Demand and Supply PDF

Principles Of Topic 3 & 4 : Market Demand and Supply  Learning Objectives 3.0 Market Demand (Week 3) 4.0 Market Supply (Week 4) 2  Markets A market is the process of buyers and sellers exchanging goods and services. Sup...

Principles Of Topic 3 & 4 : Market Demand and Supply  Learning Objectives 3.0 Market Demand (Week 3) 4.0 Market Supply (Week 4) 2  Markets A market is the process of buyers and sellers exchanging goods and services. Supermarkets, internet stores and restaurants are some examples. markets. 3  Buyers, as a group, determine the demand side of the market, whether it is consumers purchasing goods or firms purchasing inputs. Sellers, as a group, determine the supply side of the market, whether it is firms selling their goods or resource owners selling their inputs. 4  It is the interaction of buyers and sellers that determines market prices and output through the forces of and Demand and Supply. 5 Learning Objectives (3.0) DEMAND 6  Learning Objectives 3.0) Market Demand a) Definition of demand b) Law of demand, demand schedule, demand curve, individual demand and market demand c) Reason for demand curves sloping downward d) Change in quantity demanded and change in demand 7  Demand - A Definition The willingness and ability of buyers to purchase different quantities of a goods & services at different prices during a specific time period 8  Law of Demand Three (3) ways to represent the law of demand : 1) In words: when the price of a good or service falls, the quantity demanded increases. (ceteris paribus) There is an inverse relationship between price (P) and quantity demanded (Qd). 9  Demand Schedule 2) In a demand schedule: Price of Quantity of coffee coffee beans Def : The numerical tabulation of beans demanded the quantity demanded of a good (RM) (kg) at different prices. 2.00 7.1 A demand schedule is the 1.75 7.5 numerical representation of the 1.50 8.1 law of demand. 1.25 8.9 Example: James demand for 1.00 10.0 coffee beans. Notice that James 0.75 11.5 preferences obey the Law of Demand. 0.50 14.2 10  Demand Schedule A demand schedule can be shown as points on a graph. The graph lists prices on the vertical axis and quantities demanded on the horizontal axis. Each point on the graph shows how many units of the product or service an individual will buy at a particular price. The demand curve is the line that connects these points. 11  Demand Curve Price of coffee bean 3) As a demand curve: (RM) Def : A demand curve is the graphical representation of the demand schedule. 2.00 Points on demand curve shows the 1.75 highest price consumers are willing and able to pay for that particular 1.50 unit of a good 1.25 The demand curve slopes downward. 1.00 0.75 As price rises, the Demand quantity curve 0.50 demanded falls Quantity of coffee beans (kg) 0 7 9 11 13 15 17 12  Individual Demand vs Market Demand The quantity demanded in the market is the sum of the quantities demanded by ALL buyers at each price. Suppose Ali and Abu are the only two buyers in the CD’s market. (Qd = quantity demanded) Price Ali’s Qd Abu’s Qd Market Qd 0.00 7 + 9 = 16 1.00 6 + 8 = 14 2.00 5 + 7 = 12 3.00 4 + 6 = 10 4.00 3 + 5 = 8 5.00 2 + 4 = 6 6.00 1 + 3 = 4 13  The Market Demand Curve Price of CD’s Price Quantity of of CD’s $6.00 CD’s demanded 0.00 16 $5.00 1.00 14 $4.00 2.00 12 $3.00 3.00 10 4.00 8 $2.00 5.00 6 $1.00 6.00 4 $0.00 Quantity of CD’s 0 5 10 15 14  Reason For Demand Curves Sloping Downward Three (3) reasons why there is an inverse or negative relationship between price and quantity demanded: 1) Observed Behavior (logical thinking) tells us that consumers will buy more goods and services at lower prices than higher prices, ceteris paribus. 15  Reason For Demand Curves Sloping Downward 2) Diminishing Marginal Utility That is, in a given time period, a buyer will receive less satisfaction from each successive unit consumed - so consumers would only buy added units if the price were reduced. 16  Reason For Demand Curves Sloping Downward 3) Substitution Effects and Income Effects i) Substitution Effects If the price of Pizza Hut increases the quantity demanded of Pizza Hut will fall as some buyers switch out of pizza into Domino Pizza, which can substitute for Pizza Hut. 17  Reason For Demand Curves Sloping Downward ii) Income Effects With given income, when the prices of good or services decrease, consumer’s purchasing power increases. This increase in real income encourage the consumer to buy more of that good or services. 18  Changes In Quantity Demanded vs Changes In Demand If the price of a good changes, we say this leads to a change in quantity demanded. (A movement along the demand curve) If one of the other factors (determinants of demand) influencing consumer behavior changes, we say there is a change in demand. (A shift in the demand curve) 19  Changes in Quantity Demanded Price of Cigarettes per Pack C ▲price results in a 4.00 movement along the demand curve. 2.00 A D1 0 12 20 Number of Cigarettes 20 Smoked per Day  Changes in Demand Price Increase in demand Decrease in demand D2 D1 D3 0 Quantity 21 Changes In Demand vs Changes In Quantity Demanded  Determinants of Demand 1. Prices of related goods (substitutes vs complements) 2. Incomes of demanders (normal goods vs inferior goods) 3. Number of demanders/buyers 4. Taste and preferences 5. Expectations of demanders 23  1. Prices Of Related Goods (Substitutes) Substitute goods are the goods that can satisfy similar needs or desires. For example: Coca and Pepsi. Two goods are called substitutes if an increase in the price of one causes an increase in the demand for the other good. 24  The opposite also applies: Two goods are called substitutes if a decrease in the price of one causes a decrease in the demand for the other good. 25 1. Prices Of Related Goods (Substitutes)  1. Prices Of Related Goods (Complements) Complement goods are the goods that must be used together or simultaneously. For example, tennis racket and tennis ball. Two goods are complements if an increase in the price of one good causes a decrease in the demand for the other good (or opposite) 27 28 1. Prices Of Related Goods (Complements)  2. Income - Normal Good Other things equal, an increase in income usually leads to an increase in demand for goods (rightward shift). A decrease in income usually leads to a decrease in the demand for goods (leftward shift). Such goods are called normal goods. Example: CDs and movie tickets. 30 31  2. Income - Inferior Good Some goods exist for which rising (or falling) income leads to reduced (or increased) demand. These are called inferior goods. It shows that when income changes and demand changes in the opposite direction (inversely). For example: local bus service, unbranded can food & bread. 32 33 Normal Good vs Inferior Good  3. Number Of Demanders/Buyers An increase in the potential consumer population will increase (shift right) the demand for a good or service. 35  4. Taste and Preferences An increase in tastes or preferences for a good or service will increase (shift right) the demand for a good or service, vice versa. 36  5. Expectations of demanders An increase in the expected future price of a good will increase (shift right) the current demand for it. A decrease in the expected future price of a good will decrease (shift left) the current demand for it. 37  Summary Variable A change in this variable… Price …causes a movement along the D curve "Hmm, this could be interesting." Price of related goods …shifts the D curve Income …shifts the D curve No. of buyers …shifts the D curve Taste and preferences …shifts the D curve Expectations …shifts the D curve 38 EXERCISES 39 May 2020 Fill in the blanks with the most appropriate answer. Suppose the price of a Proton car has decrease from RM30,000 to RM25,000. This would cause a _______________ along the demand curve. If the increase in average income causes a shift in the demand curve to the right, you may conclude that Proton cars are _________ good. Suppose that the price of a gallon of gas increases from RM5 to RM6. Since Proton cars and gasoline are _________ good, an increase in the price of a gallon of gas shifts the demand curve for Proton cars to the ____________. Identify ONE (1) reason for the increase in the quantity demanded for chicken and any FOUR (4) reasons for the 40 decrease in the demand for chicken. Reference Tucker, I.B.(2017). Economics for today. (9th ed.). Mason, OH: Thomson South Western. 41 The End 42 Learning Objectives (4.1) SUPPLY 43  Learning Objectives 4.1) Market Supply a. Definition of supply b. Law of supply, supply curve, supply schedule, individual supply and market supply c. Reason for supply curves sloping upward d. Change in quantity supplied and change in supply 44  Supply - A Definition The willingness and ability of sellers to produce and offer different quantities of a goods & services at different prices during a specific time period 45  Law of Supply Three (3) ways to represent the law of supply : 1) In words: when the price of a good or service increase, the quantity supplied increases. (ceteris paribus) There is an positive relationship between price (P) and quantity supplied (Qs). 46  2. Supply Schedule 2) In a supply schedule: Price of Quantity of Def coffee coffee beans :The numerical beans supplied tabulation of the quantity (RM) (kg) supplied of a good at 2.00 11.6 different prices. 1.75 11.5 A supply schedule is the 1.50 11.2 numerical representation 1.25 10.7 of the law of supply. 1.00 10.0 Example: James supply 0.75 9.1 for coffee beans. Notice 0.50 8.0 that James preferences obey the Law of Supply  Supply Schedule A supply schedule can be shown as points on a graph. The graph lists prices on the vertical axis and quantities supplied on the horizontal axis. Each point on the graph shows how many units of the product or service a producer (or group of producers) would willing sell at a particular price. The supply curve is the line that connects these points. 48  Supply Curve Price of coffee beans (RM) 3) As a supply curve: Supply curve Def : A supply curve shows $2.00 graphically how much of a good 1.75 or service people are willing to As price rises, the quantity supplied rises. sell at any given price. 1.50 Supply curve slopes upward. 1.25 Points on supply curve shows 1.00 the lowest price for which a supplier can profitably sell 0.75 another unit. 0.50 0 7 9 11 13 15 17 Quantity of coffee beans (kg) 49  Individual Supply vs Market Supply The quantity supplied in the market is the sum of the quantities supplied by ALL sellers at each price. Suppose Mr.Labu and Mr.Labi are the only two sellers in this market. (Qs = quantity supplied) Price Mr.Labu Mr.Labi Market Qs $0.00 0 + 0 = 0 1.00 1 + 2 = 3 2.00 2 + 4 = 6 3.00 3 + 6 = 9 4.00 4 + 8 = 12 5.00 5 + 10 = 15 6.00 6 + 12 = 18 50  The Market Supply Curve P Price Quantity $6.00 of of CD’s CD’s supplied $5.00 0.00 0 $4.00 1.00 3 $3.00 2.00 6 3.00 9 $2.00 4.00 12 $1.00 5.00 15 $0.00 Q 6.00 18 0 5 10 15 51  Why Supply Curves Are Upward Sloping Businesses provide goods and services hoping to make a profit. Profit is the money a business has left over after it covers its costs. Businesses try to sell at prices high enough to cover their costs with some profit left over. 52  Why Supply Curves Are Upward Sloping The higher the price for a good, the more profit a business will make after paying the cost for resources. A higher price is an incentive to producer to produce more of a good. This incentive is in the form of higher profits. 53  Changes In Quantity Supplied vs Changes In Supply If the price of a good changes, it leads to a change in its quantity supplied, but not its supply. (A movement along the supply curve) If one of the other factors (determinants of supply) influences sellers' behavior, it leads to a change in supply. ( A shift in the supply curve) 54  Change in Quantity Supplied Price S C 3.00 ▲price results in a movement A along the supply 1.00 curve. Quantity 0 1 5 55  Change in Supply Price S3 S1 S2 Decrease in Supply Increase in Supply Quantity 0 56 Changes in Quantity Supplied vs Changes in Supply  Determinants of Supply 1. Input prices "Hmm, this could be interesting." 2. Prices of related products 3. Expectations 4. Number of suppliers 5. Technology 6. Government regulations 7. Weather 58  1. Input Prices Higher input prices increase the cost of production causing the supply curve to shift to the left at each and every price. Lower input prices decrease the cost of production causing the supply curve to shift to the right at each and every price. 59  2. Prices of Related Products (Substitute in Production) A substitute in production is a product that could have been supplied using the same resources If palm oil prices rise for example this may cause some farmers to switch from rubber to palm oil plantations. Thus, an increase in the price of oil palm will decrease the supply of rubber. 60  3. Expectations If producers expect a higher price in the future, they will supply less now. They would prefer to wait and sell when their goods will be more valuable. If producers currently expect that the price will be lower later they will supply more now. Otherwise, if they wait to sell, then their goods will be worth less. 61  4. Number of Suppliers An increase in the potential producer population will increase (shift right) the supply for a good or service. 62  5. Technology In this era, companies must continuously adopt new technologies in order to stay relevant in an increasingly competitive market. It is important to embrace technological advancement in production to: 1. To produce high quality products at an efficient low cost 2. Improve in efficiency and productivity 3. Reducing the need to utilize manual labour 63 Example: Malaysian rubber glove manufacturer, Top Glove Corporation Berhad, which is the world’s largest rubber manufacturer is aiming to completely computerized the company’s manufacturing and operational processes. Source:https://www.thestar.com.my/business/business-news/2018/03/07/greater- automation-for-top-glove/ 64  6. Government Regulations Supply may also change because of changes in the legal and regulatory environment in which firms operate. If such changes increase costs (eg. taxes), they will decrease supply. If they decrease costs (eg. subsidies), they will increase supply. 65  7. Weather If the weather is good, supply of that particular commodities will increase. If the weather is bad, it will destroy the crops, causing the supply of certain commodities to decrease. 66  Summary Variable A change in this variable… Price …causes a movement "Hmm, this could be interesting." along the S curve Input prices …shifts the S curve Price of related products …shifts the S curve Expectations …shifts the S curve No. of suppliers …shifts the S curve Technology …shifts the S curve Gov regulations …shifts the S curve Weather …shifts the S curve 67 Learning Objectives (4.2) Market Equilibrium 68  Learning Objectives 4.2. Market equilibrium a. Shortage and surplus b. Changes in equilibrium 69  Market Equilibrium The market equilibrium is found at the point at which the market demand and market supply curve intersect. The price at the intersection of the market demand curve and the market supply curve is called the equilibrium price. The quantity at the intersection of the market demand curve and market supply curve is called the equilibrium quantity. 70  Market Equilibrium P $6.00 D S $5.00 $4.00 At equilibrium, $3.00 QD = QS $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 71  Equilibrium Price The price that equates quantity supplied with quantity demanded P $6.00 D S P QD QS $5.00 $0 24 0 $4.00 1 21 5 2 18 10 $3.00 3 15 15 $2.00 4 12 20 $1.00 5 9 25 $0.00 6 6 30 Q 0 5 10 15 20 25 30 35 72  Equilibrium Quantity The quantity supplied and quantity demanded at the equilibrium price P $6.00 D S P QD QS $5.00 $0 24 0 $4.00 1 21 5 2 18 10 $3.00 3 15 15 $2.00 4 12 20 $1.00 5 9 25 $0.00 6 6 30 Q 0 5 10 15 20 25 30 35 73  Shortage If the market price is charged below the equilibrium price, quantity demanded will greater than quantity supplied, a shortage (excess demand) will exist. A situation where QD > QS. 74  Shortage when quantity demanded is greater than quantity supplied P $6.00 D S Example: If P = $1, $5.00 then $4.00 QD = 21 CD’s $3.00 and QS = 5 CD’s $2.00 resulting in a $1.00 shortage of 16 CD’s $0.00 Shortage Q 0 5 10 15 20 25 30 35 75  Surplus If the market price is charged above the equilibrium price, quantity supplied will greater than quantity demanded, a surplus (excess supply) will exist. A situation where QS > QD. 76  Surplus when quantity supplied is greater than quantity demanded P $6.00 D Surplus S Example: If P = $5, $5.00 then $4.00 QD = 9 CD’s $3.00 and $2.00 QS = 25 CD’s $1.00 resulting in a surplus of 16 CD’s $0.00 Q 0 5 10 15 20 25 30 35 77  Changes in Equilibrium Three steps to analyzing changes in equilibrium: 1. Decide whether event shifts supply curve, demand curve or both. 2. Decide in which direction the curve shifts. 3. Use demand-supply diagram to see how the shift changes equilibrium P and Q. 78  The Effect of Demand and Supply Shifts on Equilibrium SUPPLY CURVE SUPPLY CURVE SUPPLY CURVE UNCHANGED SHIFTS TO THE RIGHT SHIFTS TO THE LEFT DEMAND CURVE Q unchanged Q increases Q decreases UNCHANGED P unchanged P decreases P increases DEMAND CURVE Q increases Q increases or SHIFTS TO THE RIGHT Q increases P increases or decreases P increases decreases P increases DEMAND CURVE Q decreases Q increases or Q decreases SHIFTS TO THE LEFT P decreases decreases P decreases or P decreases increases 79 Equilibrium Price and Quantity Effects of Supply and Demand Curve Shifts 80 Equilibrium Price and Quantity Effects of Supply and Demand Curve Shifts 81  EXAMPLE 1 : Price of gas and Hybrid Cars Event to be analyzed: P increase in price of gas. S1 STEP 1: P2 D curve shifts because price2:of gas STEP P1 affects demand for D shifts right hybrids. because STEPhigh 3: gas S price curvemakes does not shift, hybrids D1 D2 The shiftprice because causesof an gas more attractive Q increase does not in price affect cost of Q1 Q2 relative to other cars. and quantity producing of hybrids. hybrid cars. 82  EXAMPLE 2 : Technology and Hybrid Cars Event: New technology P reduces cost of producing hybrid cars. S1 S2 STEP 1: S curve shifts because event STEP 2: affects P1 cost of production. S shifts right P2 Dbecause curve does event not STEP shift, 3: because reduces cost, D1 The shift technology production causes makes production Q is price not to fall one of the Q1 Q2 more profitable at and quantity factors that to rise. affect any given price. demand. 83  EXAMPLE 3: A Shift in Both Supply and Demand Events: price of gas up AND P new technology reduces S1 S2 production costs STEP 1: P2 Both curves shift. P1 STEP 2: Both shift to the right. STEP 3: D1 D2 Q rises, but effect Q on P is ambiguous: Q1 Q2 If demand increases more than supply, P rises. 84  EXAMPLE 3 : A Shift in Both Supply and Demand Events: P price of gas rises AND S1 S2 new technology reduces production costs STEP 3, cont. P1 But if supply P2 increases more than demand, D1 D2 P falls. Q Q1 Q2 85 EXERCISES 86  January 2022 A group of economic students are analyzing the market for KFC Value Box. For each situation, indicate how it affects the demand curve or supply curve. Then, determine what will happen to the equilibrium price and equilibrium quantity, ceteris paribus. 1. The raw material suppliers have increased the price of chicken, potato and cabbage. 2. KFC Malaysia is introducing a plant-based and meatless burger to suit the taste and preferences of Malaysians. This new burger will be added to the KFC Value Box menu. 3. McDonald’s Malaysia reduced the price of their Lunch Set. 4. The Ministry of Health recently circulated an infographic about 87 the side effects of eating too much fast food.  January 2022 The market demand and market supply functions for coffee in Alice’s cafe is as follows: Qd = 55 – 5P Qs = -50 + 10P 1. Identify the market equilibrium price and equilibrium quantity. 2. Assuming that Alice’s cafe is giving a RM1 off promotion for their 1 year anniversary, what do you expect to happen in the market? Support your answers with figures. 3. Identify the new market equilibrium price and equilibrium quantity if the new demand function is Qd = 70 – 5P. 88 Reference Tucker, I.B.(2017). Economics for today. (9th ed.). Mason, OH: Thomson South Western. 89 The End 90