Principles

Of

Topic 3 & 4 : Market Demand and Supply

 Learning Objectives

3.0 Market Demand (Week 3)

4.0 Market Supply (Week 4)

2
 Markets
• A market is the process of buyers
and sellers exchanging goods and
services.

• Supermarkets, internet stores and

restaurants are some examples.
markets.

3
• Buyers, as a group, determine the
demand side of the market, whether
it is consumers purchasing goods or
firms purchasing inputs.

• Sellers, as a group, determine the

supply side of the market, whether it
is firms selling their goods or
resource owners selling their inputs.
4
 •It is the interaction of buyers and
sellers that determines market
prices and output through the forces
of and Demand and Supply.

5
Learning Objectives
(3.0)
DEMAND

6
 Learning Objectives
3.0) Market Demand
a) Definition of demand
b) Law of demand, demand schedule,
demand curve, individual demand
and market demand
c) Reason for demand curves sloping
downward
d) Change in quantity demanded and
change in demand
7
 Demand - A Definition

The willingness and ability of

buyers to purchase different
quantities of a goods & services
at different prices during a
specific time period

8
 Law of Demand

Three (3) ways to represent the law of

demand :
1) In words: when the price of a good or
service falls, the quantity demanded
increases. (ceteris paribus) There is an
inverse relationship between price (P)
and quantity demanded (Qd).

9
 Demand Schedule

2) In a demand schedule: Price of

coffee
Quantity of
coffee beans
Def : The numerical tabulation of beans demanded
(RM) (kg)
the quantity demanded of a good
at different prices. 2.00 7.1
1.75 7.5
A demand schedule is the
numerical representation of the 1.50 8.1
law of demand. 1.25 8.9
1.00 10.0
Example: James demand for
0.75 11.5
coffee beans. Notice that James
preferences obey the Law of 0.50 14.2
Demand. 10
 Demand Schedule

A demand schedule can be shown as points

on a graph.
• The graph lists prices on the vertical
axis and quantities demanded on the
horizontal axis.
• Each point on the graph shows how
many units of the product or service an
individual will buy at a particular price.
• The demand curve is the line that
connects these points.
11
 Demand Curve
Price of
coffee bean 3) As a demand curve:
(RM)
• Def : A demand curve is the graphical
representation of the demand
2.00 schedule.
• Points on demand curve shows the
1.75
highest price consumers are willing
1.50 and able to pay for that particular unit
1.25
of a good
• The demand curve slopes
1.00
downward.
0.75 As price rises, the Demand
quantity curve
0.50 demanded falls
Quantity of coffee beans (kg)
0 7 9 11 13 15 17

12
 Individual Demand vs Market Demand

• The quantity demanded in the market is the sum of

the quantities demanded by ALL buyers at each price.
• Suppose Ali and Abu are the only two buyers in the
CD’s market. (Qd = quantity demanded)

Price Ali’s Qd Abu’s Qd Market Qd

0.00 7 + 9 = 16
1.00 6 + 8 = 14
2.00 5 + 7 = 12
3.00 4 + 6 = 10
4.00 3 + 5 = 8
5.00 2 + 4 = 6
6.00 1 + 3 = 4 13
 The Market Demand Curve
Price of CD’s Price Quantity
of of CD’s
$6.00 CD’s demanded
0.00 16
$5.00
1.00 14
$4.00 2.00 12
$3.00 3.00 10
$2.00 4.00 8
5.00 6
$1.00
6.00 4
$0.00
Quantity of CD’s
0 5 10 15
14
 Reason For Demand Curves
Sloping Downward

Three (3) reasons why there is an inverse or

negative relationship between price and
quantity demanded:

1) Observed Behavior (logical thinking) tells

us that consumers will buy more goods
and services at lower prices than higher
prices, ceteris paribus.

15
 Reason For Demand Curves
Sloping Downward

2) Diminishing Marginal Utility

That is, in a given time period, a buyer will
receive less satisfaction from each
successive unit consumed - so
consumers would only buy added units if
the price were reduced.

16
 Reason For Demand Curves
Sloping Downward

3) Substitution Effects and Income Effects

i) Substitution Effects
If the price of Pizza Hut increases the
quantity demanded of Pizza Hut will fall as
some buyers switch out of pizza into
Domino Pizza, which can substitute for
Pizza Hut.
17
 Reason For Demand Curves
Sloping Downward

ii) Income Effects

With given income, when the prices of
good or services decrease, consumer’s
purchasing power increases. This
increase in real income encourage the
consumer to buy more of that good or
services .
18
 Changes In Quantity Demanded vs
Changes In Demand

• If the price of a good changes, we say this

leads to a change in quantity demanded.
(A movement along the demand curve)

• If one of the other factors (determinants of

demand) influencing consumer behavior
changes, we say there is a change in
demand. (A shift in the demand curve)
19
 Changes in Quantity Demanded
Price of
Cigarettes
per Pack

C ▲price results in a
4.00 movement along the
demand curve.

2.00 A

D1
0 12 20 Number of Cigarettes
20
Smoked per Day
 Changes in Demand
Price

Increase in
demand

Decrease in
demand

D2
D1
D3 Quantity
0
21
Changes In Demand vs Changes In
Quantity Demanded
 Determinants of Demand

1. Prices of related goods (substitutes

vs complements)
2. Incomes of demanders (normal
goods vs inferior goods)
3. Number of demanders/buyers
4. Taste and preferences
5. Expectations of demanders
23
 1. Prices Of Related Goods
(Substitutes)

• Substitute goods are the goods that

can satisfy similar needs or desires.
For example: Coca and Pepsi.

• Two goods are called substitutes

if an increase in the price of one
causes an increase in the demand for
the other good.
24
• The opposite also applies: Two
goods are called substitutes if a
decrease in the price of one causes
a decrease in the demand for the
other good.

25
1. Prices Of Related Goods
(Substitutes)
 1. Prices Of Related Goods
(Complements)

• Complement goods are the goods that

must be used together or
simultaneously. For example, tennis
racket and tennis ball.
• Two goods are complements if an
increase in the price of one good
causes a decrease in the demand for
the other good (or opposite) 27
28
1. Prices Of Related Goods
(Complements)
 2. Income - Normal Good

• Other things equal, an increase in

income usually leads to an increase in
demand for goods (rightward shift).
• A decrease in income usually leads to
a decrease in the demand for goods
(leftward shift).
• Such goods are called normal goods.
• Example: CDs and movie tickets.
30
31
 2. Income - Inferior Good

• Some goods exist for which rising (or

falling) income leads to reduced (or
increased) demand.
• These are called inferior goods. It
shows that when income changes and
demand changes in the opposite
direction (inversely).
• For example: local bus service,
unbranded can food & bread.
32
33
Normal Good vs Inferior Good
 3. Number Of Demanders/Buyers

An increase in the potential consumer

population will increase (shift right) the
demand for a good or service.

35
 4. Taste and Preferences

An increase in tastes or preferences

for a good or service will increase (shift
right) the demand for a good or service,
vice versa.

36
 5. Expectations of demanders

• An increase in the expected future

price of a good will increase (shift right)
the current demand for it.
• A decrease in the expected future price
of a good will decrease (shift left) the
current demand for it.

37
 Summary

Variable A change in this variable…

Price …causes a movement
along the D curve
Price of
related goods …shifts the D curve
Income …shifts the D curve
No. of buyers …shifts the D curve
Taste and
preferences …shifts the D curve
Expectations …shifts the D curve 38
EXERCISES

39
May 2020
Fill in the blanks with the most appropriate answer.

Suppose the price of a Proton car has decrease from RM30,000 to

RM25,000. This would cause a _______________ along the
demand curve.

If the increase in average income causes a shift in the demand

curve to the right, you may conclude that Proton cars are
_________ good.

Suppose that the price of a gallon of gas increases from RM5 to

RM6. Since Proton cars and gasoline are _________ good, an
increase in the price of a gallon of gas shifts the demand curve for
Proton cars to the ____________.

Identify ONE (1) reason for the increase in the quantity

demanded for chicken and any FOUR (4) reasons for the
decrease in the demand for chicken. 40
Reference
Tucker, I.B.(2017).
Economics for today. (9th
ed.). Mason, OH: Thomson
South Western.

41
The End

42
Learning Objectives
(4.1)
SUPPLY

43
 Learning Objectives
4.1) Market Supply
a. Definition of supply
b. Law of supply, supply curve,
supply schedule, individual
supply and market supply
c. Reason for supply curves sloping
upward
d. Change in quantity supplied and
change in supply
44
 Supply - A Definition

The willingness and ability of

sellers to produce and offer
different quantities of a goods &
services at different prices during
a specific time period

45
 Law of Supply

Three (3) ways to represent the law of

supply :
1) In words: when the price of a good or
service increase, the quantity supplied
increases. (ceteris paribus) There is an
positive relationship between price (P)
and quantity supplied (Qs).

46
 2. Supply Schedule

2) In a supply schedule: Price of Quantity of

coffee coffee beans
• Def :The numerical beans
(RM)
supplied
(kg)
tabulation of the quantity
supplied of a good at 2.00 11.6
different prices. 1.75 11.5

• A supply schedule is the 1.50 11.2

numerical representation 1.25 10.7
of the law of supply. 1.00 10.0
• Example: James supply 0.75 9.1
for coffee beans. Notice 0.50 8.0
that James preferences
obey the Law of Supply
 Supply Schedule

A supply schedule can be shown as points on a

graph.
• The graph lists prices on the vertical axis and
quantities supplied on the horizontal axis.
• Each point on the graph shows how many
units of the product or service a producer (or
group of producers) would willing sell at a
particular price.
• The supply curve is the line that connects
these points.
48
 Supply Curve
Price of coffee
beans (RM)

3) As a supply curve:
Supply • Def : A supply curve shows
curve
$2.00 graphically how much of a
1.75
good
As price rises, the
quantity supplied
or service people are willing to
1.50 sell at any given price.
rises.
1.25 • Supply curve slopes upward.
1.00
• Points on supply curve shows
the lowest price for which a
0.75
supplier can profitably sell
0.50 another unit.
0 7 9 11 13 15 17
Quantity of coffee beans (kg)

49
 Individual Supply vs Market Supply

• The quantity supplied in the market is the sum of the

quantities supplied by ALL sellers at each price.
• Suppose Mr.Labu and Mr.Labi are the only two sellers in
this market. (Qs = quantity supplied)

Price Mr.Labu Mr.Labi Market Qs

$0.00 0 + 0 = 0
1.00 1 + 2 = 3
2.00 2 + 4 = 6
3.00 3 + 6 = 9
4.00 4 + 8 = 12
5.00 5 + 10 = 15
6.00 6 + 12 = 18 50
 The Market Supply Curve

P Price Quantity
$6.00 of of CD’s
CD’s supplied
$5.00
0.00 0
$4.00 1.00 3
$3.00 2.00 6
3.00 9
$2.00
4.00 12
$1.00 5.00 15
$0.00 Q 6.00 18
0 5 10 15
51
 Why Supply Curves
Are Upward Sloping

• Businesses provide goods and

services hoping to make a profit.
• Profit is the money a business has left
over after it covers its costs.
• Businesses try to sell at prices high
enough to cover their costs with some
profit left over.
52
 Why Supply Curves
Are Upward Sloping

• The higher the price for a good, the

more profit a business will make after
paying the cost for resources.
• A higher price is an incentive to
producer to produce more of a good.
This incentive is in the form of higher
profits.
53
 Changes In Quantity Supplied vs
Changes In Supply

• If the price of a good changes, it leads

to a change in its quantity supplied,
but not its supply. (A movement along
the supply curve)
• If one of the other factors
(determinants of supply) influences
sellers' behavior, it leads to a change
in supply. ( A shift in the supply curve)
54
 Change in Quantity Supplied
Price
S
C
3.00

▲price results in
a movement
A along the supply
1.00 curve.

Quantity
0 1 5 55
 Change in Supply

Price S3
S1 S2
Decrease in
Supply

Increase in
Supply

Quantity
0
56
Changes in Quantity Supplied vs
Changes in Supply
 Determinants of Supply

1. Input prices
2. Prices of related products
3. Expectations
4. Number of suppliers
5. Technology
6. Government regulations
7. Weather
58
 1. Input Prices

• Higher input prices increase the cost

of production causing the supply curve
to shift to the left at each and every
price.
• Lower input prices decrease the cost
of production causing the supply curve
to shift to the right at each and every
price. 59
 2. Prices of Related Products
(Substitute in Production)

• A substitute in production is a product

that could have been supplied using the
same resources
• If palm oil prices rise for example this
may cause some farmers to switch from
rubber to palm oil plantations.
• Thus, an increase in the price of oil
palm will decrease the supply of rubber.
60
 3. Expectations

• If producers expect a higher price in the

future, they will supply less now.
• They would prefer to wait and sell when
their goods will be more valuable.
• If producers currently expect that the
price will be lower later they will supply
more now.
• Otherwise, if they wait to sell, then their
goods will be worth less.
61
 4. Number of Suppliers

An increase in the potential producer

population will increase (shift right) the
supply for a good or service.

62
 5. Technology

• In this era, companies must continuously adopt

new technologies in order to stay relevant in an
increasingly competitive market.

• It is important to embrace technological

advancement in production to:
1. To produce high quality products at an efficient
low cost
2. Improve in efficiency and productivity
3. Reducing the need to utilize manual labour

63
Example:
• Malaysian rubber glove manufacturer, Top Glove
Corporation Berhad, which is the world’s largest rubber
manufacturer is aiming to completely computerized the
company’s manufacturing and operational processes.

Source:https://www.thestar.com.my/business/business-news/2018/03/07/greater-
automation-for-top-glove/
64
 6. Government Regulations

• Supply may also change because of

changes in the legal and regulatory
environment in which firms operate.
• If such changes increase costs (eg.
taxes), they will decrease supply. If
they decrease costs (eg. subsidies),
they will increase supply.
65
 7. Weather

• If the weather is good, supply of that

particular commodities will increase.
• If the weather is bad, it will destroy the
crops, causing the supply of certain
commodities to decrease.

66
 Summary

Variable A change in this variable…

Price …causes a movement
along the S curve
Input prices …shifts the S curve
Price of
related products …shifts the S curve
Expectations …shifts the S curve
No. of suppliers …shifts the S curve
Technology …shifts the S curve
Gov regulations …shifts the S curve
Weather …shifts the S curve
67
Learning Objectives
(4.2)
Market Equilibrium

68
 Learning Objectives
4.2. Market equilibrium
a. Shortage and surplus
b. Changes in equilibrium

69
 Market Equilibrium

• The market equilibrium is found at the point

at which the market demand and market
supply curve intersect.
• The price at the intersection of the market
demand curve and the market supply curve
is called the equilibrium price.
• The quantity at the intersection of the market
demand curve and market supply curve is
called the equilibrium quantity.
70
 Market Equilibrium

P
$6.00 D S
$5.00
$4.00 At equilibrium,
$3.00 QD = QS
$2.00
$1.00

$0.00 Q
0 5 10 15 20 25 30 35
71
 Equilibrium Price
The price that equates quantity supplied with
quantity demanded
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
72
 Equilibrium Quantity
The quantity supplied and quantity demanded at
the equilibrium price
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
73
 Shortage

• If the market price is charged below the

equilibrium price, quantity demanded
will greater than quantity supplied, a
shortage (excess demand) will exist.
• A situation where QD > QS.

74
 Shortage
when quantity demanded is greater than quantity
supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00 QD = 21 CD’s
$3.00 and
QS = 5 CD’s
$2.00
resulting in a
$1.00 shortage of 16 CD’s
$0.00 Shortage Q
0 5 10 15 20 25 30 35
75
 Surplus

• If the market price is charged above

the equilibrium price, quantity supplied
will greater than quantity demanded, a
surplus (excess supply) will exist.
• A situation where QS > QD.

76
 Surplus
when quantity supplied is greater than quantity
demanded
P
$6.00 D Surplus S Example:
If P = $5,
$5.00
then
$4.00 QD = 9 CD’s
$3.00 and
$2.00 QS = 25 CD’s

$1.00
resulting in a surplus
of 16 CD’s
$0.00 Q
0 5 10 15 20 25 30 35
77
 Changes in Equilibrium

Three steps to analyzing changes in

equilibrium:
1. Decide whether event shifts supply
curve,
demand curve or both.
2. Decide in which direction the curve
shifts.
3. Use demand-supply diagram to see
how the shift changes equilibrium P and Q. 78
 The Effect of Demand and Supply
Shifts on Equilibrium

SUPPLY CURVE SUPPLY CURVE SUPPLY CURVE

UNCHANGED SHIFTS TO THE RIGHT SHIFTS TO THE LEFT

DEMAND CURVE Q unchanged Q increases Q decreases

UNCHANGED P unchanged P decreases P increases

DEMAND CURVE Q increases Q increases or

SHIFTS TO THE RIGHT Q increases P increases or decreases
P increases decreases P increases

DEMAND CURVE Q decreases Q increases or Q decreases

SHIFTS TO THE LEFT P decreases decreases P decreases or
P decreases increases

79
Equilibrium Price and Quantity Effects of
Supply and Demand Curve Shifts

80
Equilibrium Price and Quantity Effects of
Supply and Demand Curve Shifts

81
 EXAMPLE 1 :
Price of gas and Hybrid Cars
Event to be analyzed: P
increase in price of gas. S1
STEP 1: P2
D curve shifts
because price
STEP 2: of gas P1
affects demand for
D shifts right
hybrids.
because
STEPhigh
3: gas
S price
curvemakes
does not shift,
hybrids D1 D2
The shiftprice
because causes of an
gas
more attractive Q
increase
does not in price
affect cost of Q1 Q2
relative to other cars.
and quantity
producing of
hybrids.
hybrid cars.
82
 EXAMPLE 2 :
Technology and Hybrid Cars
Event: New technology P
reduces cost of producing
hybrid cars. S1 S2
STEP 1:
S curve shifts
because event affects P1
STEP 2:
cost of production.
S shifts right P2
Dbecause
curve does event not
STEP
shift, 3:
because
reduces cost, D1
The shift technology
production causes
makes production Q
isprice
not to fall
one of the Q1 Q2
more profitable at
and quantity
factors that to rise.
affect
any given price.
demand.
83
 EXAMPLE 3: A Shift in Both Supply and Demand

Events:
price of gas up AND P
new technology reduces S1 S2
production costs
STEP 1: P2
Both curves shift.
P1
STEP 2:
Both shift to the right.
STEP 3: D1 D2
Q rises, but effect Q
on P is ambiguous: Q1 Q2
If demand increases more
than supply, P rises.
84
 EXAMPLE 3 : A Shift in Both Supply and Demand

Events: P
price of gas rises AND S1 S2
new technology reduces
production costs

STEP 3, cont. P1
But if supply P2
increases more than
demand, D1 D2
P falls. Q
Q1 Q2

85
EXERCISES

86
 January 2022
A group of economic students are analyzing the market for
KFC Value Box. For each situation, indicate how it affects the
demand curve or supply curve. Then, determine what will
happen to the equilibrium price and equilibrium quantity,
ceteris paribus.

1. The raw material suppliers have increased the price of chicken,

potato and cabbage.

2. KFC Malaysia is introducing a plant-based and meatless burger

to suit the taste and preferences of Malaysians. This new
burger will be added to the KFC Value Box menu.

3. McDonald’s Malaysia reduced the price of their Lunch Set.

4. The Ministry of Health recently circulated an infographic about

the side effects of eating too much fast food. 87
 January 2022
The market demand and market supply functions for coffee in
Alice’s cafe is as follows:

Qd = 55 – 5P
Qs = -50 + 10P

1. Identify the market equilibrium price and equilibrium quantity.

2. Assuming that Alice’s cafe is giving a RM1 off promotion for

their 1 year anniversary, what do you expect to happen in the
market? Support your answers with figures.

3. Identify the new market equilibrium price and equilibrium

quantity if the new demand function is Qd = 70 – 5P.

88
Reference
Tucker, I.B.(2017).
Economics for today. (9th
ed.). Mason, OH: Thomson
South Western.

89
The End

90