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- 1. Chapter 2 DEMAND, SUPPLY & MARKET EQUILIBRIUM
- 2. Chapter Outline <ul><li>1.1 Introduction: Market and the Circular Flow </li></ul><ul><li>1.2 Demand (DD) </li></ul><ul><li>1.3 Supply (SS) </li></ul><ul><li>1.4 Market Equilibrium </li></ul><ul><li>1.5 Change in Equilibrium (SS & DD) </li></ul><ul><li>1.6 SS/DD Analysis: Example </li></ul>
- 3. 1.1 INTRODUCTION Demand & supply interaction Economics decision-making units Market & the circulation flow
- 4. Markets <ul><li>A market is a group of buyers and sellers of a particular goods and services. </li></ul><ul><li>A market may be local, national or international in scope. </li></ul><ul><li>This chapter concern purely competitive market with a large number of independent buyers and sellers. </li></ul>
- 5. 1.2 DEMAND <ul><li>Quantity consumers are both willing and able to buy at each possible price during a given time period, other things constant. </li></ul><ul><li>can be defined as the purchase of product </li></ul>How many packs of ‘ai yu bing’ will student buy at a price of RM2? What if the price is RM1.50? Relationship between price & quantity demanded
- 6. Law of Demand <ul><ul><li>Says that quantity demanded varies inversely, or negatively, to the price, other things constant. </li></ul></ul><ul><ul><li>Negative relationship between price and quantity demanded. </li></ul></ul><ul><ul><li>The higher the price, the smaller the quantity demanded. </li></ul></ul>Figure: Price & Quantity Demanded: The Law of Demand
- 7. <ul><li>Demand Schedule & Demand Curve </li></ul><ul><ul><li>The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. </li></ul></ul><ul><ul><li>The demand curve is a graph of the relationship between the price of a good and the quantity demanded. </li></ul></ul><ul><ul><ul><li>Downward sloping & to the right because </li></ul></ul></ul><ul><ul><ul><li>law of demand. </li></ul></ul></ul>
- 8. May’s Demand Schedule and Demand Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-Cream Cones $3.00 12 Example 1. A decrease in price ... 2. ... increases quantity of cones demanded.
- 9. <ul><li>Individual Demand & Market demand </li></ul><ul><ul><li>The individual demand is the relationship between the quantity demanded by a single buyer and its prices </li></ul></ul><ul><ul><li>The market demand is the relationship between the total quantity demanded by all consumers in the market and its price. </li></ul></ul>
- 10. The market demand curve is the horizontal sum of the individual demand curves! Price of Ice-Cream Cone Price of Ice-Cream Cone Price of Ice-Cream Cone 2.00 2.00 2.00 4 3 7 1.00 1.00 1.00 8 5 13 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Catherine’s Demand Nicholas’s Demand Market Demand + = When the price is $2.00, Catherine will demand 4 ice-cream cones. When the price is $2.00, Nicholas will demand 3 ice-cream cones. The market demand at $2.00 will be 7 ice-cream cones. When the price is $1.00, Catherine will demand 8 ice-cream cones. When the price is $1.00, Nicholas will demand 5 ice-cream cones. The market demand at $1.00, will be 13 ice-cream cones. Example
- 11. <ul><li>Changes in Quantity Demanded & Changes in Demand </li></ul><ul><ul><li>Changes in quantity demanded result in movement along the demand curve due a change in price while other factors remain constant. (upward/downward movement) </li></ul></ul><ul><ul><li>Change in demand is the shift of the demand curve due a change in other factors while price remains constant. (leftward/ rightward shift) </li></ul></ul>
- 12. Changes in Quantity Demanded 0 D Price of Ice-Cream Cones Quantity of Ice-Cream Cones A tax on sellers of ice-cream cones raises the price of ice-cream cones and results in a movement along the demand curve. A 8 1.00 B $2.00 4
- 13. Change in Demand <ul><li>A shift in the demand curve either to the left or right caused by any changes that alters the quantity demanded at every price. Such as: </li></ul><ul><ul><li>Income </li></ul></ul><ul><ul><li>Prices of related goods </li></ul></ul><ul><ul><li>Tastes </li></ul></ul><ul><ul><li>Expectations </li></ul></ul><ul><ul><li>Number of buyers </li></ul></ul>
- 14. Shifts in The Demand Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand Decrease in demand Demand curve, D 3 Demand curve, D 1 Demand curve, D 2
- 15. Changes in Consumer Income <ul><li>Goods can be classified into two broad categories: </li></ul><ul><ul><li>Normal goods : the demand increases when income increases and decreases when income decreases </li></ul></ul><ul><ul><li>Inferior goods : the demand decreases when income increases and increases when income decreases </li></ul></ul>
- 16. Changes in Price of Related Good <ul><li>Substitute Goods </li></ul><ul><li>A product that can be used in place of another product </li></ul><ul><li>A change in the price of substitute products affect the demand for the product in the same direction in which the price change. </li></ul><ul><li>E.g: tea vs coffee; a bus ride vs an LRT ride </li></ul><ul><li>( P coffee ↑ Q dd coffee ↓ DD tea ↑ ) </li></ul>
- 17. Changes in Price of Related Good <ul><li>(ii) Complementary Goods </li></ul><ul><li>A product that is used in conjunction with another product. </li></ul><ul><li>The change in the price of a complementary product affects the demand for the product in the opposite direction to the change price. </li></ul><ul><li>E.g: a disk and computer, pen and ink. </li></ul><ul><li>( P pen ↑ Q dd pen ↓ DD ink ↓ ) </li></ul>
- 18. <ul><li>Taste & Preference </li></ul><ul><ul><li>Tastes and preferences of consumers change significantly. </li></ul></ul><ul><ul><li>If a product become more fashionable, the demand for it will increase and if the same product becomes outdated, the demand for it will fall. </li></ul></ul><ul><ul><li>E.g: Changes in music, apparel or recreation. </li></ul></ul>
- 19. <ul><li>Expectations </li></ul><ul><ul><li>The higher the expected future price of a product, the higher the current demand for that product and vice versa. </li></ul></ul><ul><ul><li>E.g: When the government plans to increase the price of sugar the following week, the demand for sugar will immediately increase. </li></ul></ul>
- 20. <ul><li>Population or Number of Buyers </li></ul><ul><ul><li>A larger population with a high rate of growth creates greater demand for goods and services. </li></ul></ul><ul><ul><li>E.g : An increase in the population of UTAR would increase the demand for houses, F & B, and other goods and services. </li></ul></ul>
- 21. <ul><li>Taste / preference </li></ul>Summary for Movement/Shift in Demand
- 22. 1.3 SUPPLY <ul><li>Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant </li></ul><ul><li>Law of supply states that the quantity supplied is usually directly related to its price, other things constant </li></ul><ul><ul><li>The lower the price, the smaller the quantity supplied </li></ul></ul><ul><ul><li>The higher the price, the greater the quantity supplied </li></ul></ul>
- 23. <ul><li>Supply Schedule & Supply Curve </li></ul><ul><ul><li>The supply schedule is a table that showing how much of a product firms will set at different prices. </li></ul></ul><ul><ul><li>The supply curve is a graph illustrating how much of a product a firm will set at different prices. </li></ul></ul><ul><ul><ul><li>Upward slopping & to the right due to the law of supply. </li></ul></ul></ul>
- 24. Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price ... 2. ... increases quantity of cones supplied.
- 25. <ul><li>Individual Supply & Market Supply </li></ul><ul><ul><li>The individual supply is the relationship between price of good and the quantity an individual producer is willing and able to sell per period, other things constant. </li></ul></ul><ul><ul><li>The market supply is the sum of all that is supplied each period by all producers of a single product. </li></ul></ul>
- 26. Market Supply Curve
- 27. <ul><li>Changes in Quantity Supplied & Changes in Supplied </li></ul><ul><ul><li>A changes in quantity supplied result in the movement along the supply curve due a change in price while other factors remain constant. </li></ul></ul><ul><ul><li>Change in supply is shift of supply curve resulting from a change in one of the determinants of supply other than price of the goods. </li></ul></ul>
- 28. Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C A rise in the price of ice cream cones results in a movement along the supply curve. 0 $3.00
- 29. Changed in Supply <ul><li>A shift of the supply curve, either to the left or right. </li></ul><ul><li>Determinants of supply other than the price of the good </li></ul><ul><ul><li>Cost of production </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>Prices of related goods </li></ul></ul><ul><ul><li>Expectation </li></ul></ul><ul><ul><li>Number of sellers </li></ul></ul>
- 30. Shifts in The Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve, S 1 Supply curve, S 3 Supply curve, S 2
- 31. <ul><li>The Cost of Production </li></ul><ul><ul><li>Response to the factor of production (labor, land, capita, energy, and so on). </li></ul></ul><ul><ul><li>Supply of a goods are negatively related to the price of the inputs used to make the good. </li></ul></ul><ul><ul><li>Objective is to maximize profit. </li></ul></ul><ul><ul><li>Example: to produce ice-cream, sellers use various inputs such as cream, sugar, flavoring, ice-cream machines. When price of one or more of these inputs rises, producing ice-cream is less profitable & firm supply less ice-cream. </li></ul></ul>
- 32. <ul><li>Technology </li></ul><ul><ul><li>Represents the economy’s knowledge about how to combine resources efficiently. </li></ul></ul><ul><ul><li>If a better technology is discovered, production costs will fall. Thus, suppliers will be more willing & able to supply the good at each price. </li></ul></ul><ul><ul><li>Example: when new technology are introduced in the production of sushi, supply of sushi will increase and shift the supply curve. </li></ul></ul>
- 33. <ul><li>Price of Related Goods </li></ul><ul><ul><li>Substitutes Goods </li></ul></ul><ul><ul><ul><li>If there is an increase in the price of substitute goods in production, supply of a good will decrease. </li></ul></ul></ul><ul><ul><ul><li>Example: Pepsi and Coke </li></ul></ul></ul><ul><ul><ul><li>( P pepsi ↑ Q SS pepsi ↑ SS coke ↓ ) </li></ul></ul></ul><ul><ul><li>Complementary Goods </li></ul></ul><ul><ul><ul><li>An increase in the price of complementary goods will increase the supply of a good & vice versa. </li></ul></ul></ul><ul><ul><ul><li>Example: Pen and Ink </li></ul></ul></ul><ul><ul><ul><li>( P pen ↑ Q SS pen ↑ SS ink ↑ ) </li></ul></ul></ul>
- 34. <ul><li>Expectations </li></ul><ul><ul><li>Expectation of price in the future could either increase or decrease current supply. </li></ul></ul><ul><ul><li>Example: when government announced an increase in the price of petrol, current supply will decrease because the supplier wants to sell after the price hike to gain profit with new price. </li></ul></ul>
- 35. <ul><li>Number of Sellers </li></ul><ul><ul><li>Market supply sums the amount supplied at each price by all producers, market supply depends on the number producers in the market. </li></ul></ul><ul><ul><li>Example: if there are more than one economic rice shop at New Town, there will be more economic rice supplied. </li></ul></ul>Shift of SS curve
- 36. Summary for Movement/Shift in Supply
- 37. Consumers (Demand) Firms (Supply) DD & SS Interaction Output (Product) Market 1.4 MARKET EQUILIBRIUM 3 set of market condition / effect: (a) The quantity demanded equal the quantity supplied at the current price. This situation called “ equilibrium ” (b) The quantity demanded exceeds the quantity supplied at the current price. This situation called “ excess demand ” or “ shortage ” (c) The quantity supplied exceeds the quantity demanded at the current price. This situation called “ excess supply ” or “ surplus ”
- 38. Equilibrium Price of Ice-Cream Cone 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00
- 39. <ul><li>Market Equilibrium </li></ul><ul><ul><li>The condition that exists in a market when the plans of buyers match those of sellers, so quantity demanded equals quantity supplied and the market clears. There is no tendency for price to change. </li></ul></ul><ul><ul><li>DD = SS </li></ul></ul><ul><li>Equilibrium price </li></ul><ul><ul><li>The price that balances quantity supplied and quantity demanded. </li></ul></ul><ul><li>Equilibrium quantity </li></ul><ul><ul><li>The quantity supplied and the quantity demanded at the equilibrium price. </li></ul></ul>
- 40. Excess Supply (Surplus) Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand Quantity demanded Quantity supplied Surplus 4 $2.50 10 2.00 7
- 41. <ul><li>Excess Supply (Surplus) </li></ul><ul><ul><li>When: </li></ul></ul><ul><ul><li>Pri ce > Equilibrium Price , then </li></ul></ul><ul><ul><li>Qs > Qd </li></ul></ul><ul><ul><li>There is excess supply or a surplus . </li></ul></ul><ul><ul><li>Suppliers will lower the price to increase sales, thereby moving toward equilibrium. </li></ul></ul>
- 42. Excess Demand (Shortage) Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand Quantity supplied Quantity demanded 1.50 10 $2.00 7 4 Shortage
- 43. <ul><li>Excess Demand (Shortage) </li></ul><ul><ul><li>When: </li></ul></ul><ul><ul><li>Price < Equilibrium Price , then </li></ul></ul><ul><ul><li>Qd > Qs </li></ul></ul><ul><ul><li>There is excess demand or a shortage . </li></ul></ul><ul><ul><li>Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. </li></ul></ul>
- 44. 1.5 CHANGE IN EQUILIBRIUM <ul><li>The market equilibrium will change when there is a shift in the demand or supply curve. </li></ul><ul><li>We will see what happens when: </li></ul><ul><li>The demand curve shifts and supply remains constant. </li></ul><ul><li>The supply curve shifts and demand remains constant. </li></ul><ul><li>Both the demand and supply curves shift. </li></ul>
- 45. <ul><li>Three Steps for Analyzing Changes in Equilibrium </li></ul><ul><ul><li>1. Decide whether the events shifts the supply or demand curve (or both) </li></ul></ul><ul><ul><li>2. Decide in which direction the curve shifts. </li></ul></ul><ul><ul><li>3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity . </li></ul></ul>
- 46. Effect of Change in Demand <ul><li>Change in DD can arise from a number of factors; change in income, tastes, etc. </li></ul>Quantity Price SS D0 D1 E0 E1 <ul><li>Suppose there is an increase in the demand for ‘Pilot’ pens, the demand curve will shift rightwards , to D1. </li></ul><ul><li>Equilibrium price will increase , and equilibrium quantity will also increase. </li></ul>Note: If there is a decrease in the demand, the effect will be vice versa.
- 47. Effect of Change in Supply <ul><li>Change in SS can arise from a number of factors; change in cost, technology, etc. </li></ul>Quantity Price S0 S1 <ul><li>Suppose there is an increase in the supply for ‘Pilot’ pens, the supply curve will shift rightwards , to S1. </li></ul><ul><li>Equilibrium price will decrease , and equilibrium quantity will increase. </li></ul>Note: If there is a decrease in the supply, the effect will be vice versa. DD E0 E1
- 48. <ul><li>As long as only one curve shifts, equilibrium price and quantity will change. </li></ul><ul><li>If both curve shift, the outcome is obvious. </li></ul><ul><li>For example : </li></ul>Effect of Changes in Both Demand and Supply (a) Supply change > demand change (b) Supply change < demand change
- 49. 1.6 ACTIVITY ?
- 50. Supply and Demand Analysis (a) Proton Berhad decreases the price of its car model, Proton Persona from P 0 to P 1. Explain the law of demand and based on it, explain what will happen to the quantity demanded for Proton Persona car . Sketch a graph to illustrate your explanation.
- 51. (b) What will happen to the Perodua Nautica (substitutes) when the price of Proton Persona car drop? Sketch a graph to illustrate your explanation
- 52. (c) Assume that Proton Persona cars need a specific regular maintenance service to bring out the performance of the car. Based on situation in (a), what will happen to the demand of that specific regular maintenance service? End
- 53. THANK YOU

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