CHAPTER 3: DEMAND AND SUPPLY Law of supply

Law of demand Direct relationship between price of a good and quantity sellers a
re willing to offer for sale in a defined time period , ceteris
Inverse relationship between the price of a good and quantity
paribus (other things being equal)
buyers are willing to purchase in defines time period, ceteris
paribus (other things being equal)
 Price increase, quantity decrease (P↑,Q↓)
 Price increase, quantity decrease (P↑,Q↓)  Price decrease, quantity increase (P↓,Q↑)
 Price decrease, quantity increase (P↓,Q↑)
Supply curve
Demand curve

Change in supply

Decrease in demand increase in demand  Number of seller (supply ↑)

 Technology: techno advance, ↓ production cost & ↑ profit
Change in demand (will make demand curve shift L/R) (supply ↑)
 Resources prices: input prices
 Number of buyers/consumer (for market demand)
 Taxes & subsidies
 Taste & preferences
 Expectation of producers
 Income:
 Price of other goods the firm could produce
normal good → (+ correlated with income: shoes, bag)
inferior good → (- correlated with income: furniture, sec car) Movement along supply curve & shift in supply
 Expectations of future changes in price, income, availability
goods
Price: Consumer expect price future ↑ so they buy early
Income: consumer expect income future ↑ so they ↑ their
consumption
 Price related goods
Substitude: coke & pepsi
Complementary: printer & ink

Movement along demand curve & shift in demand

Demand and supply

(P↓,Q↑) (P=,Q↑)
 Market Equilibrium

Market:
Any arrangement in which buyers and sellers interact to
determine the price and quantity of goods and services
exchanged.

Equilibrium:
 market demand and supply curves intersect
 the quantity demanded by consumers = the quantity
 supplied by producers at a given price
 no incentive for price to change
 market clearing price

quantity demand = quantity supply (Qd = Qs)

Excess supply

 When the price falls above the equilibrium price

 Quantity supplied > quantity demanded
 Downward pressure on price
o increase in quantity demanded
o decrease in quantity supplied

Excess demand
When the market demand & supply curve interest, the market is
 When the price falls below the equilibrium price
in equilibrium. At Eq price, Qd = Qs. The Eq price on the above
 Quantity supplied < quantity demanded
diagram RM3. Price RM3, 7 cheese tart are demand & 7 cheese
 Upward pressure on prices
tart are supplied.
o decrease in quantity demanded
Shortage vs Surplus o increase in quantity supplied

Surplus:

 A market condition existing at any price where the

 quantity supplied is greater than the quantity
 demanded ( Qs > Qd ) or (Qd < Qs)

Shortage:

 A market condition existing at any price where the

 quantity supplied is less than the quantity
 demanded ( Qs < Qd ) or (Qd > Qs).
 Changes in Equilibrium

Steps to determine the changes in equilibrium Change in both supply & demand

 Determine whether the event shifts the demand  Both demand and supply change simultaneously
 curve or supply curve  Effect on the market for cheese tarts
 Determine the direction of the shift  Rise in rural urban migration shifts the demand curve; Drought
 Determine how the shift changes the equilibrium  damaged the wheat crops shift the supply curve
 Demand curve shifts to the right; Supply curve shifts to the left
Change in demand  Equilibrium price increases
 Rural urban migration into Klang Valley o if the relative size of the shift in demand is smaller than the shift in
 Effect on the market for cheese tarts supply:
 Rise in of rural urban migration shift the demand curve (number equilibrium quantity falls
 of consumers) o if the relative size of the shift in demand is greater than the shift in
 Demand curve shifts to the right supply:
 Higher in both equilibrium price and equilibrium quantity equilibrium quantity rises
o if the relative size of the shift in demand is equal to the shift in
supply: equilibrium
quantity remains unchanged.

Change in supply
 A drought damaged the wheat crops
 Effect on the market for cheese tarts
 lower wheat production boosting the price of flour shift the
 supply curve (input price)
 Supply curve shifts to the left
 Higher equilibrium price and lower equilibrium quantity
 CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR

Utility (consumer max utility: satisfaction & happy)

Consumer prefer more a good to less of it
Ex: girls already have a lot of hijab, still will buy more of it.

 The satisfaction or pleasure, that people receive from consuming a

good or service,
or
 The sense of pleasure, or satisfaction, that comes from
consumption.

Tastes: preferences for different goods and services ➔ likes and

dislikes

2 approaches: Law of diminishing marginal utility

Why marginal utility declines when
 Cardinal Utility consumption increase?
 Because if you consume one hamburger,
 Total Utility (TU) (measurable in the same sense that a ruler
 then another, the second hamburger
measures distance)
 gives you less satisfaction than the first.
 Total utility = Qa x Qb (multiply 2 goods)
 As consumption per unit time increases,
 marginal utility utility decreases.
 Marginal Utility (MU)( change in utility derived from an increase
 This is called Law of Diminishing Marginal
in consumption of particular good)
 Utilities.
 Muhamburgers = △utility ÷ △hamburgers (M stand for changes)
 This value will fall(rise) as consumption increase (decrease)
 Ex: dr give nisa nasi lemak because she was hungry in that morning,  Ordinal Utility (base on ranking)
nisa very happy with nasi lemak, then zi come and give nisa o Indifference Curve (IC)
donut, nisa feel happy with it but she was full after eat nasi
o Modern consumption theory based on (isoutility curves = equal).
lemak.
The consumer assumed to be indifferent among different
combination of goods along a isoutility curve.

Slope IC known as marginal rate of substituition (MRS)

MRS = △tacos ÷ △hamburgers
 Differences cardinal & ordinal utility

o Budget Line (BL)/ budget contrains

o (Phamburgers x Qhamburgers) + (Ptacos x Qtacos)
o I = (PxQx) + (PyQy)
o Slope of BL= -(Pham ÷ Ptacos)
CHAPTER 5: CONSUMER EQUILIBRIUM & MARKET DEMAND

Consumer Equilibrium
Consumer must maximise the utility given by budget constrains

Utility max = when indifferent curve is tangent to the budget line,

the slope of the IC (MRSxy)=slope budget line (Px/Py)

MRSxy=Px ÷ Py OR MUx ÷ Muy =Px ÷ Py

Consumer need to spend all income on X & Y in such way

MUx ÷ Px = MUy ÷ Py OR MUx ÷ Muy =Px ÷ Py
  The movement along a demand curve is referred to as a change in
the quantity demanded.
 A shift in demand curve on the other hand is referred to as change
in demand

Measurement & interpretation of market demand Concept of consumer surplus

 An important extension of the market demand curve is the concept

of consumer surplus, or economic wellbeing consumers derive in
the market.
 The demand curve reveals the willingness of consumers to pay a
certain price for a corresponding quantity.
 They are willing to pay a higher price for a lesser quantity, but do
not have to given the level of supply coming onto the market in a
given period. Thus, they realize a "savings."
CHAPTER 6: MEASUREMENT & INTERPRETATION OF
ELASTICITIES