1. Principles of Microeconomics

2. 2
DEMAND AND SUPPLYDEMAND AND SUPPLY
CHAPTER 2
2

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DEMAND AND SUPPLY

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DEMAND
• Definition; The ability and willingness to buy
specific quantities of goods in a given period
of time at a particular price, ceteris peribus.
• It is not only desiring, wishing, or wanting to
buy the goods. The person must also have the
ability to buy the goods and he must be willing
to pay the price of the goods.

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LAW OF DEMAND
• The higher the price of product, the lower the
quantity demanded and the lower the price, the
higher the quantity demanded.
• Price (P) Quantity demanded (Qd)
Price (P) Quantity demanded (Qd)

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Example:
• If the price of chicken decreases, the quantity
demanded for chicken will …………………
• If the price of chicken increases, the quantity
demanded for chicken will ………………..

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Continue:
• These scenario is only possible if we make the
following assumption:
1.Tastes and preferences of consumers remain
unchanged.
2.Consumers’ income remains the same.
3.Price of goods which can be substituted with
chicken remain unchanged,
4.Goods should not have any prestige value.

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Demand Schedule
• A list of the quantity that a buyer is willing to
buy at different prices at one particular time.
• Shows a functional relationship between price
and quantity.
• assumptions:- income, preferences and price
related goods are constant.

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Example:Demand schedule
PRICE (RM) QUANTITY (UNITS)
5 2
4 4
3 6
2 8
1 10
The table above shows the Individual Demand Schedule
for box file.

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• A line on a graph that illustrate a demand schedule;
slopes downward because of the inverse relationship
between price and quantity demanded.
Demand curve

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INDIVIDUAL DEMAND AND MARKET DEMAND
• Individual Demand
-is the relationship between the quantities of
goods demanded by a single buyer and their
price.
• Market demand.
- Is the relationship between the total quantities
of good demanded by all consumers in the
market and its price.

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E.g: let’s assume there are only two buyers in the market, Fira
and Fara in the market demand
PRICE
QUANTITY DEMANDED (units)
FIRA FARA MARKET
5 2 3
4 4 6
3 6 8
2 8 10
1 10 12

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Price (RM)
Quantity
(units)
Dd
Demand curve for Fira

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Demand curve for Fara
Price (RM)
Dd

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Demand curve for market
Price (RM)
Quantity
(units)
Dd

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INDIVIDUAL DEMAND FUNCTION
Qx = a -bp
Where;
Qx = Quantity demanded for X
p = Price of X
a = Quantity of X when the price is zero
b = Gradient of demand curve
* The positive sign in the function shows the inverse
relationship of price and quantity demanded

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• The demand function is Qd = 120 - 10P.Calculate
the quantity of goods to be demanded at
different price levels by completing the table.
PRICE (RM) Qd (Units)
7
8
9
10

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CHANGES IN QUANTITY DEMANDED
• The movement along the demand curve due to change in price
while other factors remain constant.
Price (RM)

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CHANGES IN DEMAND
A shift of the demand curve when other factors change while
price remains the same.
Price (RM)
Rightward shift
Leftward shift

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Changes due to:
Increase in income
Fashion and taste
Future price
Price of substitute and complementary
products.

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DETERMINANTS OF DEMAND
• The demand curve shifts when there are
changes in other factors.
1)INCOME
• Income of consumer can influence the
purchasing decisions of an individual.
• When income INCREASE the consumers will
demand for more goods and services, other
things being equal-Normal goods (house, cars,
bag,etc)

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Continue:
• When income INCREASES, the demand
DECREASES-inferior (giffen goods)- low
grade rice, salted fish etc.
• When the income of the poor consumers RISE,
they can afford to buy better goods and thus
demand DECREASES for giffen goods.

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2) PRICE OF RELATED GOODS
a) Substitute goods
• goods that can be used in place of other
goods. E.g. margarine and butter
• Demand of a good if price of substitute
goods .
• Demand of a good if price of substitute
goods .

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EXAMPLE:
• When the price of margarine increases, the
quantity demanded for margarine will
……………… and consumers will …………..

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b) Complementary goods.
• goods that are used together with another
good. E.g: car and petrol.
• Demand of a good if price of substitute
goods .
• Demand of a good if price of substitute
goods .
• E.g: when the price of car increases, the
demand of car will ……….and the petrol
consumption will ………..

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3)TASTES AND FASHION
• Changes in tastes and fashion can bring significant changes in
the demand of good.
• E.g: Iphone 5 become the popoular gadget among the teenagers
thus, make the demand of this gadgets increase.
4)POPULATION OR NUMBER OF BUYERS.
• Demand depends on the size of the total population or number
of buyers in the market.
• A larger population will bring out an increase in demand.
• E.g: When Putrajaya was built, there was an increase in demand
for houses in nearby areas such Puchong and Dengkil.

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5)EXPECTATION.
• Expectation of consumers on future events
would give an impact on current demand.
• When consumers expect the price to increase
in the future, they will increase their demand
now.
• E.g: if it’s expected that the car price will rise
next year, consumers who intend to buy a car
will buy it now, vice versa.

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6) ADVERTISEMENT
• Advertised goods normally have higher demand.
• Consumers will only buy goods and services when
they are aware of existaence of those products.
7) FESTIVE SEASONS.
• Festive seasons can influence the demand of a good
greatly.
• E.g: Hari Raya – demand for Baju Melayu will
increase

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EXCEPTIONAL DEMAND
• As price increases the quantity demanded will also
increase.
• It’s against the law of demand.
Price (RM)
Quantity
(units)
Dd

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a)GIFFON/INFERIOR GOODS
• Consumed by people in the lower income group.
e.g: rice grade C
• Price INCREASE Quantity INCREASE
-when the price of grade C is high, consumers have
no choice and continue buying because they need
rice.

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b)STATUS SYMBOL GOODS
• Products purchased by people in the higher
income group to show their status.
E.g:Diamond.
• Price INCREASE Quantity INCREASE
-when the price of diamond high, consumers
will buy more to show they can afford it.

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c) SPECULATION
• The future price of the product. E.g :Cars
• Future price INCREASE, current quantity will
…………
• Future price DECREASE, current quantity wil
…………..

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d)EMERGENCIES
• War/natural disasters.
• E.g: Rice, salt, oil , sugar
e)HIGHLY PRICE GOODS
• Consumers feel a product is of superior quality
if it’s priced is very high.
• E.g: Gadget for example Iphone 5.

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INTERRELATED DEMAND
• The law of demand assumes that only price and quantity
changes and other factors remain constant. There are some
demands which are interrelated to one another.
a) CROSS DEMAND.
• Relationship between the price of complementary or substitute
goods and quantity of a good.

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I) JOINT DEMAND.
• Complementary goods – e.g: fuel and car.
Price of car (RM)
Quantity
demanded of fuel
Dd

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II) COMPETITIVE DEMAND
• Substitute goods- e.g: Butter and margarine.
Price of butter (RM)
Quantity of
margarine
Dd

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SUPPLY

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SUPPLY
• Quantity of goods that a producer is able and willing to sell at
a certain price in a given period of time.
LAW OF SUPPLY
• The higher the price of a good, the higher the quantity
supplied and vice versa.
Price (P) Quantity supplied (Qs)
Price (P) Quantity supplied(Qs)

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Example:
• If the price of chicken increase, the quantity of
chicken to be supplied will ……….
• If the price of chicken decrease, the quantity of
chicken to be supplied will ……….

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SUPPLY SCHEDULE
• A list of the amounts of a product that a seller would offer for
sale at different prices in a defined time period when all
nonprice factors are held constant.
• Example: Supply schedule:
PRICE OF ICE
CREAM (RM)
QS
0.00 0
0.5 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5

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Supply curve
Price of ice cream

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SUPPLY FUNCTION
Where;
Qs= Quantity of goods supplied
c = Quantity of goods supplied when the price (P) is zero.
P = Price of the good (RM)
Qs = c +dP

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The supply function is Qs = 15 + 3P.Calculate
the quantity of goods to be supplied at
different price levels by completing the table:
P(RM) Qs (units)
1
2
3
4

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DETERMINANTS OF SUPPLY
1)PRICE OF RELATED GOODS
a) Substitute goods
• When the price of goods the price of substitute goods will
Therefore, the manufacturer will reduce the supply of
substitute goods.
b) Complementary goods.
• When the price of cars , producers will increase the
production of cars. So, the supply of card will . Since cars
and petrol are complementary, the supply of petrol also will

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2)LEVEL OF TECHNOLOGY
• Supply will when the technology .
3)PRODUCTION COSTS.
• Increase in production cost (labour, raw material,
capital) will the numbers of supplies.
4)SPECULATION
• If the price will , producers will the current
supply.

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