THEORY OF DEMAND AND SUPPLY

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THEORY OF DEMAND AND SUPPLY

  1. 1. PRINCIPLES OF ECONOMICS
  2. 2. THEORY OF DEMAND AND SUPPLY TOPIC 2:
  3. 3. DEFINITION AND LAW OF DEMAND • WHAT IS DEMAND? :  DEMAND IS THE DESIRE TO OWN ANYTHING, THE ABILITY TO PAY FOR IT, AND THE WILLINGNESS TO PAY DURING A SPECIFIC PERIOD
  4. 4. DEMAND SCHEDULE AND DEMAND CURVE • DEMAND SCHEDULE:  A LIST SHOWING THE QUANTITY OF A GOOD THAT CONSUMERS WOULD CHOOSE TO PURCHASE AT DIFFERENCES PRICES, WITH ALL OTHER VARIABLES HELD CONSTANT • DEMAND CURVE:  GRAPHICALLY SHOWS THE RELATIONSHIPS BETWEEN THE PRICE OF A GOOD AND THE QUANTITY WITH ALL DEMANDED, HOLDING CONSTANT ALL OTHER VARIABLES THAT INFLUENCES DEMAND.
  5. 5. RM 5 Price Demand 10,000 RM 10 6,000 RM 15 4,000 (P3) (P2) (P1) EXAMPLE OF DEMAND CURVE
  6. 6. DEFINITION AND LAW OF DEMAND • LAW OF DEMAND :  THE LAW OF DEMAND STATES THAT OTHER FACTORS BEING CONSTANT, PRICE AND QUANTITY OF DEMAND OF ANY GOOD AND SERVICE ARE INVERSELY RELATED TO EACH OTHER. WHEN THE PRICE OF THE PRODUCT INCREASES, THE DEMAND FOR THE SAME PRODUCT WILL FALL.
  7. 7. ASSUMPTIONS AND LIMITATIONS OF THE LAW OF DEMAND ASSUMPTIONS: • INCOME CONSTANT. • NO CHANGE IN TASTE, FASHION AND HABIT. • NO FUTURE EXPECTATIONS. • NO CHANGE IN WEATHER AND POPULATIONS. LIMITATIONS: • VERY HIGH PRICED GOODS • VERY LOW PRICED GOODS • IGNORANCE OF THE CONSUMER • NECESSITIES
  8. 8. DETERMINANTS OF DEMAND • TASTES AND FASHIONS • THE NUMBER AND PRICE OF RELATED GOODS • INCOMES • EXPECTATIONS OF FUTURE PRICE CHANGE • POPULATIONS • WEATHER
  9. 9. DISTINCTION BETWEEN CHANGES IN QUANTITY DEMANDED AND CHANGES AND DEMAND CHANGE IN QUANTITY DEMANDED 1) OCCURS DUE TO CHANGE IN PRICE 2) RESULTS IN MOVEMENT FROM ONE POINT TO ANOTHER ON A FIXED DEMAND CURVE 3) ALSO CALLED EXTENSION AND CONTRACTION OF DEMAND CHANGE IN DEMAND 1) OCCURS DUE TO CHANGE IN DETERMINANTS OTHER THAN PRICE 2) RESULTS IN SHIFTING OF THE DEMAND CURVE EITHER TO THE RIGHT OR TO THE LEFT 3) ALSO CALLED RISE AND FALL OF DEMAND
  10. 10. PRICE ELASTICITY OF DEMAND • A MEASURE OF THE RELATIONSHIP BETWEEN CHANGES IN THE QUANTITY DEMANDED OF A PARTICULAR GOOD AND A CHANGE IN ITS PRICE. PRICE ELASTICITY OF DEMAND IS A TERM IN ECONOMICS OFTEN USED WHEN DISSCUSSING PRICE SENSITIVITY • ELASTICITY MEASURES THE RELATIONSHIP BETWEEN A GOOD AND ITS PRICE BASED ON CONSUMER DEMAND, CONSUMER INCOME AND ITS AVAILABLE SUPPLY.
  11. 11. DETERMINANTS OF PRICE ELASTICITY OF DEMAND • THE DEGREE OF NECESSITY OR WHETHER THE GOOD IS A LUXURY > NECESSITIES TEND TO HAVE AN INELASTIC DEMAND WHEREAS LUXURIES TEND TO HAVE A MORE ELAS TIC DEMAND. • THE PROPOTION OF A CONSUMER INCOME ALLOCATED TO SPENDING ON THE GOOD > PRODUCTS THAT TAKE UP A HIGH PERCENT OF INCOME WILL HAVE A MORE ELASTIC DEMAND.
  12. 12. DEFINITION OF SUPPLY AND EXPLANATION OF SUPPLY CURVE • DEFINITION OF SUPPLY QUANTITY OF OUTPUT BROUGHT FOR SALE IN THE MARKET AT THE CERTAIN PRICE THE AMMOUNT OF A GOOD PRODUCERS WOULD WANT TO PRODUCE AND SELL AT THE SPECIFIC PRICE
  13. 13. DEFINITION OF SUPPLY AND EXPLANATION OF SUPPLY CURVE • SUPPLY CURVE THE GRAPHYCAL REPRESENTATION OF THE RELATION BETWEEN THE QUANTITIES SUPPLY OF A GOOD THAT PRODUCERS ARE WILLING AND ABLE TO SELL AND THE PRICE OF THE GOOD GRAPH CURVE THAT NORMALLY SLOPES UPWARD TO THE RIGHT OF THE CHART, SHOWING THE QUANTITY OF THE PRODUCT SUPPLIED AT DIFFERENT PRICE LEVELS
  14. 14. The supply curve shown here is drawn with the following data. Price (P) $2 4 6 8 10 Quantity Supplied (Qs)0 10 20 30 40 Price and quantity supplied are positively related. EXAMPLE OF SUPPLY CURVE
  15. 15. DETERMINANT OF SUPPLY • PRODUCTION COST • TECHNOLOGY • NUMBER OF SELLERS • EXPECTATION
  16. 16. DIFFERENCES BETWEEN CHANGES IN QUANTITY SUPPLIED AND CHANGES IN SUPPLY QUANTITY SUPPLIED • OCCURS DUE TO CHANGE IN THE MARKET PRICE • IS REPRESENTATED BY MOVEMENT FROM ONE POINT TO ANOTHER ON THE SAME SUPPLY CURVE • ALSO CALLED EXTENSION AND CONTRACTION OF SUPPLY CHANGES IN SUPPLY • OCCURS DUE TO CHANGE IN DETERMINANTS OF SUPPLY OTHER THAN PRICE • IS REPRESENTATED BY A SHIFT IN THE SUPPLY CURVE EITHER TO THE RIGHT OR TO THE LEFT • ALSO CALLED RISE AND FALL IN SUPPLY
  17. 17. PRICE ELASTICITY OF SUPPLY • MEASURE THE RELATIONSHIP BETWEEN CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN PRICE. • MEASURE THE RATE OF RESPONSE OF QUALITY DEMAND DUE TO PRICE CHANGE
  18. 18. DETERMINANTS OF PRICE ELASTICITY OF SUPPLY • THE PRICE ELASTICITY OF SUPPLY DESCRIBES THE MAGNITUDE OF THE CHANGE IN QUANTITY SUPPLIED TO A CHANGE IN PRICE • MEASURE THE RESPONSIVENESS OF QUANTITY SUPPLIED TO A CHANGE IN THE PRODUCT PRICES
  19. 19. DETERMINANTS OF PRICE ELASTICITY OF SUPPLY THE MAIN FACTORS WHICH DETERMINE THE DEGREE OF PRICE ELASTICITY OF SUPPLY: TIME PERIOD ABILITY TO STORE OUTPUT FACTOR MOBILITY
  20. 20. THE END THANK YOU 

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