TOPIC 2

PRINCIPLES OF
MICROECONOMIC
S Changes in
demand and
supply
 DEMAND

Change in Quantity Demanded

 Movement along the demand curve:
- Change in price of the goods will result in the change in
quantity demanded (ceteris peribus)

Change
 Shiftof thein Demand
demand curve:
- Change in other factors except price of the goods will
result in the shift of the demand curve
 DEMAND

Change in Quantity Demanded

 A Movement along the
Demand Curve

 When the price of the good

changes and everything
else remains the same, the
quantity demanded changes
and there is a movement
along the demand curve.
 DEMAND

Change in Demand
 A Shift of the Demand
Curve

 If the price remains the same

but one of the other
influences on buyers’ plans
changes, demand changes
and the demand curve shifts.
 DEMAND

Determinants of demand
 Price
When price of goods fall, demand for the goods increase and
vice versa; ceteris peribus

 Price of related goods

Substitute goods
 A substitute goods are goods that can be used in place of
another goods.
 Increase in the price of one goods can cause an increase
in the demand for its substitutes.
 The price of goods and the quantity of substitute goods
has positive relationship.
 Example: Coffee and Tea, Palm oil and Corn oil
 DEMAND

Determinants of demand
Price
Priceofofcoffee
coffee(RM)
(RM) Price of tea (RM)

P1
P

P0 D1
D
D0

Q1 Q0 Q0 Q1 Quantity (units)
Quantity (units)

At present, the price of coffee is at P0 and the quantity demanded is at Q0. When price
of coffee increases to P1, the quantity demanded for coffee decreases to Q1. Since tea
is a substitute for coffee. The increase in price of coffee cause consumers to switch to
tea. Therefore, the demand for tea increases. As a result, the demand curve shift from
D0 to D1 and quantity demanded increases from Q0 to Q1
 DEMAND

Determinants of demand
Complement goods
 A complement goods are goods that are used together
with other goods to complete the function of an object.
 Increase in the price of one goods can cause a decrease in
the demand for its complement.
 The price of goods and the quantity of complement
goods has an inverse relationship.
 Example: Car and Petrol
 DEMAND

Determinants of demand
Price
Priceofofcoffee (RM)
cars (RM) Price of petrol (RM)

P0
P

P1 D1
D
D0

Q0 Q1 Quantity (units) Q1
Quantity (units)
Q0

At present, the price of car is at P0 and the quantity demanded is at Q0. When price
of car decreases to P1, the quantity demanded for car increases to Q1. Thus, demand
for petrol increases. As a result, the demand curve for petrol shifts from D0 to D1 and
quantity demanded increases from Q0 to Q1.
 DEMAND

Determinants of demand
 Expected future price
If the price of a good is expected to rise in the future, current
demand for the good increases and the demand curve shifts
rightward.

 Income
When income increases, consumers buy more of most goods and the
demand curve shifts rightward.
 A normal good is one for which demand increases as income
increases.
 An inferior good is a good for which demand decreases as income
increases.
 DEMAND

Determinants of demand
 Expected Future Income and Credit
When income is expected to increase in the future or when credit
is easy to obtain, the demand might increase now.

 Population
The larger the population, the greater is the demand for all
goods.

 Preferences, taste
People with the same income have different demands if they
have different preferences.
 SUPPLY

Change in Quantity Supplied

 Movement along the supply curve:
- Change in price of the goods will result in the change in
quantity supplied (ceteris peribus)

Change in Supply
 Shift of the supply curve:
- Change in other factors except price of the goods will
result in the shift of the supply curve
 SUPPLY

Change in Quantity Supplied

 A Movement along the
Supply Curve

 When the price of the good

changes and everything
else remains the same, the
quantity supplied changes
and there is a movement
along the supply curve.
 SUPPLY

Change in Supply
 A Shift of the Supply Curve

 If the price remains the same

but one of the other
influences on producers’
plans changes, supply
changes and the supply curve
shifts.
 SUPPLY

Determinants of supply
 Price
When price of goods increase, the higher the quantity will be
supplied and vice versa; ceteris peribus.

 Price of related goods

Substitute goods
 A substitute goods are goods that can be used in place of
another goods.
 Increase in the price of one goods can cause a decrease in
the supply for its substitutes.
 The price of goods and the quantity of substitute goods
has an inverse relationship.
 Example: Coffee and Tea, Palm oil and Corn oil
 SUPPLY

Determinants of supply
Complement goods
 A complement goods are goods that are used together
with other goods to complete the function of an object.
 Increase in the price of one goods can cause an increase
in the supply for its complement.
 The price of goods and the quantity of complement
goods has a positive relationship.
 Example: Car and Petrol
 SUPPLY

Determinants of supply
 Production cost of the goods
An increase in the price of resources reduces the profitability of
producing the goods and services. Thus, producer will reduce
production at each price. The supply curve will shift leftwards.

 Technology
Technological improvements increase the productivity of
labor; results in lower production costs and higher
profitability. The supply curve shift rightward.
 SUPPLY

Determinants of supply
 Number of suppliers
The larger the number of suppliers, the greater is the supply
for the goods; increasing market supply. Therefore, supply
curve shift rightward.

 Weather
Weather condition will affect supply for certain industries.
 SUPPLY

Determinants of supply
 Tax
Tax is a financial charges, fee levied enforced by the
government on individuals or businesses to fund public
spending. An increase in tax will increase the cost of
production.

 Subsidies
Subsidy is a benefit or financial aid given by the
government to individuals and businesses to ease financial
burden in consideration of overall public interest. An
increase in subsidy will reduce the cost of production.
 MARKET
EQUILIBRIUM

Definition
Equilibrium is a situation when market demand curve intersect
with market supply curve.

 Equilibrium price: Price at equilibrium point

 Equilibrium quantity: Quantity at equilibrium point
 MARKET
EQUILIBRIUM
 MARKET
EQUILIBRIUM

Conditions for market equilibrium

 Quantity demanded = Quantity supplied

If,
: Shortage or excess demand
: Surplus or excess supply
 MARKET
EQUILIBRIUM

Conditions for market equilibrium

Price (RM) Quantity Quantity Effect on Effect on
demanded supplied quantity price
(units) (units) demanded/
supplied

1 32 18 Shortage of 14 Increase
units
2 28 21 Shortage of 7 Increase
units
3 24 24 Equilibrium Stable
4 20 27 Surplus of 7 Decrease
units
5 16 30 Surplus of 14 Decrease
units
 MARKET
EQUILIBRIUM

Conditions for market equilibrium

6
Price (RM) S
5 Surplus

3 Equilibrium

2 Shortage

1 D

0
14 16 18 20 22 24 26 28 30 32 34

Quantity (units)
 MARKET
EQUILIBRIUM

Determining equilibrium
 Numerical analysis
 MARKET
EQUILIBRIUM

Determining equilibrium
 Graphical analysis

Equilibrium point
 MARKET
EQUILIBRIUM

Determining equilibrium
 Mathematical analysis

Since equilibrium is found when , therefore

Example:
Given Determine the equilibrium point.
 MARKET
EQUILIBRIUM

Determining equilibrium

Equilibrium point is found at price of RM 3 and quantity of 24 units

 MARKET
EQUILIBRIUM

Changes in Price and Quantity

All Possible Changes in Demand and Supply

 A change in demand or supply or both demand and supply

changes the equilibrium price and the equilibrium quantity.
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Change in Demand with
No Change in Supply

When demand increases,

equilibrium price rises and
the equilibrium quantity
increases. (vice versa)
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Change in Supply with No
Change in Demand

When supply increases, the

equilibrium price falls and
the equilibrium quantity
increases. (vice versa)
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Increase in Both Demand and
Supply in Unequal Magnitude

An increase in demand and an

increase in supply increase the
equilibrium quantity.

The change in equilibrium price

is uncertain because the
increase in demand raises the
equilibrium price and the
increase in supply lowers it.
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Increase in Both Demand
and Supply in Equal
Magnitude

An increase in demand and an

increase in supply increase the
equilibrium quantity.

The equilibrium price is

constant or unchanged.
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Decrease in Both Demand
and Supply in Unequal
Magnitude

A decrease in both demand

and supply decreases the
equilibrium quantity.

The change in equilibrium

price is uncertain because the
decrease in demand lowers
the equilibrium price and the
decrease in supply raises it.
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Decrease in Both Demand and
Supply in Equal Magnitude

A decrease in both demand and

supply decreases the equilibrium
quantity.

The equilibrium price is constant

or unchanged
 MARKET
EQUILIBRIUM
Changes in Price and Quantity
Decrease in Demand and
Increase in Supply in Unequal
Magnitude

A decrease in demand and an

increase in supply lowers the
equilibrium price.

The change in equilibrium

quantity is uncertain because
the decrease in demand
decreases the equilibrium
quantity and the increase in
supply increases it.
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Decrease in Demand and
Increase in Supply in Equal
Magnitude

A decrease in demand and an

increase in supply lowers the
equilibrium price.

The equilibrium quantity is

constant or unchanged.
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Increase in Demand and
Decrease in Supply in
Unequal Magnitude

An increase in demand and a

decrease in supply raises the
equilibrium price.

The change in equilibrium

quantity is uncertain because
the increase in demand
increases the equilibrium
quantity and the decrease in
supply decreases it.
 MARKET
EQUILIBRIUM

Changes in Price and Quantity

Increase in Demand and
Decrease in Supply in Equal
Magnitude

An increase in demand and a

decrease in supply raises the
equilibrium price.

The equilibrium quantity is

constant or unchanged
 MARKET
EQUILIBRIUM

Government Intervention
Price Ceiling Price Floor
Definition A legally mandate A legally mandate minimum
maximum price that price that buyers are required to
sellers are allowed to pay for the goods
charge the consumers

Purpose To protect consumers To protect sellers

How Price is set BELOW Price is set ABOVE
equilibrium price equilibrium price

Effect
Action Rationing Government purchase and
supply it

Example of goods Necessity goods Agricultural price support

 MARKET
EQUILIBRIUM

Government Intervention

P
S
Price floor (min price):
QS > QD
Price floor Price of the good is set
above the market
equilibrium price
- to help producers

Price ceiling Price ceiling (max price) :

D
Q D > QS Price of the good is set
below the market
Q
equilibrium price
- to help consumers