PB 102 MICROECONOMICS CHAPTER 2 DEMAND SUPPLY THEORY

Arrow Process Chapter 2: Demand Supply Theory Why use graphics from Power. Pointing. com? -Demand curve -Demand schedule -Inverse relationship between price and quantity demanded LAW OF DEMAND Mathematical concept Qd = a-b. P INDIVIDUAL AND MARKET DEMAND - Plot individual demand curve and market demand curve DEMAND FUNCTION Beyond an ordinary demand curve DETERMINANTS OF DEMAND a. b. EXCEPTIONAL DEMAND CURVE Price of good Others factors Want more? log on to http: //ekonomi-ynalin. blogspot. com

How Demand Supply Interact?

Definition of Demand l The ability and willingness to buy specific quantities of goods given of time at particular price; ceteris paribus Means: all other factors are relatively constant Keyword: Ability and w illingness to buy

Law of Demand l States that, the higher the price of a good, the lower quantity demanded for that good and the lower the price, the quantity demanded is higher; ceteris paribus l Inverse relationship exist between price and quantity demanded P P DD DD

Demand schedule Price (RM) Quantity Demanded (units) 5 2 4 4 3 6 2 8 1 10

Demand curve l Price 5 4 3 2 1 DD 2 4 6 8 10 Quantity

Individual Demand & Market Demand l Individual demand: l The quantity demanded by a single individual l Market demand: The total quantity of demand in the market l Adding all the quantities demanded by all consumers in the market l

Individual Demand

Market Demand Price (RM) Individual 1 Individual 2 Market Demand 5 2 4 6 4 4 5 9 3 6 6 12 2 8 7 15 1 10 8 18

Market Demand Curve

Determinants of Demand l Price of goods l Price of related goods l Consumer’s income l Consumer’s fashion, taste and interest l Population l Expectation about future price l Advertisements l Festive seasons and climate

Price of related goods l Falls into two categories: Substitude goods – A good can be used to place of another goods. Example: Public bus versus LRT ride; Pepsi-Cola versus Coca-Cola l When price of bus increases, demand for it will reduced and people will look for another alternative which is LRT. Demand for LRT will increase l

Price of related goods Complementary goods – A good can be used together with another good. Example: Disk/pen drive/software and computer l When price of computer increase, demand for it will reduced so demand for software also decreases l

Consumer’s income l Falls into two goods: Normal goods – Demand for it increases as income increases. Example: car, shirt, books l Inferior goods – Demand for it decreases as income increases. Example: low grade rice l

Consumer’s fashion, taste and interest l Interest or preferences are an individual’s attitudes toward goods and services. Example: fast food restaurant l Demand changes as consumer’s taste/interest changes l Example: Changes in music, health conscious, fashion, readings.

Population l Demand depends on the size of the total population or number of buyers in the market l An increase in total population, demand for goods and services will be greater

Expectation about future prices l The higher the expected future price of a good, today’s demand for that good will be larger. l Example: When the government going to increase the price of petrol by next week, demand for petrol today will increase

Advertisements l Advertised goods normally have higher demand because of awareness

Festive seasons and climate l During festive seasons, different products will be demanded and higher demand for that particular products l Example: Hari Raya, dry season, monsoon season.

Demand function l Mathematical concept Qd = a – b. P l Where : Qd is quantity demanded a is quantity demanded when price is zero b is slope of demand curve P is price l P/S: R given efer notes

Exceptional demand curve l In some cases, demand curve might be vary from ordinary demand curve l The situation exist for Giffen goods and luxury goods l Giffen goods – demand is lower when price is decrease l Luxury goods – demand is greater when price is increase

Exceptional Demand Curve l Luxury P goods/ Veblen goods DD 1 P 0 Upper regressive DD DD Qty

Exceptional Demand Curve l Giffen goods P DD P 0 DD Bottom regressive DD 1 Qty

Change in Quantity Demanded Movement along the demand curve l Occurs when price of own goods change l Upward movement – decrease in quantity demand (contraction) l Downward movement – increase in quantity demand (Expansion) l

Change in Demand Shift in demand curve l Occurs when there are change in other factors of demand (taste, income, population, price of related goods) l Shift to the right – increase in demand l Shift to the left – decrease in demand l

Giffen Goods

Demand phenomenon l What do you think?

Demand phenomenon l Explain the picture below

PB 102: MICROECONOMICS CHAPTER 2 DEMAND SUPPLY THEORY

Exceptional Supply curve Determinants of Supply Law of supply Supply Function Supply theory Firms and Industries Demand Curve This illustration is a part of ”Spheres”. See the whole presentation here slideshop. com/3 d-spheres

Supply phenomenon Source: www. casavaria. com/hotspring/2008. . . r-areas/

Supply phenomenon Source: anup-adelgundis. trip 0 d. eu/100409/

Food crisis Source: www. toonpool. com/cartoons/Food%2. . . is_17153

Food crisis Source: gaianeconomics. blogspot. com/2008. . . ive. html

Definition of Supply ability and willingness to sell or produce particular good and services in a given period of time at particular price, ceteris paribus l The

Law of Supply l 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, quantity supplied is lower, other things being equals (ceteris paribus) P QS

Supply Schedule Price (RM) Quantity (units) 5 4 10 8 3 2 1 6 4 2

Supply Curve Price (RM) l 5 SS 4 3 2 1 0 2 4 6 8 10 Quantity supplied

Supply Schedule & Supply Curve Price Quantity supplied 5 60 4 50 3 40 2 30 1 10

Individual Supply l The relationship between the quantity of product supplied by a single seller and its price

Market Supply l The relationship between the total quantity of a product supplied by adding all the quantities supplied by all sellers in the market l Seller 1 + Seller 2 + Seller 3 = Market Supply

Market Supply Schedule for Pen Price (RM) Seller A Seller B Market Supply 5 10 8 18 4 8 7 15 3 6 6 12 2 4 5 9 1 2 4 6

Determinants of Supply l Goods own price l Price of related goods l Cost of production l Expected future price l Technological advancement l Number of suppliers l Government policies

Goods own price l The basic supply relationship is between the price of a good and the quantity supplied. l The relationship is positive or direct meaning that an increase in price will induce and increase in the quantity supplied.

Price of related goods l Consists of two goods: Substitute goods – an increase in the price of a substitute good in production, lower the supply of the good l When price of Pepsi increases, supply of Pepsi will be increased and supply of Coke will be decreased l

Price of related goods l Second category: Complementary goods – an increase in the price of a good will increase the supply of another complement good l When price of pen increases, supply for pen will be increased and supply of ink also increased since both are complementary goods l

Cost of production l The supply will change in response wikth the factor of production (labor, capital, land) l When cost of production increases, the supply will decrease l Ex: An increase in the wages of the labor and price of the capital equipment used to produce tapes, will reduce the supply of tapes

Expected Future Price l The higher the expected future price of a good, the smaller is today’s supply of a good l Ex: When government announced an increase in the price of sugar, the today’s supply will decrease because the supplier wants to gain higher profit with new price

Technological Advancement l Changes in technology is the most influence on supply l New technologies enable producers to use fewer factors of production will lower the cost of production and increase supply l Ex: When new technology was introduced in paddy harvesting, supply of rice increased

Number of Suppliers l Other things being equal, the larger of number of firms supplying a good, larger is the supply of the good l Example: if there an increase in number of cafeteria in PKB, supply of foods and drinks will also increase

Government Policies l Falls in two types: Taxes – will decrease goods supply l Subsidies – will increase the supply as it encourage producers to produce more l

Change in Quantity Supplied Movement along the supply curve l Occurs when price of own goods change l Upward movement – increase in quantity supplied (expansion) l Downward movement – decrease in quantity supplied (contraction) l

Changes in Quantity Supplied l Price C P 3 B P 2 P 1 A Quantity Q 1 Q 2 Q 3

Change in Supply Shift in supply curve l Occurs when there are change in other factors of supply (price of related goods, government policies, technology) l Shift to the right – increase in supply l Shift to the left – decrease in supply l

Changes in Supply l Price S 3 S 1 S 2 Quantity

Reflective journal l Applicable concept of demand supply theory based on articles given l Use supply and demand analysis to explain the article you choose