Ebook Chapter 3 - Demand and Supply Analysis

Chapter 2 (Ebook Chapter 3) - Demand and Supply Analysis

• This chapter analyzes demand and supply.
• Learning outcomes include the law of demand and its curve, determinants of demand, changes in demand vs. changes in quantity demanded.
• Learning outcomes include the law of supply and its curve, determinants of supply, and changes in supply vs. changes in quantity supplied.

Definition of Demand (p51)

• Demand refers to the buyer's willingness and ability to purchase a specific quantity of a good at various prices during a specific time period.

Law of Demand (P ↓ Q↑)

• As the price of a good rises, the quantity demanded falls (ceteris paribus).
• Price and quantity demanded are inversely related.
• The demand curve slopes downwards due to the inverse relationship.

Demand Schedule

• A table showing the relationship between price and quantity demanded by a consumer, ceteris paribus.
• Example data for price (RM) and quantity demanded is provided in the schedule.

Demand Curve

• A graphical representation of the demand schedule.
• The curve visually shows how price and quantity demanded relate.
• The curve slopes downwards, reflecting the inverse relationship.

The Individual Demand Curve

• Shows the relationship between price and the quantity demanded by a single consumer.
• The curve slopes downward.

Market Demand

• The sum of the quantities demanded by all consumers in a market at each price.
• Calculated by adding the individual demand curves of all buyers.

Determinants of Demand (p51)

• Price of related goods: Substitute and complementary goods.
• Consumer income: Normal goods and inferior goods.
• Number of buyers/population: Size, demographics.
• Expectation about future prices.
• Tastes and preferences: Shifts in demand curve.
• Advertising: Influence on consumer behavior.
• Level of taxation: Effects on demand.

Prices of Related Goods

• Substitute goods: If the price of one good increases, the demand for the substitute good increases (Corn chips and Potato Chips).
• Complementary goods: If the price of one good increases, the demand for the complementary good decreases (Tennis racket and tennis ball).

Consumer Income

• Normal goods: Demand increases with increased income (e.g., bags, clothes).
• Inferior goods: Demand decreases with increased income (e.g., second-hand items).

Number of Buyers and Population

• The more buyers, the higher the demand.
• Affected by factors like birth rate, immigration, and death rate.

Buyer Expectations

• Future income: If people expect income to rise, they may increase their spending today leading to an increase in demand.
• Future prices: If prices expected to fall in the future, their purchases today may be delayed leading to decrease in demand.

Changes in Quantity Demanded

• Movement along a demand curve.
• Caused by a change in price.

Changes in Demand

• The whole demand curve shifts.
• Caused by factors other than price (example shifts in the demand curve are given).

Definition of Supply (p52)

• The amount of a specific good or service that a firm is willing and able to sell at various prices during a specific period, ceteris paribus.

Law of Supply (P ↑ Q↑)

• As prices increase, the quantity supplied also increases, ceteris paribus
• This positive relationship exists between price and supply
• The supply curve slopes upwards.

Supply Schedule

• A table showing the supply of eggs at different prices.

Supply Curve

• A graphical representation of the supply schedule.

Individual Supply vs Market Supply

• Individual supply: relationship between price and quantity supplied by a single seller.
• Market supply: sum of the quantities supplied by all sellers in the market at each price.

Determinants of Supply (p52)

• Price of related goods: Substitute and complementary goods.
• Cost of production: Factors like input costs (materials, labor).
• Number of suppliers/sellers: Increase in suppliers will increase total output.
• Technological change: Advancements will increase output; innovations = increase in supply.
• Government policies (taxes/subsidies): Taxes decrease supply. Subsidies increase supply.
• Expected future price.

The Price of Related Goods

• Substitute goods: Producers might switch to producing the substitute good with higher prices (Mutton/Cattle examples).
• Complementary goods: Increase in demand for one good will increase the demand for its related good/complement.

Change in Cost of Production

• Higher production costs decrease supply.
• Supply curve shifts left

Number of Suppliers

• More suppliers lead to an increase in supply, and vice versa.
• An increase in the number of producers = increase in total output

Technological Change

• Advancements/improvements in technology increase/increase supply

Change in Government Policy

• Taxes decrease supply
• Subsidies increase supply.

Change in Quantity Supplied vs Change in Supply

• Change in quantity supplied: movement along a supply curve in response to change in price.
• Change in supply: a shift of the entire supply curve due to changes in other factors besides price (e.g., technology, costs, government policies).