1
P2 S2
b

P0
P1 a

Q1 Q2 Qty Q3 Q1 Q2 Qty

Movement along supply curve (from The shift of supply curve (from S1 to
point a to b) due to changes in the S2 or S1 to S3) due to change in other
price of good itself (from P1 to P2). factors excluding price (Price doesn’t
change)
 Exceptional Supply
• The relationship between quantity supplied and
the price of the product or service is negative.
• Exceptional supply normally found in the supply
of labour service. (backward bending labour
supply curve)
• Substitution effect – the higher the wage rate
will increase labour’s work hours.
• Income effect – a higher income induces an
increase in demand for leisure – decrease in qty
of labour supplied.
Wage
Rate
Income effect
W2 (Exceptional supply
curve)

W1

Substitution effect
W0

Leisure Q0 Q2 Q1 Working
(hours) (hours)