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CHAPTER 2: DEMAND & SUPPLY
THEORIES
PREPARED BY: ROSMAH BT ABD GHANI @ ISMAIL
CLASSIFICATION GOODS & SERVICES
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1. Free Goods2. Economic Goods3. Public Goods4. Services
Conventional perpective
1. Free Goods Goods that have no production cost E.g: sunlight, rainwater
2. Economic Goods physical goods made by man involve a production cost E.g : textbook, shoes
3. Public Goods goods that have a common use & are
benefit to everyone E.g : public clinics, school, roads
4. Services Intangible things ( with value), can’t be seen
& touched E.g : medical care, education
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Types of goods
Inferior
Necessity
Normal Luxury
Related goods• Substitute• complementary
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ISLAMIC PERSPECTIVE
Concept of goods
•Good, clean & pure things
•The ethical and spiritual values of consumer goods.
Al-Tayyiba
t
•“Godly sustenance”, “Divine bestowal”, or “Heavenly gifts”
•Allah is the only Sustainer and Provider for all creatures
Al-Rizq
•Goods which cause wastage/extravagance
Tarafiah
Classification of goods based on hierarchy of needs
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Kamaliyah
Goods that contribute
towards the perfection of lifeHajiyah- Goods that enhance the quality of life
Dharuriyah-goods which fulfill our
basic needs
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DEMAND
Topics to be covered
Definiton
Law of DD
How to drawDeterminants
∆ DD vs ∆ QD
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Definition of demand (DD)
The ability & willingness to buy G&S for a given price at a certain time period. ceteris paribus.
Desire to buy goods or services with ability and willingness to pay
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Definition of quantity demanded (Qd) The amount (number of units) of a
goods or services that a household would buy in a given time period if it could buy all it wanted at the current market price.
The law of demand
Negative relationship between price (P) and quantity demanded (Qd)
As price rises, the quantity demanded decreases (P↑,Qd↓)and
As price falls, the quantity demanded increases (P ↓,Qd ↑)with all else equal or ceteris paribus
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The law of demand:Demand schedule
A demand schedule is a table showing
how much of a given product a household would be willing to buy at different prices.
Demand curves are usually derived from demand schedules.
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Demand for corn
Price (RM) Qd (per kg)
5 10
4 20
3 35
2 55
1 80
The law of demand: Demand curve
Demand for corn The demand curve is a
graph illustrating how much of a given product a household would be willing to buy at different prices.
The law of demand states that there is negative relationship between price and the Qd
This means that the demand curves slope downward
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Qd (kg)
Price (RM )
D
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Price (RM)
Qd (kg)
How to draw DD curve
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P
Qdo
$5
4
3
2
1
P QD
1020355580
Price of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
$54321
Quantity of Corn
15
55
P
Qdo
$5
4
3
2
1
P QD
1020355580
CORN
10 20 30 40 50 60 70 80
$54321
Price of Corn
Quantity of Corn
Plot the Points
16
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P
Qdo
$5
4
3
2
1
P QD
$54321
1020355580
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
Price of Corn
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P
Qdo
$5
4
3
2
1
P QD
1020355580
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
$54321
Price of Corn
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P
Qdo
$5
4
3
2
1
P QD
$54321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
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P
Qdo
$5
4
3
2
1
P QD
$54321
1020355580
D
Price of Corn
Quantity of Corn
CORN Connect the Points
10 20 30 40 50 60 70 80
The law of demand: Demand curve
Individual demand is the demand of one buyer in a market at various prices
Market demand is the sum of demands of all buyers in a market at various prices
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Price(RM/KG)
Quantity demand Market demand
Consumer A
Consumer B
Consumer c
1 10 8 6 24
2 8 6 5 19
3 6 4 4 14
4 4 2 2 8
5 2 1 1 4
Determinants of demand
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1.Price factor
2.Non-price factors
Determinants of demand:
Law of demand: As price rises, the quantity demanded
decreases (P↑,Qd↓)and
As price falls, the quantity demanded increases (P ↓,Qd ↑)with all else equal or ceteris paribus
Negative relationship between price and quantity demanded
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1. Price Factor: Price Itself
Determinants of demand: 2. Non-price factors
i. The price of related goodsii. Consumer’s incomeiii. Taste and preferenceiv. The number of buyers in the market/
populationv. Seasonal factor- expected future price
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1. Non-price Factors
DETERMINANTS:NON-PRICE FACTORSi. Price of related goods
Substitute
-Goods that can serve as replacements for one another
-When the price of one increases, demand for the others goes up
-Example: palm oil and soybean oil are substitutes so the demand for soybean oil increases when the price of palm oil rises
Ppalm oil↑, Qd palm oil↓, Dsoybean oil↑
P1
Q1
D0
Qd
P
P0
Q0 Q1Qd
D0
P
P0
Q0
D1
contd.. Complements
-Goods that ‘go together’
-A decrease in the price of one results in an increase in a demand for the other, vice versa.
-Example: Pen and ink are complements, so the demand for ink decreases when the price of pen rises
Ppen↑, Qd pen↓, D ink↓
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QdQ0
P
P0
D0
E1P1
Q1Qd
D0
P
E0P0
Q0
D1
Q1
Determinants of demand: 2. Non-price factorsii. Income is the sum of all households wages, salaries, and other forms of
earnings in a given period of time As income increases the demand for most goods will increase With an increase in income, consumers have the purchasing
power to demand for more goods-Two types of goods
a. Normal good: when income increase, demand for this good also increase. Example: cloth
b. Inferior/ giffen: when income increase, demand for this good decrease. Example: used car, bundle shirt
iii. Taste and preference What people like and dislike without regard the budgetary
consideration of price and income As preference change, demand will change Example: changes in people lifestyle
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Determinants of demand: 2. Non-price factors
iv. The number of buyers in the market/population
The greater the number of buyers in a market, the demand will increase
Example: the demand for parking spaces
v. Seasonal factor During festive seasons, demand for certain product
will increase Example: During Chinese New Year, demand for
mandarin oranges will increase
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CHANGES IN QD & CHANGES IN DEMAND
Def: Movement along the same demand curve
Factor influence is price determinant
-Example:P↑, Qd↓ change in price of a good
or service leads to change in Qd
Changes in demand
Def: Shift of demand curve Factor influence is non-
price determinants
-price will remains constant
change in income, taste and preference, and price of related goods leads to change in demand
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Changes in Qd
The distinction between changes in Qd and changes in demand
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Two types of movement:
1.Expansion: occurs when P decrease leads to an increase in Qd (downward movement) from Qo to Q2 (A to B)
2.Contraction: occurs when P increase leads to a decrease in Qd (upward movement) from Qo to Q2 (A to C)
Changes in Qd Changes in demand
Qo Q2
Price
P2
Po
P1
Q1
A
C
B
contraction
expansion
Qd Two types of shifting
1.Rightward: increase in demand from Qo to Q1
(Do to D1). Occurs when
-price of substitute good ↑
-price of complement good ↓
-consumer’s income ↑
-expected future price ↑ (etc…)
2.Leftward:decrease in demand from Qo to Q2
(Do to D2). Occurs when (vice versa from rightward)
D
Price
P
Q2 Qo Q1
D1DoD2
Qd
Definition of supply
Amount of a particular product or service that firm would be willing and able to offer/sell at a particular price
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Definition of quantity supplied (Qs) represents the number of units of a
product that a firm would be willing and able to offer for sale at a particular price during a given time period.
The Law of Supply
As price rises, the quantity supplied will also increase (P↑,Qs ↑)and
As price falls, the quantity supplied will fall (P ↓,Qs ↓)with all else equal or ceteris paribus
The law of supply states that there is a positive relationship between price and quantity of a good supplied.
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The Law of supply: Supply scheduleYes’s supply schedule for soybeans
Price (USD per bushel)
Qs (thousands of bushels per year)
1.75 10
2.25 20
3.00 30
4.00 45
A supply schedule is a table showing how much of a product firms will supply at different prices.
Supply curves are usually derived from supply schedules.
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The Law of Supply: Supply curveYes’s supply A supply curve is a
graph illustrating how much of a product a firm will supply per period of time at different prices
supply curves have a positive slope
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Thousands of bushels of soybean produced per year
1.75
4.00
3.00
2.25
Price (USD per bushel)
10 20 30 45
S
The Law of Supply: Supply curve
Individual supply is the supply of one seller in a market at various price
Market supply is the sum of all the quantities of a good or service supplied per period by all the firms selling in the market for that good or service.
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Determinants of supply
1. Price factor2. Non-price
factors
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Determinants of supply: 1. Price factor: price itself As price rises, the quantity supplied
will also increase (P↑,Qs ↑)and
As price falls, the quantity supplied will fall (P ↓,Qs ↓)with all else equal or ceteris paribus
positive relationship between price and quantity of a good supplied
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Determinants of supply: 2. Non-price factorsi. Cost of production/ prices of raw
materialii. Technological advancementiii. Government policiesiv. Price of other goodsv. Number of suppliersvi. Climatic conditionvii. Expected future price
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Determinants of supply: 2. Non-price factorsi. Cost of production/ prices of raw
material The cost of producing the good, which in
turn depends on the piece of required inputs (labour, capital and land)
Example: when the wages of workers increase, the cost of production will increase, thus supply will decrease
ii. Technological advancement Generally will increase the supply of product Technology advancement reduces the use of
input and cost of production, so more output can be produced using the same amount of input and cost
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Determinants of supply: 2. Non-price factorsiii. Government policies Taxes imposed by the government on certain goods
will reduce supply on the market Disincentives to producer because it increase the cost
of production Example: Tax on cigarettesiv. Price of other goods Substitute good: an increase in the price of
substitute good, decreases the supply of the good Example: when the prices of soybean oil increase, the
supply of soybean oil produce will be increase and the supply of palm oil will be decrease
Complements good: an increase in the price of the good will increase the supply of other good
Example: shuttlecock and racket
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Determinants of supply: 2. Non-price factors
v. Number of suppliers The larger the number of suppliers supplying a
good, the larger is the supply of the good Example: increase in stationary shop in Perak
will increase the supply of stationary good in Perak
vi. Climatic condition Especially in agricultural and fishing industry
vii. Expected future price If the producers expect in the near future will
increase, supply for today will reduced and vice versa
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The distinction between changes in Qs and changes in supply
Def: Movement along the same supply curve
Factor influence is price determinant
-Example:P↑, Qs ↑ change in price of a good
or service leads to change in Qs
Def: Shift of supply curve Factor influence is non-
price determinants
-price will remains constant
change in cost, input prices, technology or prices of other goods leads to change in Qs
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Changes in Qs Changes in supply
The distinction between changes in Qs and changes in supply
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Changes in Qs Changes in supply
Qs
Price (P)
Qo Q1 Q2
P0
P1P2
S
AB
C
Two types of movement:
1.Expansion: P increase leads to an increase in Qs (upward movement), from A to B
2.Contraction: P decrease leads to a decrease in Qs (downward movement), from A to C
expansioncontraction
Two types of shifting
1.Rightward: increase in supply from Q2
to Q3(S2 to S3). Occurs when
-price of substitutes good ↓
-price of complements good ↑
-expected future price ↓
-when gov gives subsidies
2.Leftward:decrease in demand from Q2 to Q1 (S2 to S1). 0ccurs when (vice versa from rightward)
Price (P)
Q1 Q2 Q3
P
S2
Qs
S1
S3
END
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