Chapter 1a Demand n Supply New

8/8/2019 Chapter 1a Demand n Supply New

1/65

ENGINEERING

ECONOMICSBFC 4013

Demand & SupplyBy : En. Mohd Luthfi Ahmad Jeni

University Tun Hussein Onn Malaysia


2/65

MARKETS DEFINED

MARKETS

POTENTIAL

SELLERS

POTENTIAL

BUYERS


3/65

$5

4

3

2

1

DEMAND DEFINED

P QD10

20

35

55

80

A schedule or a curve that shows the

various amounts of a product that

consumers are willing and able to

purchase at each of a series of possible

prices.

DEFINITION OF DEMANDSum of goods and services available in the

market which are consumed and affordable by

the customers on every price level for specific

period of time.


4/65

LAW OF DEMAND DEMAND LAW

The price for a product is

inversely proportional to

the quantity demand.

DDx = f (Px) ceterisparibus*

DDx = a bPx

* Demand of product is directly

determined by priceFigure 1A.1 Graph Demand for a Product

Price (Px)

Quantity Demand (DDx)

D

D

B

A

C

Expansion of

demand

Depletion of

demand

0


5/65

LAW OF DEMAND

As Price Falls

Quantity Demanded Rises As Price Rises

Quantity Demanded Falls

An inverse relationship exists

between price and quantity

demanded


6/65

Diminishing Marginal UtilityLAW OF DEMAND


7/65


Income Effect


8/65


Income Effect

Substitution Effect


9/65

Diminishing Marginal Utility

Income Effect

Substitution Effect

LAW OF DEMAND

Demand Curve

Individual and MarketDemand


10/65

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80

PriceofCorn

QuantityofCorn

CORNPlot the Points

10 20 30 40 50 60 70 80


11/65

55

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80

PriceofCorn

QuantityofCorn

CORNPlot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND


12/65

35

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80

PriceofCorn

QuantityofCorn

CORNPlot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND


13/65

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80

PriceofCorn

QuantityofCorn

CORNPlot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND


14/65

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80

PriceofCorn

QuantityofCorn

CORNPlot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND


15/65

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80D

PriceofCorn

QuantityofCorn

CORNConnect the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND


16/65

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80D

PriceofCorn

QuantityofCorn

CORN

10 20 30 40 50 60 70 80

What if

DemandIncreases?

GRAPHING DEMAND


17/65

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1D

PriceofCorn

QuantityofCorn

CORN

10 20 30 40 50 60 70 80

D

Increase

inDemand

Increase

in Quantity

Demanded10

20

35

55

80

30

40

60

80

+

GRAPHING DEMAND


18/65

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80D

PriceofCorn

QuantityofCorn

CORN

10 20 30 40 50 60 70 80

What if

DemandDecreases?

GRAPHING DEMAND


19/65

P

Qo

$5

4

3

2

1

P QD

$5

4

3

2

1

10

20

35

55

80D

PriceofCorn

QuantityofCorn

CORN

10 20 30 40 50 60 70 80

--

10

20

40

60

D

Decrease

in

Demand

Decrease

in Quantity

Demanded

GRAPHING DEMAND


20/65

DETERMINANTS OF

DEMAND Tastes

Number of Buyers

Income Normal (Superior) & Inferior Goods

Prices of Related Goods

Substitutes & Complements Unrelated Goods

Expectations


21/65

Demand Theory

PRICE DEMAND FLEXIBILITY

TYPES OF PRICE DEMANDFLEXIBILITY

Flexible Demand (Ep>1)

Non-flexible Demand (Ep


22/65

Demand Theory

POINT DEMAND FLEXIBLE

EXAMPLE 1A

Determine the point

flexibility for each types ofdemand below:

0

op

p

QP

PQE

priceinc an eofPercenta e

uantityinc an eofPercenta eE

v((!

!

)(

)(

POINT

PRICE(RM) QUANTITY

A 3 5B 2 10

C 1 15 Figure 1A.4 Graph showing demand of differentflexiblibilty

Price (Px)

Quantityondemand (DDx)

D

D

B

A

C

0 5 10 15

1

2

3(P

(Q

1

15

15CE

110

25BE

35

35AE

p

p

p

!v!

!v!

!v!


23/65

Demand Theory RELATIONSHIP BETWEEN PRICE CHANGE (P), TOTAL

REVENUE (TR) AND FLEXIBLE PRICE DEMAND (Ep)

TR = P x Q

TR : Total Revenue P : Price of Product

Q : Quantity of Product

P is inversely proportional with Q P ascending, Q descending P descending, Q ascending

TR depend on the flexible demand value for the products (Ep)

Effect on Price ascending Non-flexible Demand Ep 1 : P x Q = TR

Effect on Price descending Flexible Demand Ep >1 : P x Q = TR Non-flexible Demand Ep


24/65

Demand Theory

EXAMPLE 2A RESULT When Ep>1

Price (P) ascending from RM3 toRM6 will decreases TR fromRM900 to RM0

Price (P) descending from RM6to RM3 will increases TR fromRM0 to RM900

When Ep


25/65

Demand Theory

FLEXIBLE INCOME (EI)

Determine percentage ofchange in quantity demandbased on 1% change ofincome

Can be used to categorizeproducts:

LUXURY : EI > 1

NORMAL : 0 < EI < 1

NECESSITY : EI < 0

CROSS FLEXIBILITY(EXY)

Determine percentage of changein quantity demand based on 1%price change on other products.

Result: EXY > 1:

Ascending price on product Ywill increase the quantitydemand on product X ( X willreplace Y).

EXY < 1:

Ascending price on product Ywill decrease the quantity ofdemand for product X

(X&Y complimentary products)0o

I

I

Q

I

I

QE

incomeonc an eofPercenta e

uantityonc an eofPercenta eE

v(

(!

!

Ypr ctf rch gpricfrc t g

f rch gfrc t g

Y !


26/65

Demand TheoryConclusion:

If product demand is flexible

(Ep>1), the seller need to lower the

price of product .

If product demand is non-flexible

(Ep


27/65

SUPPLY / OFFER DEFINED

$1

2

3

4

5

P QS

CORN

- Supply is a schedule or a curve showing

the amounts of a product that producers are

willing and able to make available for saleat each of a series of possible prices.

- Supply is a schedule or a curve showing

the amounts of a product that producers are

willing and able to make available for saleat each of a series of possible prices.

5

20

35

50

60

- Quantity of product and services affordable by

the producer for sale in the market for every price

range for specific period of time.


28/65

LAW OF SUPPLY / OFFER

As Price RisesQuantity Supplied Rises

As Price Falls

Quantity Supplied Falls

A direct relationship exists between price and

quantity supplied


29/65

Supply / Offer Theory

OFFER LAW

Price and quantity of product offered : POSITIVERELATIONSHIP (+)

When price ascends, producer will increases the quantity ofoffer to

achieve high profit.

When price descends, the producer will decreases the quantity

of offer, to avoid lost.


30/65

5

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORNPlot the Points

GRAPHING SUPPLY


31/65

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORNPlot the Points

GRAPHING SUPPLY


32/65

35

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORNPlot the Points

GRAPHING SUPPLY


33/65

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORNPlot the Points

GRAPHING SUPPLY


34/65

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORNPlot the Points

GRAPHING SUPPLY


35/65

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORN

Connect the Points

GRAPHING SUPPLY


36/65

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORN

What if

Supply

Increases?

GRAPHING SUPPLY


37/65

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

PriceofCorn

QuantityofCorn

$5

4

3

2

1

60

50

35

20

5

P QS

CORN

80

70

60

45

30

SIncrease

in

Supply

Increase

in Quantity

Supplied

GRAPHING SUPPLY


38/65

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORN

What if

Supply

Decreases?

GRAPHING SUPPLY


39/65

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$5

4

3

2

1

60

50

35

20

5

P QS

PriceofCorn

QuantityofCorn

CORNS

45

30

20

0

--

Decrease

in

Supply

Decrease

in QuantitySupplied

GRAPHING SUPPLY


40/65


Figure 1A.6 Offer Graph by seller

MarketPrice

Quantityofproductoffered

S

SB

A

C

0 20 30 40

1

2

3

4

Expansion in

offerDepletion in

offer

Figure 1A.7 Change in offer for similar price

MarketPrice

Quantityofproductoffered

S2

S

0 Q2 Q Q1

P

Expansion in

offer

Depletion in

offer

S2 S1

S S1


41/65


FLEXIBLE OFFER flexible

TYPES OF FLEXIBLE PRICE

OFFER

Flexible Demand (ES>1)

Non-flexible demand (ES


42/65

Offer Theory

KEANJALAN PENAWARAN

Fi ure 1A.9 Offer flexible rap

MarketPrice

Quantityofproductsoffered

S1

0 Q0

Q1

Q2

P

S0

S2

C an e Factors onFlexible Price Offer (ES)

1. Time Factor

2. C aracteristic of product

3. Manufacturin factor used

- Current term

- S ort term

- Lon term

- Fixed factor

- Variable factor

P1


43/65


Fi ure 1A.8

Price of

ot er productClimate

ExpectedPrice

Sum of

Producers

Tec nolo y

Tax

and Subsidy

Factor Cost

Of Production

Factors on Decision of Offer


44/65

DETERMINANTS OF

SUPPLY Resource Prices

Technology

Taxes & Subsidies

Prices of Other Goods

Price Expectations

Number of Sellers


45/65

DETERMINANTS OF

SUPPLY Resource Prices

Technology

Taxes & Subsidies

Prices of Other Goods

Price Expectations

Number of Sellers

Combining

with

Demand

MARKET DEMAND &


46/65

MARKET DEMAND &

SUPPLY

$5

4

3

2

1

10

20

35

55

80

$5

4

3

2

1

60

50

35

20

5

200

B

U

Y

E

R

S

P QD

BUSHELS

OF CORNMARKET

DEMAND

2,000

4,000

7,000

11,000

16,000

200

S

E

L

L

E

R

S

12,000

10,000

7,000

4,000

1,000

P QS

BUSHELS

OF CORNMARKET

SUPPLY

EQUILIBRIUM

x x

MARKET DEMAND &


47/65

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$5

4

3

2

1

2,000

4,000

7,000

11,000

16,000

$5

4

3

2

1

12,000

10,000

7,000

4,000

1,000D

P Q

S

PriceofCorn

QuantityofCorn

CORN

MARKET

CORN

MARKET

Market

ClearingEquilibrium

MARKET DEMAND &

SUPPLY

MARKET DEMAND &


48/65

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$5

4

3

2

1

2,000

4,000

7,000

11,000

16,000

$5

4

3

2

1

12,000

10,000

7,000

4,000

1,000D

P Q

S

PriceofCorn

QuantityofCorn

CORN

MARKET

CORN

MARKETSurplusAt a $4 price

more is being

supplied than

demanded

MARKET DEMAND &

SUPPLY

MARKET DEMAND &


49/65

117

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$5

4

3

2

1

2,000

4,000

7,000

11,000

16,000

$5

4

3

2

1

12,000

10,000

7,000

4,000

1,000D

P Q

S

PriceofCorn

QuantityofCorn

CORN

MARKET

CORN

MARKET

At a $2 price

more is beingdemanded than

supplied

Shortage

MARKET DEMAND &

SUPPLY

MARKET DEMAND &


50/65

117

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$5

4

3

2

1

2,000

4,000

7,000

11,000

16,000

$5

4

3

2

1

12,000

10,000

7,000

4,000

1,000D

P Q

S

PriceofCorn

QuantityofCorn

CORN

MARKET

CORN

MARKET

Shortage

MARKET DEMAND &

SUPPLY

Surplus


51/65

Market Equilibrium

MARKET ECONOMY

Demand Vs Offer of product

Demand : USER

Offer : PRODUCER

MARKET

A place where buyer and seller interact

between one another.

MARKET EQUILIBRIUM

Quantity offered by the producer

at a particular price = quantity

demanded by the buyer at that

price.

Fi ure 1A.10 Example of relations ip between

price & uantity of product X

Price

Quantity

S

0 200 600 1000

30

D

DS

E

10

50


52/65

Market Equilibrium DEMAND FORMULA

OFFER FORMULA

FOR EQUILIBRIUM TO

OCCUR

QD = a bP

QS = f + P

QD = Qsor

a bP = f + P

Note

QD : quantity demand

QS : quantity offer@supplyP : target pricea dan f : constantsb : demand gradientg : offer gradient

Facts

Gradient of demand (b) : ( - )Gradient of offer (g) : ( + )


53/65

E1E2

Change of Point of Equilibrium

Fi ure 1A.12 Offer C an e Demand Fix

Price

Quantity

0 Q2 Q0 Q1

P0

P1

P2

D S

S

D

E0

S2

S2

S1

S1

E2

Fi ure 1A.11 Demand C an e Offer Fix

Price

Quantity

S

0 Q2 Q0 Q1

P0

D

D

S

E0

P2

P1

D1

D1

D2

D2

E1


54/65

MARKET EQUILIBRIUM

Equilibrium Price & Quantity

Rationing Function of Prices

Changes in Demand Changes in Quantity

Demanded

Changes in Supply

Changes in Quantity Supplied


55/65

Complex Cases

Supply Increases;Demand DecreasesPrices DecreaseQuantity Indeterminate

Supply Decreases;

Demand IncreasesPrice IncreasesQuantity Indeterminate

Multiple Shifts


56/65

Complex Cases

Supply Increases;Demand IncreasesPrices IndeterminateQuantity Increases

Supply Decreases;

Demand DecreasesPrice IndeterminateQuantity Decreases

Multiple Shifts


57/65

Government Set Prices

Price CeilingsShortages

Rationing ProblemBlack Markets

Rent Controls

Price FloorsSurpluses


58/65

Price Ceiling

A maximum price that sellers may charge for a good,

usually set by government.

Excess Demand

(Shortage)

Created by a

Price Ceiling


59/65

Price ceiling

Price Rationing :The process by which the market system

allocates goods and services to consumers when quantity

demanded exceeds quantity supplied.

Ration coupons Tickets or coupons that entitle

individuals to purchase a certain amount of a given product

per month.

Black market A market in which illegal trading takes

place at market-determined prices.


60/65

PRICE FLOORS

Price floor A minimum pricebelow which exchange is not

permitted.

Minimum wage A price floorset under the price of labor.

Agricultural Products


61/65

Effect of Tax & Subsidy

TAX

Determined by government

Commonly need to be paid by producer and consumers

AIM :

Source of revenue

Reducing usage of products

SUBSIDY

Offer by government, in term of aid.

Given to the producer.

AIM :

To reduce cost engaged by the producer

Reducing price of product.

To help local producer to be at par with foreign producer (highquality product but cheaper price)


62/65

Effect of Tax Market Equilibrium

Fi ure 1A.13 Tax paid by consumer and

Producer

(Imperfect flexible Product)

E

Price

Quantity

S1

0 Q2 Q1

P0

D

DS1

P2

P1

S2

S2

B

F

A

Consumer

Producer

TAX PAID BY CONSUMERS > PRODUCER

S2

Fi ure 1A.14 Tax paid by consumer and

Producer (Flexible Product)

A

E

Price

Quantity

S1

0 Q2 Q1

P0

D

D

S1

P2

P1

S2

S2

B

F

Consumer

ProducerS2

TAX PAID BY CONSUMERS < PRODUCER


63/65

Effect on Tax- Market Equilibrium

Fi ure 1A.16 Tax paid by Customer & Producer

(Perfect flexible Product Demand)

Fi ure 1A.15 Tax paid by Customer &

Producer

( Imperfect flexible Product Demand)

A

CUSTOMER NOT WILLING TO BUY

PRODUCT IF P >OP1

Price

Quantity

S1

0 Q2 Q1

P1 D

S1

S2

B

S2

Price

Quantity

S1

0 Q

D

S1

P2

P1

S2

S2

TAX PAID BY CUSTOMERS

(ex : luxury products, highly income group)


64/65

Effect on Subsidy- Market Equilibrium

Fi ure 1A.17 Subsidy & its effect on Demand

C

Price

Quantity

S2

0 Q1 Q2

P0

D

S2

P1

P2

S1

S2

E

A

Customer

Producer D

B


65/65

E1 E0

Government Intervention Price System

Fi ure 1A.18 Minimum Price Concept

PROTECTS PRODUCERS RIGHT

Price

Quantity0 Q2 Q1

P2

P1

P1

D

D

A

S0

S0

S1

S1

E0

MinimumPrice

B

Fi ure 1A.19 Maximum Price Concept

Price

Quantity

S

0 Q0 Q1

P2

S

P0

P1

D1

D1

D0

D0

E1

MaximumPrice

A B

PROTECTS CUSTOMERS RIGHT

Documents

Chapter 1a Demand n Supply New