CHAPTER 2

DEMAND AND SUPPLY

SUPPLY AND DEMAND : HOW MARKETS WORK

• A market is a group of buyers and sellers of a particular

good or service.
• The terms supply and demand refer to the behavior of
people . . . as they interact with one another in
markets.
• Buyers determine demand.
• Sellers determine supply
DEMAND

• Demand is a desire to buy goods and services with an ability to pay.

• Law of Demand
The law of demand states that, other things equal, the quantity
demanded (Qd) of a good falls when the price (P) of the good
rises, vice versa.

Price and quantity demand have negative relationship or inverse

relationship.
• Demand Schedule
• The demand schedule is a table Price Qty Demanded
that shows the relationship (RM) (cones)
between the price of the good 5.00 2
and the quantity demanded. 4.00 4
3.00 6
• The price and quantity demand 2.00 8
has negative relationship. 1.00 10
Table shows the quantity of mechanical
• When price increase, quantity pencils demanded at each price level
demand decrease, vice versa
Demand Curve
The demand curve is a graph to show the relationship
between the price of a good and the quantity demanded.

Price (RM)

Demand (D)

Quantity (units)
Individual demand vs Market demand

Individual demand
• The relationship between the quantity demanded (of a product) by a
single individual and its price.

Market demand
• Market demand refers to the sum of all individual demands for a
particular good or service.
• Graphically, individual demand curves are summed horizontally to
obtain the market demand curve.
Individual demand Market demand
- Add the quantity of
Abu, Bala and Chong
Price (RM) Abu Bala Chong Market
Demand
5 2 3 4 9
4 4 5 8 17
3 6 7 12 25
2 8 9 15 32
1 10 11 20 41
Price Price
Price Price
3 3 3 3

D D D
D
Q Q Q Q
6 7 12 25

Demand curve for Demand curve for Demand curve for Abu + Bala + Chong
Abu Bala Chong
Non Price determinants of Demand

• Non Price determinants of demand are the factors that may influence the demand curve
to shift either to the left (decrease in demand) or to the right (increase in demand)
• The factors are:
i) Price of related goods
ii) Taste and preference
iii) Consumer’s income
iv) No. of buyers
v) Consumer’s expectation about future price.
vi) Festive season.

•
i) Price of related goods
• When a fall in the price of one good reduces the demand for another good, the two
goods are called substitutes.
Eg: tea and coffee

• When a fall in the price of one good increases the demand for another good, the two
goods are called complements.
Eg: petrol and car
ii) Taste and preference
• Favorable products by the consumers will cause the demand increases (demand shifts to
the right) and unfavorable products will cause the demand decreases (demand shifts to
the left).
iii) Consumer’s income
• Other thing remains constant, when the income of consumer increases, the demand for
products increases and vice versa.

iv) Number of buyers or population.

• Increase in size of population (increase in number of buyer), will increase the demand for
goods and services and vice versa.
 
v) Consumer’s expectation about the future price.
• When the consumers expect the price of a product to increase in the future, the current
demand for that particular product will increase. This is because, consumer do not want to
buy sugar when the price is higher.
• Example: When price of sugar is expected to increase next week, demand for sugar currently
(now) will increase.
vi) Festive season.
• During the festive season such as Hari Raya and Chinese New Year, the demand for
certain products increases.
• Example: The demand for “songkok” increases during Hari Raya season.
Change in demand vs Change in Quantity
demand
Change in Quantity Demand Change in Demand

Graph Price (RM)

Price (RM)

A
P0

C
D2
Demand (D) D0
D1
Quantity (Q) Quantity (units)
Q1 Q0 Q2 Q1 Q0 Q2
Change in Quantity Demand Change in Demand
Definition It refers to a movement from one point to It refers to a shift in the demand curve
another point along the demand curve. whether to the right or to the left.

Movement Upward movement from A (P0, Q0) to B (P1, Q1). Shift to the right from D0 to D2 (Increase
Decrease in quantity demanded called in demand).
contraction.
Downward movement from A (P0, Q0) to C (P2, Shift to the left from D0 to D1 (Decrease in
Q2). demand).
Increase in quantity demanded called expansion.

Factor of The change in the product’s price alone. • Price of related goods
movement Eg: When the price of sugar increases from • Expected future price
RM1.50 to RM 1.70 per kg, the quantity • Number of buyers
demanded for sugar will decrease from 2 kg to 1 Eg. No. of buyer increases, demand for
kg. nasi lemak increases
SUPPLY

Definition
• Supply is defined as an amount of product that a producer is willing and
able to produce for sale in a given period of time and at a particular price

Law of Supply
• Price and quantity supplied have positive relationship.
• “The law of supply states that the higher the price of a product, the
higher the quantity supply for that product and the lower the price of a
product, the lower the quantity supplied, ceteris paribus.”
Supply Schedule and Supply Curve
Price (RM)
• The supply schedule represents a functional Supply (S)
relationship between price and quantity
supplied.

Price (RM) Quantity (units)

5 20
4 16 Quantity (units)
3 12
2 8
  1 4 • The supply curve shows the relationship
between quantities supplied for a product and
its price and supply curve must be upward
sloping.
Individual Supply and Market Supply

Individual supply.
• The relationship between the quantity supplied (for a product) by a single
individual and its price.

 
Market supply.
• The relationship between the total quantity supplied (for a product) by
adding all quantities supplied by all producers in the market and its price.
• Market supply is the combination of individual supplies.
Individual supply
Market supply
- Add Quantity
supply of seller A,
Price (RM) Seller A Seller B Seller C Market B and C
Supply

5 10 20 35 65
4 8 18 30 56
3 6 16 25 47
2 4 14 20 38
1 2 12 15 29
Price Price Price Price
S S S S

3 3 3 3

Q Q Q Quantity
6 16 47 (units)

Seller A Seller B Seller C Seller A + B + C

Non Price Determinants of Supply

• Non Price determinants of supply are the factors that may influence the supply curve to
shift either to the left (decrease in supply) or to the right (increase in supply)
• The factors are:
i) Price of other goods
ii) Cost of production
iii) Technology
iv) No. of sellers
v) Producer’s expectation about future price.
vi) Taxes and subsidies.
i) Prices of other goods.
• A producer can produce many related goods using the same FOP. But when a price
of one good increase, the producer will use more FOP to produce more that
particular good, as a result the producer will produce less the other goods.
• For example: when the price of rubber increases, the producer will grow more
rubber and he will grow less palm oil using the same FOP.

ii) Cost of production.

• When the price of resources increases, it will cause the cost of production to rise
and as a result it will discourage producers to produce more of the products.
• For example: price of raw materials, wage rate and etc.
iii) Technology advancement.
• Improvement in technology enables the producer to produce more products at a lower
cost. Producer’s profit will increase and it motivates the producer to produce more.

iv) Number of producer or seller.

• The larger the number of producer or seller, the larger the market supply of the
product. It is because each producer or seller is competing with each other to win the
market.

v) Producer’s expectation about the future price.

• When the price is expected to increase in the future, it will induce producer to
produce more of product using the current FOP at optimum level. Due to that, the
current supply of product will reduce.
vi) Taxes and subsidies.
• Tax will increase the cost of production and reduce the profit and this will
make the producer not willing to produce more of the product.
• Subsidies in contrast will reduce cost of production and it may increase the
profit of producer. Once profit increases producer is willing to produce more of
the product.
Change in Quantity Supplied vs Change in Supplied

Change in Quantity Supply Change in Supply

Graph Price (RM)

Supply
Price
(RM) S1 S0
P1 B S2

P0 A
P0
C
P2

Quantity (units) Quantity (units)

Q1 Q0 Q2
Change in Quantity Supply Change in Supply
Definition It refers to a movement from one point to another It refers to a shift in the Supply curve
point along the Supply curve. whether to the right or to the left.

Movement Upward movement from A (P0, Q0) to B (P1, Q1). Shift to the right from D0 to D2 (Increase
Increase in quantity Supplied called expansion in Supply).
Downward movement from A (P0, Q0) to C (P2,
Q2). Shift to the left from D0 to D1 (Decrease
Decrease in quantity supplied called contraction. in Supply).

Factor of The change in the product’s price alone. • Price of other goods
movement Eg: When the price of sugar increases from • Expected future price
RM1.50 to RM 1.70 per kg, the quantity supplied • Number of sellers
for sugar will increase from 2 kg to 3 kg. Eg. No. of seller increases, supply for nasi
lemak increases
Sample of Final Exam Questions

1. Define Supply. Explain any four (4) of non price determinants

that influence the supply for a product.
2. Explain any four (4) determinants of demand.