PB 102 MICROECONOMICS
CHAPTER 2
DEMAND AND SUPPLY THEORY
Arrow Process
Chapter 2: Demand and Supply Theory
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-Demand curve
-Demand schedule
-Inverse relationship
between price and
quantity demanded
LAW OF DEMAND
Mathematical concept
Qd = a-bP
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
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How Demand and Supply Interact?
Definition of Demand

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
Law of Demand
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
 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

Price
5
4
3
2
1
DD
Quantity
2
4
6
8
10
Individual Demand & Market
Demand
Individual demand:
 The quantity demanded by a single
individual
 Market demand:

The total quantity of demand in the market
 Adding all the quantities demanded by all
consumers in the market

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
Price of goods
 Price of related goods
 Consumer’s income
 Consumer’s fashion, taste and interest
 Population
 Expectation about future price
 Advertisements
 Festive seasons and climate

Price of related goods

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
 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

Price of related goods
Complementary goods – A good can be
used together with another good. Example:
Disk/pen drive/software and computer
 When price of computer increase, demand
for it will reduced so demand for software
also decreases

Consumer’s income

Falls into two goods:
Normal goods – Demand for it increases
as income increases. Example: car, shirt,
books
 Inferior goods – Demand for it decreases
as income increases. Example: low grade
rice

Consumer’s fashion, taste and
interest
Interest or preferences are an
individual’s attitudes toward goods and
services. Example: fast food restaurant
 Demand changes as consumer’s
taste/interest changes
 Example: Changes in music, health
conscious, fashion, readings.

Population
Demand depends on the size of the total
population or number of buyers in the
market
 An increase in total population, demand
for goods and services will be greater

Expectation about future prices
The higher the expected future price of a
good, today’s demand for that good
will be larger.
 Example: When the government going to
increase the price of petrol by next week,

demand for petrol today will
increase
Advertisements

Advertised goods normally have higher
demand because of awareness
Festive seasons and climate
During festive seasons, different
products will be demanded and higher
demand for that particular products
 Example: Hari Raya, dry season,
monsoon season.

Demand function

Mathematical concept
Qd = a – bP
 Where : Qd is quantity demanded
a is quantity demanded when price
is zero
b is slope of demand curve
P is price

Exceptional demand curve
In some cases, demand curve might be
vary from ordinary demand curve
 The situation exist for Giffen goods and
luxury goods
 Giffen goods – demand is lower when
price is decrease
 Luxury goods – demand is greater when
price is increase

Exceptional Demand Curve

Luxury goods/ Veblen goods
P
DD1
P0
Upper regressive
DD
DD
Qty
Exceptional Demand Curve

Giffen goods
P
DD
P0
DD
Bottom regressive
DD1
Qty
Change in Quantity Demanded

Movement along the
demand curve
 Occurs when price
of own goods
change
 Upward movement –
decrease in quantity
demand (contraction)
 Downward
movement – increase
in quantity demand
(Expansion)
Change in Demand

Shift in demand
curve
 Occurs when there
are change in other
factors of demand
(taste, income,
population, price of
related goods)
 Shift to the right –
increase in demand
 Shift to the left –
decrease in demand
Giffen Goods
Demand phenomenon

What do you think?
Demand phenomenon

Explain the picture below
PB102: MICROECONOMICS
CHAPTER 2
DEMAND AND 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/3d-spheres
Supply phenomenon
Source: www.casavaria.com/hotspring/2008...r-areas/
Supply phenomenon
Source: anup-adelgundis.trip0d.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

The ability and willingness to sell or
produce particular good and services
in a given period of time at particular
price, ceteris paribus
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, quantity supplied is lower, other
things being equals (ceteris paribus)
P
QS
P
QS
Supply Schedule
Price (RM)
Quantity (units)
5
10
4
8
3
6
2
4
1
2
Supply Curve
Price (RM)

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

The relationship between the quantity of
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
 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
Goods own price
 Price of related goods
 Cost of production
 Expected future price
 Technological advancement
 Number of suppliers
 Government policies

Goods own price
The basic supply relationship is between
the price of a good and the quantity
supplied.
 The relationship is positive or direct
meaning that an increase in price will
induce and increase in the quantity
supplied.

Price of related goods

Consists of two goods:
Substitute goods – an increase in the price
of a substitute good in production, lower the
supply of the good
 When price of Pepsi increases, supply of
Pepsi will be increased and supply of Coke
will be decreased

Price of related goods

Second category:
Complementary goods – an increase in the
price of a good will increase the supply of
another complement good
 When price of pen increases, supply for pen
will be increased and supply of ink also
increased since both are complementary
goods

Cost of production
The supply will change in response wikth
the factor of production (labor, capital,
land)
 When cost of production increases, the
supply will decrease
 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
The higher the expected future price of a
good, the smaller is today’s supply of a
good
 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
Changes in technology is the most
influence on supply
 New technologies enable producers to
use fewer factors of production will lower
the cost of production and increase
supply
 Ex: When new technology was
introduced in paddy harvesting, supply of
rice increased

Number of Suppliers
Other things being equal, the larger of
number of firms supplying a good, larger
is the supply of the good
 Example: if there an increase in number
of cafeteria in PKB, supply of foods and
drinks will also increase

Government Policies

Falls in two types:
Taxes – will decrease goods supply
 Subsidies – will increase the supply as it
encourage producers to produce more

Change in Quantity Supplied

Movement along the
supply curve
 Occurs when price
of own goods
change
 Upward movement –
increase in quantity
supplied (expansion)
 Downward
movement –
decrease in quantity
supplied (contraction)
Changes in Quantity Supplied

Price
C
P3
B
P2
A
P1
Quantity
Q1
Q2
Q3
Change in Supply

Shift in supply curve
 Occurs when there
are change in other
factors of supply
(price of related
goods, government
policies, technology)
 Shift to the right –
increase in supply
 Shift to the left –
decrease in supply
Changes in Supply

Price
S3
S1
S2
Quantity
Reflective journal
Applicable concept of demand and
supply theory based on articles given
 Use supply and demand analysis to
explain the article you choose
