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 CHAPTER 2
DEMAND AND SUPPLY

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 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.

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 CLASSIFICATION OF GOODS AND
SERVICES

FREE GOODS PUBLIC GOODS

Free goods are goods that Public goods are goods that
have no production cost. are for common use and will
benefit everyone.

ECONOMIC GOODS AND SERVICES

Economic goods are goods of value that can be seen and
touched.
Economic services are intangible things (with value) that
cannot been seen or touched.

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 LAW OF DEMAND

Law of demand states that the higher the

price of a good, the lower is the quantity
demanded for that good and the lower the
price, the higher is the quantity
demanded, ceteris paribus.

P  Qdd  P  Qdd 

NEGATIVE RELATIONSHIP

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 DEMAND SCHEDULE AND CURVE

Demand Schedule Demand Curve

12
Price Quantity
10
5 2
8
4 4
6
3 6 DD
4
2 8
2
1 10
0
2 4 6 8 10

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 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.

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 Consumers’ Tastes and
income trends

Price of
related goods Population or
number of
buyers

Supply of
DETERMINANTS
Expectation
money in OF DEMAND
about future
circulation prices

Festive
Level of taxation
seasons and Advertisement
climate
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 CHANGES IN QUANTITY DEMANDED
VS. CHANGES IN DEMAND
CHANGES IN QUANTITY CHANGES IN DEMAND
DEMANDED
Price Price

D1
DD D0
Quantity
Quantity
 Movement along DD curve
 Price changes and other factors  Shift in the demand curve
are constant  Occurs when there are changes in
 Upward movement  Decrease in other factors but price remains
quantity demanded (Contraction) constant
 Downward movement  Increase  Increase in Demand (D0  D1)
in quantity demanded (Expansion)  Decrease in Demand (D1  D0)

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 EXCEPTIONAL DEMAND

Exceptional Demand is the opposite of the

Law of Demand where as price increases,
demand will also increase and vice versa.

GIFFEN GOODS

SPECULATION

EMERGENCIES

STATUS SYMBOL GOODS

HIGHLY-PRICED GOODS
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 INTER-RELATED DEMAND

CROSS DEMAND

The demand for a good is also affected by the price of

its substitute or complementary goods. Cross demand
can be divided into two: Joint demand and
competitive demand.

DERIVED DEMAND
Derived demand is the demand for a good which
is derived from other goods.

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 CROSS DEMAND: JOINT DEMAND
VS COMPETITIVE DEMAND
Cross Demand Positive relationship exists
between substitute goods
Price of pizza Price of pizza

DD
Negative relationship exists P2
P2 between complement
goods

P1 P1

DD

Q1 Q2 Quantity of soft drinks Q1 Q2 Quantity of

soft drinks

Joint Demand Competitive Demand

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 PRICE ELASTICITY OF DEMAND

DEFINITION:

Measures the
sensitivity/responsiveness of
the quantity demanded due to a
change in its price.

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 PRICE ELASTICITY OF DEMAND (cont.)

FORMULA:

d = %  Quantity Demanded
%  Price

d = Q2 – Q1 x P1
Q1 P2 – P1

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 DEGREE OF ELASTICITY

Perfectly Inelastic Demand

Price (RM) A conditionInelastic Demand
in which the quantity demanded does
d =0 not changeofaschange
the price changes.
A large percentage in the price of a good
d < 1 will only affect a small percentage of change in the
Elastic
quantity Demand
demanded.

A small percentage of change in the

Unitary
price of a good will leadElastic
to larger
percentage of change in quantity
d =  Demand
demanded.
Perfectly Elastic
A condition in which
Demand
percentage changes in price
equals to percentage
A condition in which a small
changes in quantity
percentage of change in
demanded.
price leads to an infinite
d = 1 percentage of change in the
d > 1 quantity demanded.

Quantity Demanded

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 Proportion of the
expenditure on a Nature of
Existence of product goods
substitutes

DETERMINANTS
Frequently Income level
purchased OF PRICE
products ELASTICITY OF
DEMAND

Time
Complementary dimension
goods Habits

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 RELATIONSHIP TO TOTAL
REVENUE
Total Revenue (TR) = Price (P) x Quantity (Q)

The information on price elasticity of demand will be useful

Price
for the seller to adjust their selling price since it will affect
the total revenue.

DEMAND IS ELASTIC
RM30

Total Revenue
RM20 x 10 = RM200
RM20
If seller increases price to RM30
New Total Revenue
= RM30 x 5 = RM150
 TR =  RM50
D

5 10
Quantity Demanded

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 RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)

Price
DEMAND IS INELASTIC

RM2 Total Revenue

RM1 x 15 = RM15
If seller increases price to RM2
RM1
New Total Revenue
= RM2 x 10 = RM20
 TR =  RM5

10 15
Quantity Demanded

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 RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)

DEMAND IS UNITARY ELASTIC

Price

Total Revenue

RM2 RM1 x 20 = RM20

If seller increases price to RM2
New Total Revenue
RM1 = RM2 x 10 = RM20
 TR =  0

10 20
Quantity Demanded

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 INCOME ELASTICITY OF DEMAND

DEFINITION:

Measures the sensitivity/responsiveness

of the quantity demanded due to a
change in income.

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 INCOME ELASTICITY OF DEMAND (cont.)

FORMULA:

Y = %  Quantity Demanded
%  Income

d = Q2 – Q1 x Y1
Q1 Y2 – Y1

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 RESPONSES OF INCOME
ELASTICITY

Elastic Income
-Type of good: Luxury goods such as antique
furniture and diamonds
Income
y =0
Inelastic Income
-Type of good: Normal goods such as food
and clothing

Negative Income Elasticity

-Type of good: Giffen/ Inferior goods such
as used car and low grade potatoes

0 < y < 1 Zero Income Elasticity

-Type of good: Necessity Goods such as rice
and vegetables

y > 1 y < 0
Quantity Demanded

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 CROSS ELASTICITY OF DEMAND

DEFINITION:

Measures the sensitivity/responsiveness of

the quantity demanded of one product due to
a change in the price of a related product.

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 INCOME ELASTICITY OF DEMAND

FORMULA:

X = %  Quantity Demanded of good X

%  Price of good Y

x = Qx2 – Qx1 x Py1

Qx1 Py2 – Py1

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 RESPONSES OF CROSS
ELASTICITY

Price of Good X Positive Cross Elasticity

x =0
-Good X and Y are substitute goods

Negative Cross Elasticity

-Good X and Y are complementary goods

Zero Cross Elasticity

-Good X and Y have no relationship

x > 0 x < 0

Quantity Demanded
of Good Y

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 DEFINITION OF SUPPLY

Supply is defined as the ability and

willingness to sell or produce a particular
product and services in a given period of
time at a particular price, ceteris paribus.

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 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 the lower the
price of a good, the lower is the quantity
supplied, ceteris paribus.

P  Qss  P  Qss 

POSITIVE RELATIONSHIP

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 SUPPLY SCHEDULE AND CURVE

Supply Schedule Supply Curve

Price Quantity 12

5 10 10

4 8 8

3 6 6
Supply
2 4 4

1 2 2

0
1 2 3 4 5

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 INDIVIDUAL AND MARKET SUPPLY

INDIVIDUAL SUPPLY
The relationship between the quantity of a 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 and its price.

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 Cost of
production Expected
future price

Price of
related goods

Technological
DETERMINANTS advancement
OF SUPPLY

Improvement in Number of
infrastructure Government sellers
Policies

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 CHANGE IN QUANTITY SUPPLIED
VS. CHANGE IN SUPPLY
CHANGE IN QUANTITY SUPPLIED CHANGE IN SUPPLY

Price Price

s0
SS s1
Quantity Quantity

 Movement along supply curve

 Shift in the supply curve
 Price changes and other factors are
constant  Occurs when there are changes in
other factors but the price remains
 Downward movement  Decrease in
constant
quantity supplied (Contraction)
 Increase in Supply (S0  S1)
 Upward movement  Increase in
quantity supplied (Expansion)  Decrease in Supply (S1  S0)

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 EXCEPTIONAL SUPPLY
Exceptional Supply is the opposite of the Law of
Supply where as price increases, the quantity supplied
Wage Rate decreases and vice versa

20 Income Effect
(Exceptional Supply
Curve)
15

10

Substitution Effect

Labour
0 1 2 3 4 5 6
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 PRICE ELASTICITY OF SUPPLY

DEFINITION:

Measures the sensitivity/responsiveness of

the quantity supplied due to a change in the
price of a product or service.

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 PRICE ELASTICITY OF SUPPLY (cont.)

FORMULA:

ss = %  Quantity Supplied

%  Price

SS = Q2 – Q1 x P1
Q1 P2 – P1

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 DEGREE OF ELASTICITY
Elastic Supply
A small percentage of change in the price of a good will lead to
larger percentage of change in the quantity supplied.

Inelastic Supply
Price (RM)
ss =0 A large percentage of change in the price of a good
ss = 1 will only affect a small percentage of change of the
quantity supplied.
ss < 1
Unitary Elastic Supply
Percentage change in price equals the percentage
change in the quantity supplied.

Perfectly Elastic Supply

An almost zero percentage of change in price
ss =  brings a very large percentage of change in the
quantity supplied.

Perfectly Inelastic Supply

ss > 1 A percentage of change in price has no effect on
the percentage of change in the quantity supplied.

Quantity Demanded

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 Time Period
Technology
improvements

Availability and
mobility of
DETERMINANTS factors of
OF PRICE production
ELASTICITY OF
SUPPLY

Nature of the
Perishability
market

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