1. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 1

2. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 2 Demand and Supply 2 CHAPTER

3. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 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. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 4 LAW OF DEMAND Law of demand states that the higher the price of a good, the lower the quantity demanded for that good and lower the price, quantity demanded is higher, ceteris paribus. P Q DD NEGATIVE RELATIONSHIP

5. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 5 DEMAND SCHEDULE AND DEMAND CURVE PriceQuantity 9.02 8.54 8.06 7.58 7.010 Demand Schedule 0 2 4 6 8 10 12 246810 DD Demand Curve D D

6. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 6 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.

7. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 7 CHANGE IN QUANTITY DEMANDED CHANGE IN DEMAND DD 1 Movement along the demand curve Price changes and other factors are constant Upward movement: Decrease in quantity demanded (contraction) Downward movement: Increase in quantity demanded (expansion) Shift in the demand curve Occurs when changes in other factors and price remains constant Increase in demand (DD0 DD1 ) Decrease in demand (DD1 DD0 ) DD Quantity Price DD 0 Quantity Price CHANGES IN DEMAND AND QUANTITY DEMANDED

8. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 8 Festive Seasons and Climate Price of Related Goods Consumers Income Consumers Income Tastes and Fashions Population or Number of Buyers Expectation Advertisement THE DETERMINANTS OF DEMAND

9. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 9 Exceptional demand is against the Law of Demand where as price increases, demand will also increase and vice versa EMERGENCIES SPECULATION STATUS SYMBOL GODS GIFFEN GOODS EXCEPTIONAL DEMAND

10. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 10 Derived demand is the demand for a good which is derived from other goods. CROSS DEMAND DERIVED DEMAND INTERRELATED DEMAND The demand for a good is also affected by the price of its substitute or complementary goods. Cross demand can be divided into: joint demand and competitive demand.

11. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 11 Supply is defined as the ability and willingness to sell or produce a particular product and services in a given period of time at particular price, ceteris paribus. DEFINITION OF SUPPLY

12. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 12 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 lower the price, quantity supplied is lower, ceteris paribus. P Q ss POSITIVE RELATIONSHIP

13. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 13 SUPPLY SCHEDULE AND SUPPLY CURVE PriceQuantity 9.010 8.58 8.06 7.54 7.02 Supply Schedule SupplyCurve 0 2 4 6 8 10 12 1 23 4 5 SS S S

14. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 14 INDIVIDUAL AND MARKET SUPPLY INDIVIDUAL SUPPLY The relationship between quantity of a product supplied by a single seller and its price. MARKET SUPPLY The relationship between total quantity of a product supplied by adding all the quantities supplied by all sellers in the market and its price.

15. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 15 CHANGE IN SUPPLY CHANGE IN QUANTITY SUPPLIED CHANGES IN QUANTITY SUPPLIED AND CHANGE IN SUPPLY Movement along the supply curve Price changes and other factors are constant Downward movement: Decrease in quantity supplied (contraction) Upward movement: Increase in quantity supplied (expansion) Shift in the supply curve Occurs when changes in other factors and price remains constant Increase in supply (SS0 SS1 ) Decrease in supply (SS1 SS0 ) SS Quantity Price SS 1 SS 0 Quantity Price

16. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 16 Exceptional supply is against the Law of Supply where as price increases, the quantity supplied decreases and vice versa Income Effect (Exceptional Supply Curve) Substitution Effect EXCEPTIONAL SUPPLY Wage Rate Labour 4501236 15 5 10 20

17. All Rights ReservedMicroeconomics © Oxford University Press Malaysia, 2008 2– 17 Price of Related Goods Cost of Production Expectation Technological Advancement Number of Sellers Government Policies THE DETERMINANTS OF SUPPLY