2. CHAPTER 2
DEMAND AND SUPPLY

3. DEFINITION OF DEMAND
Demand is defined as the ability and willingness to buy specific quantities of goods in a given period of time at a particular price, ceteris paribus.

4. CLASSIFICATION OF GOODS AND SERVICES
Free goods are goods that have no production cost.
Public goods are goods that are for common use and will benefit everyone.
Economic goods are goods of value that can be seen and touched. Economic services are intangible things (with value) that cannot be seen or touched.

5. NEGATIVE RELATIONSHIP
LAW OF DEMAND
Law of demand states that the higher the price of a good, the lower is the quantity demanded for that good and the lower the price, the higher is the quantity demanded, ceteris paribus.
P  Qdd 
P  Qdd 
NEGATIVE RELATIONSHIP

6. DEMAND SCHEDULE AND CURVE
Price (RM)
Demand Curve 5 4 3 2 1 6 8 10 DD
Price
Quantity 5 2 4 3 6 8 1 10
Quantity (units)

7. INDIVIDUAL AND MARKET DEMAND
INDIVIDUAL DEMAND
The relationship between the quantity
of a good demanded by a single individual
and its price.
MARKET DEMAND
The relationship between the total quantity
of a good demanded by adding all the quantities demanded by all consumers in the market and its price.

8. Population or number of buyers
Consumers’
income
Tastes and trends
Price of related goods
Population or number of buyers
DETERMINANTS
OF DEMAND
Supply of money in circulation
Expectation about future prices
Level of taxation
Advertisement
Festive seasons and climate

9. CHANGES IN QUANTITY DEMANDED VS. CHANGES IN DEMAND
Price D1 D0
Quantity
Shift in the demand curve
Occurs when there are changes in other factors but price remains constant
Increase in Demand (D0  D1)
Decrease in Demand (D1  D0)
CHANGES IN DEMAND
Price DD
Quantity
Movement along DD curve
Price changes and other factors are constant
Upward movement  Decrease in quantity demanded (Contraction)
Downward movement  Increase in quantity demanded (Expansion)

10. EXCEPTIONAL DEMAND GIFFEN GOODS SPECULATION EMERGENCIES
Exceptional Demand is the opposite of the Law of Demand where as price increases, demand will also increase and vice versa.
GIFFEN GOODS
SPECULATION
EMERGENCIES
STATUS SYMBOL GOODS
HIGHLY-PRICED GOODS

11. INTER-RELATED DEMAND CROSS DEMAND
The demand for a good is also affected by the price of its substitute or complementary goods. Cross demand can be divided into two: Joint demand and competitive demand.

12. CROSS DEMAND: JOINT DEMAND VS. COMPETITIVE DEMAND
Price of pizza
Price of pizza DD P2 P2 P1 P1 DD
Q Q1
Quantity of soft drinks
Q Q2
Quantity of spaghetti
a) Joint Demand b) Competitive Demand
Negative relationship exists between complement goods
Positive relationship exists between substitute goods

13. INTER-RELATED DEMAND DERIVED DEMAND
Derived demand is the demand for a good which is derived from other goods.

14. DERIVED DEMAND Derived Demand
Wage rate (RM per hour)
Price (RM) S0 S0 P1
WR1 P0
WR0 D1 D1 D0 D0
Quantity of houses
Q Q1
Q Q1
Quantity of workers
Demand and supply for houses Demand and supply for carpenters

15. INTERRELATED DEMAND COMPOSITE DEMAND
Composite demand is demand for a good that has multiple uses
For example: oil can be used for petrol, kerosene and diesel

16. COMPOSITE DEMAND
Price
Price S1 S0 S0 P1 P1 P0 P0 D1 D0 D0
Q Q1
Quantity of petrol
Q1 Q0
Quantity of diesel
Demand and supply for petrol Demand and supply for diesel

17. PRICE ELASTICITY OF DEMAND
DEFINITION:
Measures the sensitivity/responsiveness of the quantity demanded
due to a change in its price.

18. PRICE ELASTICITY OF DEMAND (cont.)
FORMULA:
d = %  Quantity Demanded
%  Price
d = Q2 – Q1 x P1
Q P2 – P1

19. DEGREE OF ELASTICITY Elastic Demand d > 1 Perfectly Elastic Demand
A small percentage of change in the price of a good will lead to larger percentage of change in quantity demanded.
d > 1
Perfectly Elastic Demand
A condition in which a small percentage of change in price leads to an infinite percentage of change in the quantity demanded.
d = 
Inelastic Demand
A large percentage of change in the price of a good will only affect a small percentage of change in the quantity demanded.
d < 1
Unitary Elastic Demand
A condition in which percentage changes in price equals to percentage changes in quantity demanded.
d = 1
Perfectly Inelastic Demand
A condition in which the quantity demanded does not change as the price changes.
d =0

20. DEGREE OF ELASTICITY d =0 d < 1 d =  d = 1 d > 1
Price (RM)
d =0
d < 1
d = 
d = 1
d > 1
Quantity Demanded

21. OF PRICE ELASTICITY OF DEMAND
Proportion of the expenditure on a product
Proportion of the expenditure on a product
Nature of goods
Existence of substitutes
Existence of substitutes
DETERMINANTS
OF PRICE ELASTICITY OF DEMAND
Income level
Frequently purchased products
Time dimension
Complementary goods
Habits

22. RELATIONSHIP TO TOTAL REVENUE
Total Revenue (TR) = Price (P) x Quantity (Q)
The information on price elasticity of demand will be useful for the seller to adjust their selling price since it will affect the total revenue.
Price
DEMAND IS ELASTIC
Total Revenue
RM20 x 10 = RM200
If seller increases price to RM30
New Total Revenue
= RM30 x 5 = RM150
 TR =  RM50
RM30
RM20 D 5 10
Quantity Demanded

23. RELATIONSHIP TO TOTAL REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)
Price
DEMAND IS INELASTIC
Total Revenue
RM1 x 15 = RM15
If seller increases price to RM2
New Total Revenue
= RM2 x 10 = RM20
 TR =  RM5
RM2
RM1 D 10 15
Quantity Demanded

24. RELATIONSHIP TO TOTAL REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)
Price
DEMAND IS UNITARY ELASTIC
Total Revenue
RM1 x 20 = RM20
If seller increases price to RM2
New Total Revenue
= RM2 x 10 = RM20
 TR =  0
RM2
RM1 D 10 20
Quantity Demanded

25. INCOME ELASTICITY OF DEMAND
DEFINITION:
Measures the sensitivity/responsiveness of the quantity demanded
due to a change in income.

26. INCOME ELASTICITY OF DEMAND (cont.)
FORMULA:
Y = %  Quantity Demanded
%  Income
Y = Q2 – Q1 x Y1
Q Y2 – Y1

27. RESPONSES OF INCOME ELASTICITY
Elastic Income
Type of good: Luxury goods such as antique furniture and diamonds
Income
y =0
Inelastic Income
Type of good: Normal goods such as food and clothing
Negative Income Elasticity
Type of good: Giffen/ Inferior goods such as used car and low grade potatoes
0 < y < 1
Zero Income Elasticity
Type of good: Necessity Goods such as rice and vegetables
y > 1
y< 0
Quantity Demanded

28. CROSS ELASTICITY OF DEMAND
DEFINITION:
Measures the sensitivity/responsiveness
of the quantity demanded of one product
due to a change in the price of a related product.

29. CROSS ELASTICITY OF DEMAND
FORMULA:
X = %  Quantity Demanded of good X
%  Price of good Y
X = QX2 – QX1 x PY1
QX PY2 – PY1

30. RESPONSES OF CROSS ELASTICITY
Price of Good X
Positive Cross Elasticity
Good X and Y are substitute goods
x =0
Negative Cross Elasticity
Good X and Y are complementary goods
Zero Cross Elasticity
Good X and Y have no relationship
x > 0
x < 0
Quantity Demanded of Good Y

31. DEFINITION OF SUPPLY Supply is defined as the ability and willingness
to sell or produce a particular product
and services in a given period of time
at a particular price, ceteris paribus.

32. POSITIVE RELATIONSHIP
LAW OF SUPPLY
Law of supply states that the higher the price
of a good, the greater is the quantity supplied
for that good and the lower the price of a good,
the lower is the quantity supplied, ceteris paribus.
P  Qss 
P  Qss 
POSITIVE RELATIONSHIP

33. SUPPLY SCHEDULE AND CURVE
Supply Curve 10 8 6 4 2 12 1 3 5
Supply
Price
Quantity 5 10 4 8 3 6 2 1

34. INDIVIDUAL AND MARKET SUPPLY
INDIVIDUAL SUPPLY
The relationship between the quantity of a product supplied by a single seller and its price.
MARKET SUPPLY
The relationship between the total quantity
of a product supplied by adding all the quantities supplied by all sellers
in the market and its price.

35. Proportion of the expenditure on a product Cost of production
Expected future price
Price of related goods
DETERMINANTS
OF SUPPLY
Improvement in infrastructure
Technological advancement
Government Policies
Number of sellers

36. CHANGE IN QUANTITY SUPPLIED VS. CHANGE IN SUPPLY
Price s0 s1
Quantity
Shift in the supply curve
Occurs when there are changes in other factors but the price remains constant
Increase in Supply (S0  S1)
Decrease in Supply (S1  S0)
Price SS
Quantity
Movement along supply curve
Price changes and other factors are constant
Downward movement  Decrease in quantity supplied (Contraction)
Upward movement  Increase in quantity supplied (Expansion)

37. EXCEPTIONAL SUPPLY
Exceptional Supply is the opposite of the Law of Supply where as price increases, the quantity supplied decreases and vice versa
Wage Rate 20
Income Effect
(Exceptional Supply Curve) 15 10
Substitution Effect 5
Labour 1 2 3 4 5 6

38. INTERRELATED SUPPLY
JOINT SUPPLY
Increase in the supply of one good brings to an increase in the supply
of another related goods.

39. PRICE ELASTICITY OF SUPPLY
DEFINITION:
Measures the sensitivity/responsiveness
of the quantity supplied due to a change
in the price of a product or service.

40. PRICE ELASTICITY OF SUPPLY (cont.)
FORMULA:
ss = %  Quantity Supplied
%  Price
SS = Q2 – Q1 x P1
Q P2 – P1

41. DEGREE OF ELASTICITY ss > 1 ss < 1 ss =0 ss = 1 ss < 1
Elastic Supply
A small percentage of change in the price of a good will lead to larger percentage of change in the quantity supplied.
ss > 1
Inelastic Supply
A large percentage of change in the price of a good will only affect a small percentage of change of the quantity supplied.
ss < 1
Price (RM)
ss =0
ss = 1
ss < 1
Unitary Elastic Supply
Percentage change in price equals the percentage change in the quantity supplied.
ss = 1
Perfectly Elastic Supply
An almost zero percentage of change in price brings a very large percentage of change in the quantity supplied.
ss = 
ss = 
Perfectly Inelastic Supply
A percentage of change in price has no effect on the percentage of change in the quantity supplied.
ss =0
ss > 1
Quantity Supplied

42. OF PRICE ELASTICITY OF SUPPLY
Time Period
Technology improvements
Nature of the market
DETERMINANTS
OF PRICE ELASTICITY OF SUPPLY
Availability and mobility of factors of production
Perishability