Chapter 2 Demand and Supply Analysis PDF

CHAPTER 2 (Ebook Chapter 3) DEMAND AND SUPPLY ANALYSIS Learning outcome: ◦ Demand  Law of demand and demand curve  Determinants of demand  Changes in demand versus changes in quantity demanded ◦ Supply  Law of supply and supply curve  Determinants of supply  Changes in supply versus chan...

CHAPTER 2 (Ebook Chapter 3) DEMAND AND SUPPLY ANALYSIS Learning outcome: ◦ Demand  Law of demand and demand curve  Determinants of demand  Changes in demand versus changes in quantity demanded ◦ Supply  Law of supply and supply curve  Determinants of supply  Changes in supply versus changes in quantity supplied  Definition of Demand (p51) refers to (1) the willingness and ability of buyers to purchase different quantities of good (2) at different prices (3) during a specific time period. Law of Demand (P Qd ) the price of good rises, the quantity demanded of the good falls, ceteris paribus. price of good and the quantity demanded of good are inversely related. demand curve is negatively slope because when prices increase, the quantity  Demand Demand Schedule Curve Demand schedule - table of Demand curve - the numbers that shows the relationship between the relationship between price price of a good and the and quantity demanded by a quantity demanded. consumer, ceteris paribus (Other thing remain constant). Price (RM) When price increase, quantity Price (RM) Qty demanded will Demanded 1 decrease 0 10 20 8 8 40 6 6 60 4 4 80 2 D 2 100 0 2 4 6 8 10 D Qty 0 0 0 0 0 DD  The Individual Demand Curve The individual demand curve shows the relationship between the price of a good and the quantity that a single consumer is willing to bu buy, or quantity demanded. Market Demand ◦ Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service. ◦ Market DD = Ali DD + Abu DD + Ahmad DD  From individual DD to Market DD Quantity of Pizza Demanded Price Ali Abu Ahmad Market (RM) DD DD DD DD 8 4 2 1 7 6 7 4 2 13 2 10 6 3 19 4 13 8 ▲Table 1.1 From Individual to 4 25 Market Demand Ali DD + Abu DD + Ahmad DD = Market DD P P P P 6 6 6 6 DD DD DD DD 7 Qty 4 Qty 2 Qty 13 Qty  Determinants of Demand (p51) ◦Price of related goods – substitute and complementary ◦Consumers income ◦The number of buyers and population ◦Expectation about the future price ◦Taste and preference ◦Advertisement ◦Level of taxation  Prices of Related Goods There are two type of related goods. Two goods are substitutes if they satisfy similar needs or desire. (Corn chips and Potato Chips). If the two goods are substitutes, a fall in the price of one good reduces the demand for another good. Two goods are complements if they are consumed jointly. (Tennis racket and tennis ball). If the two goods are complements, a fall in the price of one good increases the demand for another good.  Substitute Goods Two goods are substitutes if they satisfy similar needs or desire. (Corn chips (cc) and Potato Chips (pc)). If the two goods are substitutes, a increase in the price of one good increase the demand for another good. Pcc - QDcc - DDpc P (RM) P (RM) B P2 P A SUBSTITUTES P1 Dpc2 DCC Dpc1 0 Qd2 Qd1 QTY 0 Qpc1 Qpc2 QTY  Complementary Goods Two goods are complements if they are consumed jointly. (Tennis racket (TR) and tennis ball (TB)). If the two goods are complements, a increase in the price of one good decrease the demand for another good. PTR - QDTR - DDTB P (RM) P (RM) P2 P P1 COMPLEMENTS DTB1 DTR DTB2 Qd2 Qd1 QTY QTB2 QTB1 QTY  Consumers Income When income increase, a person will buy more of any particular good at a given price. But, the ability to buy more good does not necessarily imply the willingness to do so. This can be explain by using normal goods and inferior goods. For normal goods, an increase in income will increase demand for normal goods. E.g: Bag, cloth and shoes. For inferior goods, an increase in income will decrease the demand for inferior goods. E.g: second hand goods.  Normal Good Price of Blue Jeans (RM) 3.00 An increase in income will increase in 2.5 demand for normal good 0 Increase 2.0 in 0 demand 1.5 0 1.0 0 0.5 D2 0 D1 Quantity 0 1 2 3 4 5 6 7 8 9 1 1 1 of Blue 0 1 2 Jeans  Inferior Good Price of Blue Jeans (RM) 3.00 2.5 An increase in income 0 will reduce the demand for inferior good 2.0 0 Decrease 1.5 in 0 demand 1.0 0 0.5 0 D2 D1 Quantity 0 1 2 3 4 5 6 7 8 9 1 1 1 of Blue 0 1 2 Jeans  Number of Buyers and Population The more buyers, the higher the demand. The number of buyers can be affected by the size of population and demographics which is age, gender and race. Increase – higher birth rate and increased immigration. Decrease – higher death rate, war and migration from one region of the country to P D1 D D2 Qd  Buyer expectations ◦Buyers can expect change in ◦future income ◦future prices and act to change demand today Future income ◦If you expect your income to rise, you may consume more now. Demand will increase. Future prices ◦If you expect prices to fall in the future, you may put off purchases today. Demand will decrease. P D1 D D2 Qd  Tastes and Preferences ◦ What do we want to buy? ◦ People’s preferences affect the amount of good they are willing to buy at a particular price. ◦ A change in preferences in favor of a good shifts the demand curve rightward. P Example : if people prefer economics book than other book, demand for economics book will increase. (D D1) D 1 D Q  IMPORTANT KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND Changes in Quantity Demanded Change in Quantity Demanded ✹ Movement along the demand curve. Price of Ice- Cream ✹ Caused by a change in the price of Cones the product, other factors constant. B ✹ Upward – decrease in qty demanded $2.0 0 ✹ Downward – increase in qty demanded 1.00 A D 0 4 8Quantity of Ice-Cream Cones  Changes in Demand When something changes other than price, what happens? The whole curve shifts, there is a change in demand SHIFTS IN THE DEMAND CURVE Changes in factors of demand are factors that cause shifts in the demand curve Prices of related goods Income Tastes Expectations Number of buyers  Shifts in the Demand Curve Recall our assumption – hold other things constant – ceteris paribus allow only price to change – change in quantity demanded. But what if other factors do change? – change in demand – shift to a new demand curve, either to the left (DD decrease) or right (DD increase).  Changes in Demand, Shifts in Demand Curve ◦The demand for a good increases if people are willing and able to buy more of the good at all prices. (a) ◦The demand for a good decrease if people are willing and able to buy less of the good at all prices. (b) P (RM) P (RM) A B B A 60 60 D1 D2 D2 D1 0 600 900 QTY 0 600 900 QTY (a) (b) A Change in Demand Versus a Change in Quantity Demanded To summarize: Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).  Definition of Supply (p52) Supply is the amount of a particular product or service that a firm would be willing and able to sell at a particular price during a given period of time, ceteris paribus. Law of Supply (P Qs ) the price of good rises, the quantity supplied of the good increases, ceteris paribus and vice versa. price of good and the quantity supplied of good are positively related. supply curve is positively slope because when prices increase, the quantity supplied will increase.  Supply Schedule Example: The supply of Eggs Price (RM) Quantity (Units) 0.16 80 0.14 60 0.12 50 0.10 40  SUPPLY CURVE Pric EGGS e (RM S $0.16 ) $0.14 $0.12 $0.1 0 40 50 60 80 Q (Kg)  Individual Supply VS Market Supply Individual Supply: Market Supply: ◦It shows the The sum of relationship between quantity supply by the price and all seller in the quantity of a product market at different supplied by a single prices seller.  Determinants of Supply (p52) ◦The price of related goods – substitute/complement ◦The cost of production ◦Number of suppliers ◦Technological change ◦Government policies – taxes / subsidies ◦Expected future price  The Price of Related Goods P Mutton Cattle S2 P S S1 P1 P2 P0 Q0 Q1 Q Q2 Q3 Q Substitute goods (mutton and cattle) When produce 1 good, the other good cannot be produced. Assume there is an increase in price for Mutton from P0 to P1. Increase in price, increase its supply from Q0 to Q1 because the producer that previously produce Cattle will switch to the production of Mutton. The effect: supply curve for Cattle will shift to the left from S 1 to S2 at price P2 & quantity Q2  Complementary Goods ◦ When produce 1 good, will supply the other good too ◦ Eg: producer that sell mutton will also sell its skin ◦ Increase in P for mutton 🡪 increase qty supply at the same time will increase supply for its skin (even though P does not change) ◦ supply curve shift to the right from S1 to S2. Mutton Skin P P S S1 S P1 2 P2 P0 Q0 Q1 Q Q2 Q3 Q  Change in Cost of Production ◦ A rise in costs will reduce profits & lead some firms to cut back on output ◦ A rise in costs of production will lead to a decrease in supply. ◦ Supply curve will shift to the left from S1 to S2. Qty supplied will decrease from Q1 to Q2. P S2 S P1 1 Q2 Q1 Q  Number of Suppliers ◦More suppliers mean more output can be produced in the market - supply curve shifts to the right – increase supply. Technological Change ◦Increase in technology - supply of goods also increases (SS curve shift rightward), vice versa  Change in Government Policy ◦A rise in indirect taxation (same effect as a rise in costs of production). Reduce profit & increase the cost of production 🡪 shift the entire supply curve to the left by the full amount of the tax – decrease supply. ◦Subsidy has exactly the opposite effect 🡪 shift the supply curve to the right by the full amount of the subsidy – increase supply.  A Change in Quantity Supplied VS a Change in Supply Change in Qty Supply Change in Supply ◻ Referring to a ✹ Referring to the shift movement along of the entire supply the same supply curve due to the curve due to the change in other change in it’s own factors such as price price while other of other goods, price of thing remain the raw material, etc same. (Ceteris ✹ The price itself peribus) remain unchanged. ◻ The curve will move ✹ The curve will shift  Change in Qty Supply Change in Supply Pric Pric e S S3 S1 P2 e S2 b S P0 P1 a Q1 Q2 Qty Q Q1 Qty 3 Q2 Movement along supply curve The shift of supply curve (from point a to b) due to (from S1 to S2 or S1 to S3) due changes in the price of good to change in other factors itself (from P1 to P2). excluding price (Price doesn’t change) THANK YOU....