notes for economic

1. Principles of Economics |
CHAPTER 3: DEMAND AND SUPPLY
AUDREY SIAH
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2. Principles of Economics |
Learning Outcomes
3.1 Explain what determines the demand for a product in a competitive
market.
3.2 Explain what determines the supply for a product in a competitive
market.
3.3 Describe how supply and demand together determines the
equilibrium price and the equilibrium quantity.
3.4 Compare a market in equilibrium with a market in disequilibrium.
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3. Principles of Economics |
DEMAND
Demand
How much of a good buyers are willing and able to purchase during a given
period, other things being equal.
The quantity demanded is inversely related to the price.
 as price increases, quantity demanded decreases
 as prices decreases, quantity demanded increases
The Law of Demand
 other things remaining constant, quantity demanded varies inversely with
price
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4. Principles of Economics |
DEMAND
Demand schedule
 A table that indicates the quantity demanded at each price.
Demand Curve
 A graphic representation of demand schedule.
 It shows the relationship between price and quantity demanded.
 It slopes downward.
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5. Principles of Economics |
DEMAND
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6. Principles of Economics |
INDIVIDUAL DEMAND VS MARKET DEMAND
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Individual Demand
Demand for a product or service of one individual
Market Demand
Sum of all individual demands for a product or service

7. Principles of Economics |
INDIVIDUAL DEMAND VS MARKET DEMAND
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8. Principles of Economics |
DEMAND
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When price changes
the quantity demanded will change.
movement along the same demand curve.
A change in one or more of the non-price determinants of demand
will alter the quantity demanded at any given price.
the demand curve will shift.

9. Principles of Economics |
DEMAND
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Shifts in demand curve
An increase in demand
Any change that increases the quantity demanded, at any given
price.
shifts the demand curve to the right.
A decrease in demand
Any change that decreases the quantity demanded, at any given
price.
shifts the demand curve to the left.

10. Principles of Economics |
DEMAND
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11. Principles of Economics |
DEMAND
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Variables that can shifts in demand curve
Tastes
Number of Consumers
Income
Prices of Related Goods
Expectation

12. Principles of Economics |
DEMAND
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Tastes
Change in tastes – changes the demand
Number of Consumers
Increase in number of consumers – market demand increases
increases product demand.

13. Principles of Economics |
Demand
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Income
Normal goods - positively correlated with income.
o shoes, bags
Inferior goods - negatively correlated with income.
o used furniture, second hand cars

14. Principles of Economics |
Demand
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Prices of Related Goods
Substitute - positively correlated with change in the price of
related goods.
oCoke and Pepsi
Complementary - negatively correlated with change in the price
of related goods
oprinters and ink cartridges

15. Principles of Economics |
Demand
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Expectation
Future Price - If consumers expect that the price of the good will
be raised in the future, they are more willing to beat the increase
by buying early.
o This causes an increase in current demand.
Future income - If consumers expect income to increase in the
future, they are more likely to increase their current consumption.
oThis causes an increase in current demand

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17. Principles of Economics |
Supply
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Supply
The relationship between price and quantity supplied.
The Law of Supply
 The quantity supplied varies positively with price, other things being
equal.
 as price falls, the quantity supplied falls
 as price rises, the quantity supplied rises

18. Principles of Economics |
Supply
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Supply schedule
 A table that shows the quantity supplied at each price.
Supply curve
 The graphic representation of a supply schedule.
 It shows how the quantity of goods supplied varies as its price
changes, other thing being equal.
 The supply curve slopes upward.

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20. Principles of Economics |
Individual Supply vs Market Supply
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Individual Supply
Supply for a product or service of one individual
Market Supply
 Horizontal summation of the individual supply curves for a product
or service

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22. Principles of Economics |
Supply
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When price changes
the quantity supplied will change.
movement along the same supply curve.
A change in one or more of the non-price determinants of supply
will alter the quantity supplied at any given price.
the supply curve will shift.

23. Principles of Economics |
Supply
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Shifts in supply curve
An increase in supply
Any change that increases the quantity supplied, at any given
price.
shifts the supply curve to the right.
A decrease in supply
Any change that decreases the quantity supplied, at any given
price.
shifts the supply curve to the left.

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25. Principles of Economics |
Supply
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Variables that can shifts in supply curve
Input Prices
Technology
Number of producers
Expectation for future prices

26. Principles of Economics |
Supply
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Input prices
The relationship between input price and supply are
negatively correlated.
Technology
Technological advancement reduces production cost and
increases profit
oIncrease in supply

27. Principles of Economics |
Supply
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Number of producers
Increase in number of sellers – market supply increases
Expectation for future prices
Expected higher prices –decrease in current supply

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29. Principles of Economics |
MARKET EQUILIBRIUM
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Equilibrium
market demand and supply curves intersect
the quantity demanded by consumers = the quantity supplied by
producers at a given price
no incentive for price to change
market-clearing price

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31. Principles of Economics |
EXCESS SUPPLY
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Excess supply
When price falls above the equilibrium price
Quantity supplied > quantity demanded
Downward pressure on price
oincrease in quantity demanded
odecrease in quantity supplied

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33. Principles of Economics |
EXCESS DEMAND
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Excess demand
When price falls below the equilibrium price
Quantity supplied < quantity demanded
Upward pressure on price
odecrease in quantity demanded
oincrease in quantity supplied

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35. Principles of Economics |
CHANGES IN EQUILIBRIUM
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3-step process to examine changes in equilibrium
1) Determine whether the event shifts the demand curve or supply
curve
2) Determine the direction of the shift
3) Determine how the shift changes the equilibrium

36. Principles of Economics |
CHANGES IN DEMAND
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Rural-urban migration into Klang Valley
 Effect on the market for cheese tarts
1) Rise in of rural-urban migration – shift the demand curve (number
of consumers)
2) Demand curve shift to the right
3) Higher in both equilibrium price and equilibrium quantity

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38. Principles of Economics |
CHANGES IN SUPPLY
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 A drought damaged the wheat crops
 Effect on the market for cheese tarts
1) lower wheat production boosting the price of flour – shift the
supply curve (input price)
2) Supply curve shift to the left
3) Higher equilibrium price and lower equilibrium quantity

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40. Principles of Economics |
CHANGES IN BOTH DEMAND AND SUPPLY
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 Both demand and supply change simultaneously
 Effect on the market for cheese tarts
1) Rise in of rural-urban migration – shift the demand curve; Drought
damaged the wheat crops – shift the supply curve
2) Demand curve shifts to the right; Supply curve shifts to the left
3) Equilibrium price raises
o if the relative size of the shift in demand is smaller than the shift in supply: equilibrium
quantity –falls
o if the relative size of the shift in demand is greater than the shift in supply: equilibrium
quantity –rises
o if the relative size of the shift in demand is equal to the shift in supply: equilibrium
quantity –remain unchanged.

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42. Principles of Economics | 42