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DEMAND AND SUPPLY.pptx
- 1. Chapter 2: Demand andSupply
- 3. Economics: Types ofGoods Free goods • Available without production • Refer to as gift from nature • No element of rivalry • Produced from limited resources • E.g. sunlight, air, rainwater and river Economic goods • Limited in supply and are man-made goods • Require effort to be produced and involve cost of production • Features of being excludable and rivalrous • Involve opportunity cost Perishable goods • Cannot last long • E.g. fruits, meat and vegetable Non- Perishable goods • Can last for a longer time • Houses, gardening tools and televisions Public goods • Known as non-excludable and non- rivalrous • Non-excludability means no one can be prevented from using the goods • Non-rivalrous or non-exhaustibility the consumption of the goods by one person will not reduce the amount available to others • Is made supply and available to all Partial public goods • Possible to exclude people from consuming if they do not pay for goods Pure public goods • Impossible to exclude from people to consume when these goods are sypplied
- 4. Islamic Economics: Typesof Goods Dharurriyah • Necessity goods that we cannot survive and live without • E.g. food, shelter, clothes and education Hajiyyah • Comfort goods • E.g. air conditioners, washing machines and vacuum cleaner Kamaliyyah • Luxury goods that satisfy the needs of humans • Human still can survive and live comfortably • E.g. bungalows and diamond necklaces Tarafiyyah • Refer to non- permissible goods that will cause a negative impact on society • Are extravagant and unnecessary, lead to wastage • E.g. extravagant flights, lavish furniture and luxurious toilets
- 5. • Different quantitiesof goods or services which buyers are willing and able to buy at different possible prices in a specific period, ceteris paribus. Definition • Shows an inverse relationship between the quantity demanded ant the price goods itself, ceteris paribus. • Demand curve generally downward sloping. • Indicate negative relationship between the price of goods (P) and services and quantity demanded (Q). Law of demand
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- 7. Individual Demand andMarket Demand Individual Demand • Refers to the demand of goods and services from a single consumer. Market Demand • This is horizontal summation of all the individual demands in a particular market.
- 8. Price of GoodsX (USD) Total Quantity Demanded of Goods X (unit) Market Demand Customer A Customer B 10 15 5 20 20 10 4 14 30 7 3 10 10 15 20 10 4 5 14 20 𝑫𝑨 𝑫𝑩 𝑫𝒎𝒂𝒓𝒌𝒆𝒕 𝑸𝒅 𝑸𝒅 𝑸𝒅 P P P Customer A Customer B Market Demand
- 9. 𝑸𝟐 𝑸𝟏 𝑸𝟎 𝑷𝟏 𝑷𝟎 𝑷𝟐 𝟎 P(USD) Quantity Contraction in demand Expansion in demand Change in Quantity Demanded • Occurs along the same demand curve or only movement along the demand curve. • The change in quantity demanded is caused by a change in the price of goods, ceteris good. • Contraction of demand – if price increase from 𝑃1 𝑡𝑜 𝑃2, the quantity demanded will fall from 𝑄1 to 𝑄2 unit. • Expansion of demand – if price decrease from 𝑃1 𝑡𝑜 𝑃0, the quantity demanded will increase from 𝑄1 to 𝑄0 unit.
- 10. Change in Demand •Cause the entire demand curve to change. • Involve a rightwards or a leftward shift of the demand curve • Cause by other factors influencing the demand, whereas the price of the goods itself remains unchanged • Rightward shift – if demand increase from 𝑄0 to 𝑄1 , the demand curve shift rightward from 𝐷0 to 𝐷1 • Leftward shift – if demand decrease from 𝑄0 to 𝑄2 , the demand curve shift leftward from 𝐷0 to 𝐷2 𝑸𝟐 𝑸𝟏 𝑸𝟎 𝑷𝟎 𝟎 P (USD) Quantity Decrease in demand Increase in demand 𝑫𝟏 𝑫𝟐 𝑫𝟎
- 11. Price Factor –Movement Along the Demand Curve 𝑸𝟏 P Q 0 𝑷𝟏 𝑸𝑶 𝑷𝑶 A B The quantity demanded would change if there an increasing or decreasing of price movement along a demand curve
- 12. Factor Relationship Example Consumer’sIncome The sum of all a household/consumer’s wage, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. For normal and superior goods. Positive relationship Inferior goods Goods for which demand tends to fall when income rises. Negative relationship Non-price factors – shift in demand curve
- 13. Factor Relationship Example Substitutesgoods A product that you view as similar or identical to the one that you are considering purchasing. Act as replacement good. E.g. butter or margarine, coffee or tea , kiwi or apple Positive relationship Complementary goods A good that you like to consume at the same time as the product your are considering buying. E.g. petrol and car, shoes and stocking, milk and cereal Negative relationship
- 14. Factor Population or numberof potential buyers A higher number of buyers or a bigger population in the market will lead to an increase in demand, shift demand curve to right and otherwise Age groups may influence demand differently Consumer’s preferences Influenced by the types of advertising or information that the consumer gets Favorable change leads to an increase in demands and will shift the demand curve to the right. Consumer’s expectations of future prices If the speculation that the price of goods X will increase, then people will buy more and stock up X to avoid paying more, thus the demand of good X increase, will shift demand curve to the right Socio-economic conditions When the economy is in recession, people are uncertain about their future income and job, tend to have lower income and spend less, less good would be demanded and otherwise
- 15. Exceptional Demand Giften Goods •Inferior goods that normally consumed by those in the poor income group • E.g As the price of broken rice decrease, the real income of customers will increase, the income allocated for buying broken rice will now be larger than before, less broken rice is demanded, the consumer may switch to buying better quality of goods Veblen goods or luxury goods • Goods bought by higher income to show off their status • E.g. when the price of diamond increase, they will be bought at a higher price, while if price decrease, they will stop buying diamond because it lost the prestige value and considered as cheap product Speculation of a future change in price • If people speculate that the price of rice will continue rise in the future, they will buy more rice now even if the price has risen • E.g. stock market
- 16. 1. The priceof coffee increase, how will this affect demand for tea? 2. There is increase in individual income, will this affect inferior good and how? 3. The price of petrol increase, how will this affect demand for car? 4. People speculate the price of bread will increase. 5. The price of low quality potato increase Discussion
- 17. • Supply isdefined as the producer’s ability and willingness to supply different quantities of goods and services at different possible price and time range, ceteris paribus. Definition • It states that there is a direct or positive relationship between the price and quantity supplied of goods and services, holding other factors constant in a given period • When price increases, quantity supplied will also increase and vice versa Law of Supply
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- 19. Individual and marketsupply • Individual supply refers to the supply of goods and services from a single producer • Market supply refers to the supply of goods and services from a group of producers • It is a horizontal summation of all individual supply in a particular market Individual supply Market supply
- 20. Example Price of dark chocolate ice-cream (USD) Qsof dark chocolate ice-cream (unit) Total Qs of dark chocolate ice- cream (unit) Shop D Shop E Shop F Market Supply 5 15 20 25 60 4 12 316 20 348 3 9 12 15 36 2 6 8 10 24 1 3 4 5 11
- 21. Quantity Supplied Change in QuantitySupplied • Change in quantity supplied is shown by a movement along the same supply curve • The change in quantity supplied is caused by a change in the price of goods, ceteris good. • Expansion in supply – if price increase from 𝑃0 𝑡𝑜 𝑃2, the quantity supplied will increase from 𝑄0 to 𝑄2unit. • Contraction of supply – if price decrease from 𝑃0 𝑡𝑜 𝑃1, the quantity supplied will decrease from 𝑄0 to 𝑄1 unit. 𝑸𝟏 𝑸𝟎 𝑸𝟐 𝑷𝟎 𝑷𝟏 𝑷𝟐 𝟎 P (USD) Contraction in supply Expansion in supply
- 22. Change in supply •Cause the entire supply curve to change. • Involve a rightwards or a leftward shift of the supply curve • Cause by other factors influencing the supply, whereas the price of the goods itself remains unchanged • Rightward shift – if supply increase from 𝑄0 to 𝑄1 , the supply curve shift rightward from 𝑆0 to 𝑆1 • Leftward shift – if supply decrease from 𝑄0 to 𝑄2 , the supply curve shift leftward from 𝑆0 to 𝑆2 𝑸𝟐 𝑸𝟏 𝑸𝟎 𝑷𝟎 𝟎 P (USD) Quantity Decrease in supplied Increase in supplied 𝑺𝟏 𝑺𝟐 𝑺𝟎
- 23. Price Factor –Movement Along the Supple Curve • Price of the goods itself When price changes, quantity supplied will change and this will cause a movement along the same supply curve. The price of goods increases, assuming other factors influencing supply are ceteris paribus, the quantity supplied for that particular foods will increase and vice versa. 𝑸𝟏 𝑸𝟎 𝑸𝟐 𝑷𝟎 𝑷𝟏 𝑷𝟐 𝟎 P (USD) Quantity If the price of the goods increases from 𝑷𝟎 to 𝑷𝟐, the quantity supplied also increases from 𝑸𝟎 to 𝑸𝟐. Likewise, if price decreases from 𝑷𝟎 to 𝑷𝟏, the quantity supplied will decrease from 𝑸𝟎 to 𝑸𝟏.
- 24. Factors influencing theshift of the demand curve
- 25. • Cost andavailability of the factors of production If there is an increase in wages, the cost of production will increase, the profit of suppliers will decrease, reducing the supply of goods and shifting the entire supply curve leftward. • What happen if wages is decreasing? • What happen if price of machinery increase? • What happen if rent of building (factory) decrease? P 𝐐𝐒 𝐏𝟎 𝐐𝟎 𝐐𝟏 𝐒𝟎 𝐒𝟏 0
- 26. • Changes inthe prices of related goods 1. Goods in joint supply of related goods Joint supply goods or complementary goods refer to goods which are supplied at the same time. E.g. beef and leather are supplied at the same time when cow is slaughtered. When the price of cow increase, the quantity supplied for beef will increase and supply of leather will also increase since both goods are complementary goods. • Price of butter decrease? - cake and cookies • Price of microchips increase? – PCs and monitors P 𝐐𝐒 𝐏𝟎 𝐐𝟏 𝐐𝟎 𝐒𝟏 𝐒𝟎 0
- 27. • Changes inthe prices of related goods 2. Goods in competitive supply or substitute goods The supply of goods will decrease if there is an increase in the price of substitute goods. This situation happens because some of the resources are now being used to produce more other goods. • Increase in the supply of coffee (tea)? • Decrease in the supply of butter (margarine)? P 𝐐𝐒 𝐏𝟎 𝐐𝟎 𝐐𝟏 𝐒𝟎 𝐒𝟏 0
- 28. • Level oftechnology Higher technology levels allow a smaller quantity of resources to be used for production, reduces the cost of production, increase the supply of a product by shifting the entire supply curve rightwards. • Increase number of technology in production of cars? • Decrease number of technology in production if computer? P 𝐐𝐒 𝐏𝟎 𝐐𝟏 𝐐𝟎 𝐒𝟏 𝐒𝟎 0
- 29. • Government oreconomic policy Government policies consist of taxation and subsidies. P 𝐐𝐒 𝐏𝟎 𝐐𝟏 𝐐𝟎 𝐒𝟏 𝐒𝟎 0 Taxation When the production of goods is taxed, this increase the cost of production and reduces the amount of profit earned, lead to decrease in supply and supply curve shifts leftwards. Subsidies When the production of goods is subsidies, this decrease the cost of production and encourage producers to produces more, lead to increase in supply and supply curve shifts rightwards. • The production of goods Y is taxed. • The production of goods X is subsidies. P 𝐐𝐒 𝐏𝟎 𝐐𝟎 𝐐𝟏 𝐒𝟎 𝐒𝟏 0
- 30. • Producers’ expectationsof future prices If the producers anticipate that the future price of smartphones will increase, the producers will supply less at that present time, this will decrease the supply of smartphones. • Future price of radio will decrease. • Future price of laptop will decrease. P 𝐐𝐒 𝐏𝟎 𝐐𝟎 𝐐𝟏 𝐒𝟎 𝐒𝟏 0
- 31. • Number ofsuppliers With more suppliers, more outputs can be produced in the market, supply will increase and supply curve will shift to the right. • Supplier for production of CDs decrease. • Less suppliers for shoes production. P 𝐐𝐒 𝐏𝟎 𝐐𝟏 𝐐𝟎 𝐒𝟏 𝐒𝟎 0
- 32. Exercise 1 Price (USD)Quantity Demanded (millions) A 0.50 22 B 1.00 15 C 1.50 10 D 2.00 7 E 2.50 5 1. Plot the demand curve on the graph paper. 2. What is the effect of increase in income level on normal goods and inferior goods? 3. If there is an increase in the price of printer, what is the effect on the demand for ink cartridges?
- 33. Exercise 2 Price (USD)Quantity Supplied (millions) A 0.50 0 B 1.00 6 C 1.50 10 D 2.00 13 E 2.50 15 1. Plot the supply curve in the graph paper. 2. If wage increases, what is the effect on the supply curve of cloth? 3. Suppose there is technological advancement in the production of cars, what is the effect on the supply of cars?