CHAPTER 2

DEMAND, SUPPLY
&
MARKET EQUILIBRIUM
Learning Outcomes

At the end of this lesson, you should be able to:

 Explain the meaning of demand and law of demand
 Distinguish between a change in quantity demanded and a
change in demand
 Explain the meaning of supply and law of supply
 Explain the determination of demand, supply and market
equilibrium
 Determine the effects of changes in demand & supply on
equilibrium prices & quantities
 DEMAND
DEFINITION
 The desire to buy goods and services with the
ability to pay(effective demand).

 It shows the quantity of the product, which will be

purchased at various possible prices, other things
equal.
 Willing and able to purchase – willingness alone will
not be effective in the market. People may be
willing to buy a watch brand Rolex but have no
money, the purchase won’t happen and reflected
in the market.
 LAW OF DEMAND

 There is a negative or inverse relationship between

price and quantity demanded

 The higher the price, the lower the quantity

demanded of a product and the lower the price,
the higher the quantity demanded of a product
,(ceteris paribus).

 ceteris paribus=Other things equal/constant ,is

important assumption.
 DEMAND CURVE

RM

8
5

10 15 18 QTY

P Qdd P Qdd
RM 5 RM 8 , 15 10 RM 5 RM 3 , 15 18
DETERMINANTS OF DEMAND

a) Price of related goods

 Substitute - goods that can be replaces with others

goods. For example tea and coffee.

 Complement - goods that need to be used

together with other goods. For example car and
petrol.
b) Taste and preferences

 If the product is favorable by consumer,

demand for this product will increase at
each price, and then the demand curve
will shift rightward. This is also called
increase in demand.

 If the product is unfavorable, the demand

will decrease at every price levels then
demand curve will shift to the left. It is
called decrease in demand.
c ) Income

 A rise in income causes an increase in

demand. This type of goods is also called
superior, or normal goods.

 But sometimes, an increase of income will

cause the demand for the product to fall,
because with the higher income people
can buy other similar more expensive
goods.
d) Number of buyers /population

 Increase in the number of customers in a

market increases demand.

e) Advertisements

 Advertisements will attract people to buy

the goods and services.

f) Festive season and climate

 E.g.: demand for mandarin oranges will

increase during Chinese New Year.
g) Expectation about future price

 Consumer expectation about future

product price , product availability and
future income can shift demand. For
example when people know about the rises
in price of sugar in next month , they will be
high demand for this month.

h) Level of taxation
 The higher the taxes, the lower the
purchasing power of consumers. This will
lead to a decrease in demand and vise
versa. E.g: income tax.
 THE DIFFERENCE BETWEEN CHANGES
IN DEMAND AND CHANGES IN
QUANTITY DEMAND
Change in demand
P - Refers to a shift of demand
curve whether to right or to
the left
- Cause by the other
factors(not price).

Movement from D0 to D1
- Change in quantity to left is
decrease is demand
D1 D0 D2
Movement from D0 to D2
Q2 Q0 Q1 QTY
- Change in quantity to right is
increase in demand
 Change in quantity demand.
-Refer to a movement along
P the demand curve.
-From b to a and b to c
-Cause by the price.
a -From b to c
P1

b
-Q0 to Q2 = expansion
P0 -From b to a
P2
c
-Q0 to Q1 = contraction

Q
Q1 Q0 Q2
 SUPPLY
DEFINITION:

SUPPLY IS THE AMOUNT OF PRODUCTS THAT A

PRODUCER IS WILLING AND ABLE TO PRODUCE FOR
SALE IN A GIVEN PERIOD OF TIME AT A PARTICULAR
PRICE, CATERIS PARIBUS .
Law Of Supply

 The relationship between price and quantity

of supply is POSITIVE.

 As the price rise, the quantity supply will

increase.

 As the price falls, the quantity supply

decrease.
• supply can be presented in a form of table or graph
showing the possible prices and quantities of supply that
producers want to supply and capable of supply.

P
S
P²

P

P¹

Q
Q¹ Q Q²

P Qss P Qss
DETERMINANTS OF SUPPLY

1) Resources price/cost (input of production)

 The higher resources price will increase the

production cost.
 It will discourage them to produce more.
 so it is decrease in supply n the curve will shift to
the left.
 Lower resources price will induce them to
supply more output because lower cost of
production.

 Increase in supply n curve will shift to the right.

2) Price of related goods
Substitutes goods
 Supply of a product will decrease if there is an
increase in the price of substitute product.
E.g.,pepsi and coke
 When the P of Pepsi increase, the Qs will
increase and Qs of coke will decrease.
Complementary goods
 an increase in the price of a product will
increase the supply of a complementary
product. E.g., pen and ink
 When P of pens increases, the Qs of pens
increase and Qs of ink increase.
3) Technology
- improvement in technology enable them to produce more
output.
Increase in supply n curve shift to right. (Always increase)

4) Taxes and subsidies

- taxes- consider as production cost (producer need to pay it)
demotivate the producer to produce the product n will
reduce profit
decrease in supply – shift to the left
- subsidies – reduce production cost n motivated the
producer to produce more output.
Increase in profit will increase the supply – shift to the right
5) Expectation of producer
- expectation about the future price of a product
- when the price of goods will increase next month,
producer will decrease their supply for this month.

6) Number of seller
- the larger the number of seller, the greater the
market supply
- when more of firm enter the market, it will
increase of supply n shift to the right
- if firm are leaving the market it will cause
decrease in supply n shift curve to the left.
 CHANGE IN SUPPLY

PRICE S1
S0
S2

QUANTITY

- It change caused by other factors(not price).

Movement from S0 to S1
o Shift to the left (decrease in supply)
Movement from S0 to S2
o Shift to the right (increase in supply)
 CHANGE IN QUANTITY SUPPLIED
•Movement from one point to another on a fixed supply curve
Caused by their change of price of the specified product
PRICE
Z • Movement on curve from Y to Z
P2 - Price increase from P0 to P2
Y (expansion of supply)
P0 -Increase in quantity supplied
X from Q0 to Q2
P1

• Movement on curve from Y to X

Q1 Q0 Q2 QUANTITY - Price decrease from P0 to P1
(contraction of supply)
- Decrease in quantity supplied
from Q0 to Q1
Market Equilibrium
Definition of Market
Equilibrium

A situation where quantity

demanded for a good is
equal to quantity supplied

Qd = Qs
Market Equilibrium:
Example
Price Qty Qty Supplied Market Situation
(RM) Demanded (units)
(units)
9.00 2000 10000 QS > QD Surplus
(8000)

8.50 4000 8000 QS > QD Surplus

(4000)

8.00 6000 6000 QS = QD Equilibrium

7.50 8000 4000 QD > QS Shortage

(4000)

7.00 10000 2000 QD > QS Shortage

(8000)
Diagram: Market Equilibrium

Price (RM)

DD Surplus
SS Equilibrium price
9.00 (EP) = RM 8.00

8.50

EP 8.00 E Equilibrium
Quantity (EQ) =
7.50 6000 units

7.00 Shortage
SS DD
Quantity
2000 4000 6000 8000 10000 (Units)
EQ
 Changes in Equilibrium
Increase in Demand Decrease in Demand
Price (RM)
Price (RM)
DD1
DD
DD
SS
SS
9.00
9.00
DD1
E1 8.50
8.50
E
E 8.00
8.00

7.50 E1
7.50

DD1 7.00
7.00
DD SS DD
SS DD1 Quantity
Quantity
2000 4000 6000 8000 10000 (Units)
2000 4000 6000 8000 10000 (Units)

P = RM8.00 to RM8.50 P = RM8.00 to RM7.50

Q = 6000 to 8000 units Q = 6000 to 4000 units

 Changes in Equilibrium
Increase in Supply Decrease in Supply
Price (RM)
Price (RM)

DD SS1
DD
SS1 SS
SS
9.00
9.00
E1
8.50
8.50
E
E 8.00
8.00

E1 7.50 SS1
7.50

7.00
7.00
DD SS DD
SS SS1 Quantity
Quantity
2000 4000 6000 8000 10000 (Units)
2000 4000 6000 8000 10000 (Units)

P = RM8.00 to RM7.50 P = RM8.00 to RM8.50

Q = 6000 to 8000 units Q = 6000 to 4000 units