CHAPTER 2

DEMAND AND SUPPLY

 THEORY OF DEMAND
• Demand is the WILLINGNESS AND ABILITY to
buy goods and services at a particular prices at
a given range or prices.
• For example: Ali wish to buy a durian and able
to purchase it at price RM3.00/kg.

A desire without ability to pay is

Not a DEMAND!
• Law of Demand
– The law of demand states that, the quantity
demanded (Qd) of a good falls when the price (P)
of the good rises and vice versa
 • negative relationship between price and the
quantity demanded

e.g:
 If the price of books decreases, the quantity demand for books will increase.
The consumer will prefer to buy more books when these are cheaper. At the
same time, consumer’s purchasing power increases since they can save more
money when the price of books falls.
 Demand Curve
◦ The demand curve is a graph of the relationship between
the price of a good and the quantity demanded.

***Downward sloping from left to the right

 Table 1: Individual Demand Figure 1: Demand Curve for Pens
Schedule for Pens

Price (RM) Quantity (RM)

5 2

4 4 •Demand curve is downward

sloping from left to right

3 6

2 8

1 10
 Individual Demand and Market Demand
Definition
(a) Individual demand – refers to the demand
by a single individual for a particular good or
service.

(a) Market demand – Market demand refers to the sum of

all individual demands for a particular good or service
 market demands is the combination of individual
demands

Individual Demand 1 + Individual Demand 2 = Market Demand

Market Demand = ∑ Individual Demand
 Table 2: Market Demand Schedule for Pens

Price (RM) Individual 1 Individuals 2 Market Demand

5 2 4
4 4 5
3 6 6
2 8 7
1 10 8
 Determinants of Demand
In general, we can categories the factors that determine the demand for a good
into two main factors:
a) Price of goods
b) Other non price factors.

a) Price of goods
• Changes in the price of a good will affect the quantity demanded of the goods
• When the price of the goods falls, the quantity demanded for the goods will
increase
• When the price of the goods rises, the quantity demanded for the goods will
decrease
• Eg: If the price of chicken rises, the quantity demand for chicken will
decreases
• However, if the price of chicken falls, the quantity demand for chicken will
increases
b) Non-price Determinants of Demand

1. Consumer’s Income
• Normally, when income increases, consumer’s demand for more
goods and services will increase.
• If consumer’s income decreases, the consumers will decrease
their expenditure.
• However the effect of income on the demand is determined by the
types of goods as follow:
 Normal goods –cars, shirts and books (If income , demand for
normal goods )
 Inferior goods –low-grade rice, lower quality shirts and others (If
income, demand for inferior goods )
 Essential goods- rice, sugar or cooking oil (If the income increase
or decrease, demand for essential goods does not change)
2. Changes in the price of related goods
-Related goods refer to other goods that have relationship with the other goods.
-There are two types of related goods : substitutes and complementary goods

a) Substitute goods
Different goods that can be used to replace the function of one another
An increase in the price of one good can cause an increase in the demand for its
substitute
Eg: tea and coffee, palm oil and corn oil, margarine and butter
If the price of tea , demand for coffee 
There is a positive relationship between the price of goods and the demand of a
substitute goods.

b) Complementary goods
Goods that are used together with other product to complete the functions of an object
An increase in the price of one good will decrease the demand for its complementary
goods.
E.g: car and petrol; pen and ink; bread and butter
If the price of car  , demand for petrol 
There is a negative relationship between price and demand for complementary goods
3. Seasons
• Season can influence demand, such as the
monsoon season, festival season, and school
seasons
 Eg: During the monsoon season, the demand for
umbrellas will increase
 Eg: During festive seasons, demand for food,
clothing and transportation will increase
 Eg: During school term, the demand for school
uniforms, school shoes and books increase.
4. Population
-an increase in population would generally lead
to an increase in demand.
-an increase in the birth rate of a country will
increase the demand for goods.

5. Fashion, taste and preferences

-eg: the latest handbags , design, fashion
- Change in taste for western food, coffee
6. Expected future price/speculation
-if one speculates that the price of rice will
increase in the future, then he will buy more rice
today.

7. Advertisement and promotions

-advertised goods generally have higher
demand.
 CHANGES IN DEMAND CURVE

 Demand curve can change in two situation:

i. When there is a CHANGE IN QUANTITY DEMAND
(or movement along demand curve)
ii. When there is a CHANGE IN DEMAND
(or shift in a demand curve)

1.CHANGE IN QUANTITY DEMAND

o Occur due to changes in the PRICE of goods.

eg: When the price of goods increases, quantity demanded of the
goods decreases.

o Change in quantity demanded happens along the same demand

curve (a movement along the demand curve).
 quantity demanded increases – downward movement- expansion
 Quantity demanded decreases– upward movement- contraction
 For example; if the price of ice cream increases from RM10 to RM20, the
quantity demanded of ice cream will decrease from 6 to 4 units ice cream.
 As a result, when quantity demanded decreases; demand curve will move to
upward (called as contraction)

Price

RM20
A Upward movement (contraction)

RM10 B Downward movement (expansion)

RM5 C

D
0 4 6 8 Quantity of Ice-Cream

 If the price of ice cream decreases from RM10 to RM5, the quantity demanded will
increase from 6 to 8 units ice cream.
 As a result, when quantity demanded increases; demand curve will move to
downward (called as expansion)
Example 1;
Price

10
D3 D1 D2

0 Quantity
3 5 8

If consumer’s income increases, demand for goods and

services will increase. As a result, demand curve will shift to the
right from D1 to D2.

 However, if income decreases, demand for goods and services

will decrease. As a result, demand curve will shift to the left.
Example 2;
Price

10
D3 D1 D2

0 Quantity of
3 5 8 petrol

The figure above is the demand curve for petrol. If the price of
car falls, it will cause the demand for petrol will increase. Thus,
the demand curve for petrol will shift to the right from D1 to D2.
*Demand curve will shift to the right if:
 income , population , number of buyers , P of
substitute goods , P of complement goods , expected
future P ,
Eg: When income increases, demand will increase. Then,
demand curve will shift to the right

*Demand curve will shift to the left if:

 Income , population , number of buyers , P of
substitute goods , P of complement goods , expected
future P 
Eg: When income decreases, demand will decrease. Then,
demand curve will shift to the left
 Change in Demand VS Change in
Quantity Demanded
Change in Quantity Demanded Change in Demand
Definition
Movement along demand curve due to
the change of price of the good itself
Factor:
Change in price of a good or service
ceteris paribus. (eg change in the price
of Milo)
Movement
Movement along the demand curve (P ,
move upward. vv)
Definition
Shift in the demand curve due to change in other
factors affecting demand excluding price of the
good itself
Factors
population, income, price of related goods, etc.
Movement
•shift to a new demand curve (to the right or left)
because Price of a product remains constant
12
STUDY QUESTIONS
QUESTION 1:

1. The ‘law of demand’ implies that

a) as price fall, demand increases b) as price rise, demand decreases
c) as prices fall, quantity demand increases d) as prices rise, quantity demand
increases

2. According to the law of demand there is ____________ relationship between price and
quantity demanded
a) Positive b) Negative
c) Either positive or negative d) A constantly changing

3. If average income increases, then there will be

a) a movement along the demand curve
b) a movement along and a shift in demand curve
c) a shift only of the demand curve
d) no effect on the demand curve

4. Which of the following would probably lead to a shift in the demand curve for cameras?
a) A decrease in the price of cameras
b) An increase in real income
c) A decrease in the price of car
d) A decrease in cost of producing cameras

.
5. Which of the following will cause a movement along the demand curve for good ‘Y’
a) A change in the price of a close substitute
b) A change in the price of good ‘Y’
c) A change in consumer tastes and preferences for good ‘Y’
d) A change in consumer income

6. Assuming beef and chicken are substitute, a decrease in the price of chicken will cause the
demand curve for beef to
a) shift to the left as consumers switch from beef to chicken
b) shift to the right as consumers switch from a beef to chicken
c) remain unchanged, since beef and chicken are sold in separate markets
d) do none of the above

7. An increase in the price of product ‘X’ resulted in a decrease in the demand for product ‘Y’, so
‘X’ and ‘Y’ are
a) inferior goods b) normal goods
c) complementary goods d) substitute goods

8. Assuming steak is a normal good, a decrease in consumer income, other things being equal,
will
a) cause a downward movement along the demand curve for steak
b) shift the demand curve for steak to the left
c) cause an upward movement along the demand curve for steak
d) shift the demand curve for steak to the right
 THEORY OF SUPPLY
• Supply is willingness and ability to sell or produce
a particular product or services in a given period
of time at a particular price.
• Law of Supply
– The law of supply states that, the quantity supplied of
a good rises when the price of the good rises.

 e.g: if the price of chickens increases, the quantity of chicken

supplied will increase since the seller will sell more to earn profit
• positive relationship between price and the
quantity supplied

 e.g:
If the price of chickens increases, the quantity of chicken
supplied will increase since the seller will sell more to earn
profit
Supply curve:

◦ Supply curve is a graph of the relationship between the

price of a good and the quantity supplied.

***upward sloping from left to the right

 Supply Schedule and Supply Curve
Price
S
5
Price (RM) Quantity
3 (units)
5 10
6 10 Quantity 4 8
Upward sloping curve
3 6
2 4
1 2
 Determinants of supply
a) Price factors

a) Non price determinants of supply

 Prices of related goods

Resources
Price@ cost of Number of seller
production

Non-Price Determinants Technology

of Supply
Government Policies

Expectation about
the future price
Infrastructure

20
 Non Price Determinants of supply
1. Prices of related goods
Substitute goods. Eg : P milo , Qs milo  ; S vico 
Complementary goods. Eg : P pen , Qs pen , S ink 

2. Cost of production/prices of raw materials

-P raw materials , cost of production  ; S 
-If the price of cotton increases, cost of production will increases.
As a result, supply of dress will decreases
3. Technological advancement
-Tech  , cost of production  ; S 

4. Government policies
If impose tax on imported goods, S of imported goods 
If give subsidies on agricultural goods, S of agri. 

5. Number of sellers in the market

-the larger the number of firms supplying a product , the larger
the quantity supplied of the product and vice versa.
Eg ; If the number of café increases, the supply of foods and
drinks will increase
 CHANGES IN SUPPLY CURVE

 Supply curve can change in two situation:

i. When there is a CHANGE IN QUANTITY SUPPLY
(or movement along supply curve)
ii. When there is a CHANGE IN SUPPLY
(or shift in a supply curve)

1. CHANGE IN QUANTITY SUPPLY

o Occur due to changes in the PRICE of goods.

When the price of goods increases, quantity supply of the goods
increases.

o Change in quantity supplied happens along the same supply curve (a

movement along the supply curve).
 quantity supplied increases – upward movement- expansion
 Quantity supplied decreases– downward movement- contraction
 For example; if the price of ice cream increases from RM10 to RM20, the
quantity supply of ice cream will increase from 6 to 8 units.
 As a result, when quantity supplied increases; supply curve will move to upward
(called as expansion)

Price
S

RM20

B
RM10 Upward movement (expansion)
A
RM5 Downward movement (expansion)
C

0 4 6 8 Quantity of Ice-Cream

 If the price of ice cream decreases from RM10 to RM5, the quantity supply will
decrease from 6 to 4 units.
 As a result, when quantity supplied decreases; supply curve will move to
downward (called as contraction)
Example ;
Price

10

S3
S1 S2

0 Quantity
3 5 8
If production costs decreases, supply for goods and services
will increase. As a result, supply curve will shift to the right from
S1 to S2.

 However, if production costs increases, supply for goods and

services will decrease. As a result, supply curve will shift to the
left.
*Supply curve will shift to the right if:
Price of substitute goods , Price of
complementary goods , cost of production ,
Expected future price ,  in number of sellers,
technology , Government  subsidy to sellers

*Supply curve will shift to the left if:

Price of substitute goods , Price of
complementary goods , cost of production ,
Expected future price ,  in number of sellers,
technology , Government  taxes
 Change in Supply VS Change in
Quantity Supplied
Change in Quantity Supplied Change in Supply
Price
P2 b S
S1 S2
P1 a
P0 c d

Q1 Q2
Quantity Q1 Q2
Definition Definition Quantity
Movement along supply curve due to the Shift in the supply curve due to change in other
change of price of the good itself factors affecting supply excluding price of the
Factor: good itself
Change in price of a good or service Factors
ceteris paribus. (eg change in the price Number of seller, technology, taxes,subsidy etc.
of Milo) Movement
Movement •shift to a new supply curve (to the right or left)
Movement along the supply curve (P , because Price of a product remains constant
move upward. vv) 21
QUESTION 1:

1. The law of supply says that there is a _____________ relationship between price and
quantity supplied.
a) Positive b) negative
c) either positive or negative d) none of the above

2. According to the law of supply, the supply curve of a good is ___________ sloping.
a)downward
b)upward
c)either upward or downward
d)neither upward or downward

3. Which of the following would probably lead to a shift in the supply curve for potatoes.
a)The price of the carrots increases
b)The price of the cars increases
•An increase in real income
•All of the above

4. If the price of egg increases, Alia’s production of cakes will

•Increase in the supply of cakes
•Increase the quantity supply of cakes
•Decrease the supply of cakes
•Decrease the quantity supply of cakes
5. Which may cause the supply curve for imported apples to shift to the right?
a)A decrease in the price of imported apples
b)A decrease in the price of manggo
c)A decrease in taxes on imported apples
d)A decrease in consumer’s income

6. Graphically, a decrease in supply is represented by

a) an inward shift of the supply curve
b) an outward shift of the supply curve
c) an upward movement along a given supply curve
d) a downward movement along a given supply curve

7. A shift to either the left or right of the supply curve is called

a)A change in quantity demanded
b)A change in supply
c)A change in demand
d)A change in quantity supplied

8. Which of the following is not a determinant of supply

a)Cost of production
b)Income
c)Subsidy
d)Number of seller