BAEB602 Chapter 2: Demand and Supply (Part 2)

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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Learning objectives

Identify the x and y axes. Identify the origin. on a graph. Identify x and y coordinates of a point. Plot points on a graph Applying demand and supply concepts

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Elements of a graph

We often use graphs to give us a picture of the relationships between variables.

Let's first look at the basic construction of graphs.

A graph is a visual representation of a relationship between two variables, x

and y.

A graph consists of two axes called the x (horizontal) and y (vertical) axes.

These axes correspond to the variables we are relating. In economics we will

usually give the axes different names, such as Price and Quantity.

The point where the two axes intersect is called the origin. The origin is also

identified as the point (0, 0).

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Elements of a graph

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Coordinates of points – Identify x coordinate

A point is the basic relationship displayed on a graph. Each point is defined by a pair of numbers containing two coordinates. A

coordinate is one of a set of numbers used to identify the location of a point on a graph.

Each point is identified by both an x and a y coordinate. In this unit you will learn how to find both coordinates for any point. You will also learn the correct notation for labeling the coordinates of a point. You will first begin by identifying the x-coordinate of a point.

The x-coordinate of a point is the value that tells you how far from the origin the point is on the horizontal, or x-axis.

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Exercise 2.2

Refer to diagram below, I identify the following:

1) Draw a straight line from the point directly to the x-axis.

2) The number where the line hits the x-axis is the value of the x-coordinate.

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Exercise 2.2

Refer to diagram below, I identify the following:

1) Draw a straight line from the point directly to the x-axis.

2) The number where the line hits the x-axis is the value of the x-coordinate.

Answer:

At the above is a graph with two points, B and D. In this figure:The x-coordinate of point B is 100. The x-coordinate of point D is 400.

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As we already mentioned, each point is defined by two coordinates, the x and

the y coordinate. Now that you know how to find the x-coordinate of a point, you

have to be able to find the y-coordinate. The y-coordinate of a point is the

value that tells you how far from the origin the point is on the vertical, or y-axis.

Coordinates of points – Identify y coordinate

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According to the given diagram, Identify the following:

1) To find the y-coordinate of a point on a graph: Draw a straight line from the point directly to the y-axis.

2) The number where the line hits the axis is the value of the y-coordinate.

Exercise 2.3

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According to the given diagram, Identify the following:

1) To find the y-coordinate of a point on a graph: Draw a straight line from the point directly to the y-axis.

2) The number where the line hits the axis is the value of the y-coordinate.

Answer:

Exercise 2.3

At above graph, we now identify the y-coordinate for each.The y-coordinate of point B is 400. The y-coordinate of point D is 100.

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Notation for Identifying Points

Once you have the coordinates of a point you can use the ordered pair notation for labeling points. The notation is simple. Points are identified by stating their coordinates in the form of (x, y). Note that the x-coordinate always comes first. For example, in the figure we've been using, we have identified both the x and y coordinate for each of the points B and D. The x-coordinate of point B is 100.

The y-coordinate of point B is 400. Coordinates of point B are (100, 400) The x-coordinate of point D is 400. The y-coordinate of point D is 100. Coordinates of point D are (400, 100)

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Exercise 2.4

Based on the following graph, identify the following:

1) Which point is on the y-axis?

2) Which point is labeled (20, 60)?

3) Which point(s) have a y-coordinate of 30?

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Exercise 2.4

Based on the following graph, identify the following:

1) Which point is on the y-axis? Answer: Point A

2) Which point is labeled (20, 60)? Answer: Point B

3) Which point(s) have a y-coordinate of 30? Answer: Point A & C

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Plotting graph

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Law of demand

According to the law of demand, the lower the price of a good, the larger the quantity consumers wish to purchase.

The relationship will hold only if the other factors affecting consumption, such as income and preferences.

Tips: In drawing a demand curve, we assume that incomes, the prices of related goods, and preferences are the same at all points on the curve.

Why?

It is because to identify the independent influence of the good’s own price on consumer purchases. If incomes, price of related goods or preferences do change, the entire demand curve shifts.

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Law of demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.

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Law of demand

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C)

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A demand curve

The demand curve D shows the quantity of DVD players that consumers will purchase at alternative prices. Its negative slope reflects the law of demand: more DVD players are purchased at a lower price.

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An increase in demand

For a demand curve, other influences besides the price of the good being

examined (consumers’ income, consumers’ preferences, prices of related

goods, and so on) are held constant at all points along the curve. Changes

in these underlying factors normally cause the demand curve to shift. Here, an

increase in consumers’ incomes causes the demand curve to shift from D to D’

because DVD players are assumed to be a normal good.

Exam Hint: 1) Identify what is a normal good definition?

2) What are the factors that affect increase in demand?

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An Increase in demand

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Law of supply

According to the law of supply, the higher the price of a good, the larger the quantity firms want to produce.

Supply curves for most goods slope upward. Basically, the upward slope reflects the fact that per-unit opportunity costs rise when more units are produced, so a higher price is necessary to elicit a greater output.

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Law of supply

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

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A supply curve

The supply curve S shows the quantity of DVD players firms will be willing to produce at alternative prices. It generally slope upwards, indicating that a higher price will result in increased output.

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An increase in supply

For a supply curve, technologyand input supply conditions are held constant at all point alone curve. Changes in these underlying factors normally cause the supply curve to shift. Here, a technological change causes the supply curve to shift from S to S’

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Shift in Versus Movement along Supply Curve

1) Movement along a given supply curve

A change in quantity supplied that occurs in response to a change in the

good’s selling price, other factors holding constant.

2) Shift of a supply curve

A change in the supply curve itself that occurs when the other factors,

besides price, that affect output change.

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Shift Vs Movement

For economics, the “movements” and “shifts” in relation to the supply and demand curves represent very different market phenomena:

1. Movements A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

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Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa

Shift Vs Movement

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Shift Vs Movement

2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.

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Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

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Example: Supply and demand relationship

Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.

If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.

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Equilibrium

When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

http://www.investopedia.com/terms/e/equilibrium.asp

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Class Task/Preparation/Activity

Revise the following for next week Assignment 1 (Individual)

1) Law of demand

2) Law of supply

3) Demand curve

4) Supply curve

5) Increase in demand

6) Increase in supply

7) Shift vs. Movement

8) Equilibrium

9) Plotting graph

10) Analysis, based on all topic discuss.

Type of questions: Multiple Choice, Fill in the blanks, Structure, Analysis.

Tips: Read all today’s chapter.

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References

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Exercise 2.5 – Individual

Answer all of the following:

1) Illustrate with a diagram what is demand?

2) Illustrate with a diagram what is supply?

3) Illustrate with a diagram what is equilibrium?

4) Plot the following within the same graph

a) A = When the quantity of x is 10, it’s equal to $20

b) B = When the quantity of x is 20, it’s equal to $40

c) C = When the quantity of x is 30, it’s equal to $60

Full name:

Student ID/ Passport / IC:

Subject code: BAEB602

Date:

Please submit before you leave class.

BAEB602 Chapter 2: Demand and Supply (Part 2)

Technology

original demand

supply relationship

dvd players

ten cds

held constant

underlying

vice versa

line hits