PB 102 MICROECONOMICS

CHAPTER 2

DEMAND AND SUPPLY THEORY

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DETERMINANTS OF DEMAND

-Demand curve-Demand schedule-Inverse relationship between price and quantity demanded

Mathematical concept Qd = a-bP

Beyond an ordinary demand curve

- Plot individual demand curve and market demand curve

a. Price of goodb. Others factors

DEMAND FUNCTION

EXCEPTIONAL DEMAND CURVEINDIVIDUAL

AND MARKET DEMAND

LAW OF DEMAND

Chapter 2: Demand and Supply Theory

How Demand and Supply Interact?

Definition of Demand

The ability and willingness to buy specific quantities of goods given of time at particular price; ceteris paribus

Means: all other factors are relatively constant

Keyword:Ability and willingness to buy

Law of Demand

States that, the higher the price of a good, the lower quantity demanded for that good and the lower the price, the quantity demanded is higher; ceteris paribus

Inverse relationship exist between price and quantity demanded

P DDP DD

Demand schedule

Price (RM) Quantity Demanded (units)

5 2

4 4

3 6

2 8

1 10

Demand curve

Price

2 4 6 8 10

5

4

3

2

1

Quantity

DD

Individual Demand & Market Demand

Individual demand:The quantity demanded by a single

individual Market demand:

The total quantity of demand in the marketAdding all the quantities demanded by all

consumers in the market

Individual Demand

Market Demand

Price (RM) Individual 1 Individual 2 Market Demand

5 2 4 6

4 4 5 9

3 6 6 12

2 8 7 15

1 10 8 18

Market Demand Curve

Determinants of Demand

Price of goodsPrice of related goodsConsumer’s incomeConsumer’s fashion, taste and interestPopulationExpectation about future priceAdvertisementsFestive seasons and climate

Price of related goods

Falls into two categories:Substitude goods – A good can be used to

place of another goods. Example: Public bus versus LRT ride; Pepsi-Cola versus Coca-Cola

When price of bus increases, demand for it will reduced and people will look for another alternative which is LRT. Demand for LRT will increase

Price of related goods

Complementary goods – A good can be used together with another good. Example: Disk/pen drive/software and computer

When price of computer increase, demand for it will reduced so demand for software also decreases

Consumer’s income

Falls into two goods:Normal goods – Demand for it increases

as income increases. Example: car, shirt, books

Inferior goods – Demand for it decreases as income increases. Example: low grade rice

Consumer’s fashion, taste and interest

Interest or preferences are an individual’s attitudes toward goods and services. Example: fast food restaurant

Demand changes as consumer’s taste/interest changes

Example: Changes in music, health conscious, fashion, readings.

Population

Demand depends on the size of the total population or number of buyers in the market

An increase in total population, demand for goods and services will be greater

Expectation about future prices

The higher the expected future price of a

good, today’s demand for that good will be larger.

Example: When the government going to increase the price of petrol by next week,

demand for petrol today will increase

Advertisements

Advertised goods normally have higher demand because of awareness

Festive seasons and climate

During festive seasons, different products will be demanded and higher demand for that particular products

Example: Hari Raya, dry season, monsoon season.

Demand function

Mathematical concept Qd = a – bPWhere : Qd is quantity demanded

a is quantity demanded when price is zero

b is slope of demand curve

P is price

P/S: Refer notes given

Exceptional demand curve

In some cases, demand curve might be vary from ordinary demand curve

The situation exist for Giffen goods and luxury goods

Giffen goods – demand is lower when price is decrease

Luxury goods – demand is greater when price is increase

Exceptional Demand Curve

Luxury goods/ Veblen goods

DD1

DD

Qty

P

DDP0

Upper regressive

Exceptional Demand Curve

Giffen goods

Qty

P

P0

DD1

DD

DD

Bottom regressive

Change in Quantity Demanded Movement along the

demand curve Occurs when price of

own goods change Upward movement –

decrease in quantity demand (contraction)

Downward movement – increase in quantity demand (Expansion)

Change in Demand Shift in demand

curve Occurs when there

are change in other factors of demand (taste, income, population, price of related goods)

Shift to the right – increase in demand

Shift to the left – decrease in demand

Giffen Goods

Demand phenomenon

What do you think?

Demand phenomenon

Explain the picture below

PB102: MICROECONOMICS

CHAPTER 2

DEMAND AND SUPPLY THEORY

Firms and Industries Demand

Curve

Exceptional Supply curve

Supply Function

Law of supply Supply

theory

This illustration is a part of ”Spheres”. See the whole presentation here slideshop.com/3d-spheres

Determinants of Supply

Supply phenomenon

Source: www.casavaria.com/hotspring/2008...r-areas/

Supply phenomenon

Source: anup-adelgundis.trip0d.eu/100409/

Food crisis

Source: www.toonpool.com/cartoons/Food%2...is_17153

Food crisis

Source: gaianeconomics.blogspot.com/2008...ive.html

Definition of Supply

The ability and willingness to sell or

produce particular good and services in a given period of time at particular price, ceteris paribus

Law of Supply

States that the higher the price of a good, the greater is the quantity supplied for that good and the lower the price of a good, quantity supplied is lower, other things being equals (ceteris paribus)

P QS

P QS

Supply Schedule

Price (RM) Quantity (units)

5 10

4 8

3 6

2 4

1 2

Supply Curve

Price (RM)

Quantity supplied

SS5

4

3

2

1

0 2 4 6 8 10

Supply Schedule & Supply Curve

Price Quantity supplied

5 60

4 50

3 40

2 30

1 10

Individual Supply

The relationship between the quantity of product supplied by a single seller and its price

Market Supply

The relationship between the total quantity of a product supplied by adding all the quantities supplied by all sellers in the market

Seller 1 + Seller 2 + Seller 3 = Market Supply

Market Supply Schedule for Pen

Price (RM) Seller A Seller B Market Supply

5 10 8 18

4 8 7 15

3 6 6 12

2 4 5 9

1 2 4 6

Determinants of Supply

Goods own pricePrice of related goodsCost of productionExpected future priceTechnological advancementNumber of suppliersGovernment policies

Goods own price

The basic supply relationship is between the price of a good and the quantity supplied.

The relationship is positive or direct meaning that an increase in price will induce and increase in the quantity supplied.

Price of related goods

Consists of two goods:Substitute goods – an increase in the price

of a substitute good in production, lower the supply of the good

When price of Pepsi increases, supply of Pepsi will be increased and supply of Coke will be decreased

Price of related goods

Second category:Complementary goods – an increase in the

price of a good will increase the supply of another complement good

When price of pen increases, supply for pen will be increased and supply of ink also increased since both are complementary goods

Cost of production

The supply will change in response wikth the factor of production (labor, capital, land)

When cost of production increases, the supply will decrease

Ex: An increase in the wages of the labor and price of the capital equipment used to produce tapes, will reduce the supply of tapes

Expected Future Price

The higher the expected future price of a good, the smaller is today’s supply of a good

Ex: When government announced an increase in the price of sugar, the today’s supply will decrease because the supplier wants to gain higher profit with new price

Technological Advancement

Changes in technology is the most influence on supply

New technologies enable producers to use fewer factors of production will lower the cost of production and increase supply

Ex: When new technology was introduced in paddy harvesting, supply of rice increased

Number of Suppliers

Other things being equal, the larger of number of firms supplying a good, larger is the supply of the good

Example: if there an increase in number of cafeteria in PKB, supply of foods and drinks will also increase

Government Policies

Falls in two types:Taxes – will decrease goods supply Subsidies – will increase the supply as it

encourage producers to produce more

Change in Quantity Supplied

Movement along the supply curve

Occurs when price of own goods change

Upward movement – increase in quantity supplied (expansion)

Downward movement – decrease in quantity supplied (contraction)

Changes in Quantity Supplied

Price

P3

P2

P1A

B

C

Q1 Q2 Q3Quantity

Change in Supply Shift in supply curve Occurs when there

are change in other factors of supply (price of related goods, government policies, technology)

Shift to the right – increase in supply

Shift to the left – decrease in supply

Changes in Supply

Price

S1

S2

S3

Quantity

Reflective journal

Applicable concept of demand and supply theory based on articles given

Use supply and demand analysis to explain the article you choose