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Chapter 2 & 4
DEMAND,
SUPPLY &
MARKET
EQUILIBRIUM

1

Presentation
This presentation is a mash up of 3 sources. They
are:
•Hariff, A.(2011). Chapter 4, The forces of Supply
and Demand.
•Kanth, J.(2013). Demand and Supply.
•Shin, S.(2011). Chapter 2, Demand and Supply
Market Equilibrium.

2

Chapter Outline
• 1.1 Introduction: Market and
the Circular Flow
• 1.2 Demand (DD)
• 1.3 Supply (SS)
• 1.4 Market Equilibrium
• 1.5 Change in Equilibrium
(SS & DD)
• 1.6 SS/DD Analysis:
Example

3

1.1 INTRODUCTION
Market & the circulation flow
Economics decision-making units

Demand &
supply
interaction

4

1.2 DEMAND
Relationship between
price & quantity demanded

How many packs of ‘ai yu
bing’ will student buy at a
price of RM2? What if the
price is RM1.50?

• Quantity consumers are both willing and
able to buy at each possible price during a
given time period, other things constant.
• can be defined as the purchase of
product
6

Law of Demand
– Says that quantity demanded varies inversely, or
negatively, to the price, other things constant.
– Negative relationship between price and quantity
demanded.
– The higher the price, the smaller the quantity
demanded.
Figure: Price & Quantity
Demanded: The Law of
Demand

7

Demand Schedule & Demand
Curve
– The demand schedule is a table that shows the
relationship between the price of the good and
the quantity demanded.
– The demand curve is a graph of the
relationship between the price of a good and
the quantity demanded.
• Downward sloping & to the right because
law of demand.

8

May’s Demand Schedule and
Demand Curve

Example

Price of
Ice-Cream Cone
$3.00
2.50

1. A decrease
in price ...

2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.

9

Individual Demand & Market
demand
– The individual demand is the relationship
between the quantity demanded by a single
buyer and its prices
– The market demand is the relationship
between the total quantity demanded by all
consumers in the market and its price.

10

Changes in Quantity Demanded &
Changes in Demand
– Changes in quantity demanded
result in movement along the demand
curve due a change in price while
other factors remain constant.
(upward/downward movement)
– Change in demand is the shift of the
demand curve due a change in other
factors while price remains constant.
(leftward/ rightward shift)
11

Changes in Quantity Demanded
Price of IceCream
Cones

B

$2.0
0

A tax on sellers of icecream cones raises
the price of ice-cream
cones and results in a
movement along the
demand curve.
A

1.00

D
0

4

8

Quantity of Ice-Cream Cones
12

Change in Demand
• 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:






Income
Prices of related goods
Tastes
Expectations
Number of buyers
13

Shifts in The Demand
Curve

Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand

Demand curve, D3
0

Demand
curve, D1

Demand
curve, D2

Quantity of
14
Ice-Cream Cones

Substitution Effect
• Substitution Effect:
• - When the price of a good rises,
consumers will substitute away to
other goods
• - Holding real purchasing power
constant, an increase in the price
of a good relative to others, raises
the opportunity cost of consuming
that good, and therefore demand
strictly decreases
• - for ALL goods then: ↑ own price,
SE sees ↓ quantity demanded

Changes in Consumer Income
• Goods can be classified into two
broad categories:
 Normal goods: the demand
increases when income increases
and decreases when income
decreases
 Inferior goods: the demand
decreases when income increases
and increases when income
decreases
16

Changes in Price of Related
Good
-

-

(i) Substitute Goods
A product that can be used in place
of another product
A change in the price of substitute
products affect the demand for the
product in the same direction in
which the price change.
E.g: tea vs coffee; a bus ride vs an
LRT ride
( P coffee ↑ Q dd coffee ↓ DD tea ↑)
17

Changes in Price of Related
Good
-

-

(ii) Complementary Goods
A product that is used in conjunction
with another product.
The change in the price of a
complementary product affects the
demand for the product in the
opposite direction to the change
price.
E.g: a disk and computer, pen and
ink.
( P pen ↑ Q dd pen ↓ DD ink ↓ )

18

Taste & Preference
– Tastes and preferences of consumers
change significantly.
– 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.
– E.g: Changes in music, apparel or
recreation.
19

Expectations
– The higher the expected future price
of a product, the higher the current
demand for that product and vice versa.
– E.g: When the government plans to
increase the price of sugar the following
week, the demand for sugar will
immediately increase.

20

Population or Number of
Buyers
– A larger population with a high rate of
growth creates greater demand for
goods and services.
– E.g: An increase in the population of
UTAR would increase the demand for
houses, F & B, and other goods and
services.
21

1.3 SUPPLY
• 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
• Law of supply states that the quantity
supplied is usually directly related to its
price, other things constant
 The lower the price, the smaller the quantity
supplied
 The higher the price, the greater the quantity
supplied
22

Supply Schedule & Supply
Curve
– The supply schedule is a table
that showing how much of a product
firms will set at different prices.
– The supply curve is a graph
illustrating how much of a product a
firm will set at different prices.
• Upward slopping & to the right due to the law
of supply.

23

Ben’s Supply Schedule and
Supply Curve

Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...

2.50
2.00
1.50
1.00
0.50

0

1 2

3

4

5

6

7

8

9 10 11 12 Quantity of
Ice-Cream Cones

2. ... increases quantity of cones supplied.

24

Individual Supply & Market
Supply
– 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.
– The market supply is the sum of
all that is supplied each period by
all producers of a single product.
26

Change in Quantity Supplied
Price of IceCream
Cone

S
C

$3.0
0

A rise in the price
of ice cream
cones results in a
movement along
the supply curve.

A

1.00

0

1

5

Quantity of
Ice-Cream
Cones 30

Changed in Supply
• A shift of the supply curve, either to the
left or right.
• Determinants of supply other than the
price of the good
 Technology
 Prices of related goods
 Expectation
 Number of sellers
31

Shifts in The Supply
Curve

Price of
Ice-Cream
Cone

Supply
curve, S 3
Decrease
in supply

Supply
curve, S 1

Supply
curve, S 2

Increase
in supply

0

Quantity of
32
Ice-Cream Cones

Technology
– Represents the economy’s knowledge about
how to combine resources efficiently.
– If a better technology is discovered,
production costs will fall. Thus, suppliers will
be more willing & able to supply the good at
each price.
– Example: when new technology are introduced
in the production of sushi, supply of sushi will
increase and shift the supply curve.

33

Price of Related Goods
– Substitutes Goods
• If there is an increase in the price of substitute
goods in production, supply of a good will
decrease.
• Example: Pepsi and Coke

( Ppepsi ↑QSS pepsi↑ SScoke↓ )
– Complementary Goods
• An increase in the price of complementary
goods will increase the supply of a good & vice
versa.
• Example: Pen and Ink

( Ppen ↑QSS pen↑ SSink ↑ )

34

Expectations
– Expectation of price in the future
could either increase or decrease
current supply.
– 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.
35

Number of Sellers
– Market supply sums the amount supplied
at each price by all producers, market
supply depends on the number producers
in the market.
– Example: if there are more than one economic
rice shop at New Town, there will be more
economic rice supplied.

Shift of SS curve
36

1.4 MARKET EQUILIBRIUM
Output (Product)
Market

DD & SS Interaction

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”
37
or “surplus”

Equilibrium
Price of
Ice-Cream
Cone

Supply

$2.00

Equilibrium

Equilibrium price

Equilibrium
quantity
0

1

2

3

4

5

6

7

8

Demand

9 10 11 12 13
Quantity of Ice-Cream Cones
38

1.5 CHANGE IN
EQUILIBRIUM

• The market equilibrium will change
when there is a shift in the demand
or supply curve.
• We will see what happens when:
The demand curve shifts and supply
remains constant.
The supply curve shifts and demand
remains constant.
Both the demand and supply curves
shift.

43

Effect of Change in
Demand

• Change in DD can arise from a
number of factors; change in income,
tastes, etc.
•
Price
SS
E1
E0
D0

D1
Quantity

Suppose there is an increase
in the demand for ‘Pilot’
pens, the demand curve will
shift rightwards, to D1.
rightwards
• Equilibrium price will
increase, and equilibrium
increase
quantity will also increase.

Note: If there is a decrease in the demand, the
effect will be vice versa.

44

References
This presentation is a mash up of 3 sources.
•Kanth, J.(2013). Demand and supply.
http://www.slideshare.net/jnchandrakanth/demand-and-supply29294711
Accessed 06 March 2014
•Shin, S.(2011).Chapter 2, Demand and Supply, Market
Equilibrium.
http://www.slideshare.net/SusuJie/chap2-7165119
•Hariff, A.(2011). The market forces of Demand and Supply.
http://www.slideshare.net/AminHanif/lecture-4-10007901

50

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