BAEB602

School of Marketing and Entrepreneurship (SoME)FACULTY OF BUSINESS AND MANAGEMENT

PREPARED BY:Nur Suhaili Ramli

CHAPTER 2

MICROECONOMICS

DEMAND AND SUPPLY

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CHAPTER 2: DEMAND AND SUPPLY

Learning outcome

Student able to define theory of demand

Student able to understand the Law of Demand

Student able to understand change in quantity demanded versus change in

demand

Student able to understand factors that influence market demand

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CHAPTER 2: DEMAND AND SUPPLY

Definition of demand: the quantity of a good or service that buyers are willing

and able to purchase at different prices in a period of time in a given market

holding other non-price factors constant.

The Law of Demand: An inverse or negative relationship between the price of a

good and the quantity buyers are willing to buy.

A demand schedule: It shows the quantity demanded of a product at various

price levels.

A demand curve: refers to the demand curve of an individual or a consumer or

a buyer.

Theory of Demand

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CHAPTER 2: DEMAND AND SUPPLY

Individual demand curve: It shows the relationship between the price of the

product and the quantity of the product demanded by an individual producer or

seller.

A market demand: It is derived by summing the quantity demanded horizontally

at each and every price level

Theory of Demand

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CHAPTER 2: DEMAND AND SUPPLY

Change in Quantity Demanded

Factors: Is caused solely by changes in the price of the product itself, cateris paribus.

Effects: It is shown by movements along the same demand curve.

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Change in Demand

Factors: Refers to change in the quantity demanded at each possible price and

is changes in factors other than the good’s or product’s own price.

Effect: It is shown by a shift of the entire demand curve; either to the right or to

the left. An increased in demand is shown by a right ward shift in the whole

demand. A decrease in demand is shown by a leftward shift of the entire

demand curve.

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Determinants of individual demand

Income

It is highly depending on the types of the products for example normal product

and inferior product. The effect for both products for the demand curve

Tastes and Preferences

Tastes and preferences of consumers are influencing by many factors such as

advertising, fads and fashion, the behavior of some popular artists, the

development of the new products.

The effect of less preferable and more preferable of the consumers to the

demand curve.

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CHAPTER 2: DEMAND AND SUPPLY

Price of related goods

The price of one product can and does effect the demand for other products.

Two types of goods can either be substitute or complementary goods. Effects of

the product to another product.

Number of buyers

The demand for a good will vary with the number of buyers. When the number

of buyers increase, the demand for most products will increase.

Determinants of individual demand

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CHAPTER 2: DEMAND AND SUPPLY

Terms in demands

Law of demand: the quantity of a good demanded per period of time will

fall as price raises and will rise as price falls, other things being equal.

Income effect: The effect of a change in price on quantity demanded

arising from the consumer becoming better or worse off as a result of

the price change

Substitution effect: The effect of a change in price on quantity

demanded arising from the consumer switching to or from alternative

(substitute) products

Quantity demanded: The amount of a good that a consumer is willing

and able to buy at a given price over a given period of time.

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Types of goods

Substitute goods: A pair of goods which are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises.

Complementary goods: A pair of goods consumed together. As the price of one goes up, the demand for both goods will fall.

Normal goods: Goods whose demand increases as consumer income increase. They have a positive income elasticity of demand. Luxury goods will have a higher income elasticity of demand than more basic goods.

Inferior goods: Goods whose demand decreases as consumer income increase. Such good have a negative income elasticity of demand.

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Theory of Supply

Definition of supply The Law of Supply Supply Schedule and Supply curve Change in quantity supplied versus change in supply Factors that influence market supply.

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Definition of supply: The quantity of a good or service that suppliers are willing

and able to sell at different prices in a period of time in a given market holding

other non-price factors constant.

The Law of Supply: A direct or positive relationship between the price of a good

and the quantity buyers are willing to buy.

A supply schedule: A table that shows the relationship between the quantity

supplied of a product at various price levels.

A supply curve: A curve that shows the relationship between the price of

product and the quantity of the product supplied.

Theory of Supply

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CHAPTER 2: DEMAND AND SUPPLY

Individual supply curve: It shows the relationship between the price of the product and the quantity of the product supplied by an individual producer or seller.

A market demand: It is derived by summing the quantity supplied horizontally at each and every price level.

Theory of Supply

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Change in Quantity Supplied

Factor:

It is caused solely by changes in the price of product itself.

Effects:

It is shown by movements along the same supply curve, cateris paribus. It shows the movement from one point to another point.

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Change in Supply

Factors:

It refers to a change in the quantity supplied at each possible price and is caused by changes in factors other that the price.

Effects:

It is shown by shifts of the entire supply curve, either to the right or to the left.

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Determinants of Individual Supply

Number of sellers:

The larger the number of suppliers, the greater the market supply is, then the

supply curve will shift to the right. The smaller the number of firms in the

industry, the lesser is the market supply, and the supply curve shifts to the left.

Technology

It is defined as the skills and technology concerning the use of resources in

production. If there is a more advanced technology the ability to produce output

will increased and therefore the supply curve will be increased.

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Equilibrium

Market clearing: A market clears when supply matches demand, leaving

no shortage or surplus.

Equilibrium price: The price where the quantity demanded equals the

quantity supplied: the price where there is no shortage or surplus.

Equilibrium: A position of balance. A position from which there is no

inherent tendency to move away.

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CHAPTER 2: DEMAND AND SUPPLY

QUIZ

1. Differentiate Macroeconomics and Microeconomics.

2. Identify “needs” and “wants”.

3. Provide 3 examples for “need” and 3 examples for “wants”

4. List down three (3) assumptions about market participants.

5. What is opportunity cost?

6. Identify three (3) main categories of resources.

7. What is Mixed Market Economy?

8. What is demand?

9. What is supply?

10.What is equilibrium?

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Submission: Before leaving class.