Supply, Demand and Price

8/19/2019 Supply, Demand and Price

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SUPPLY, DEMAND AND PRICE


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SUPPLY, DEMAND AND PRICE

At the end of this topic, you should able to:

1. Understand and apply the concept of supply and

demand.

2. Relate the law of supply and demand with examples.

3. Determine the elasticity demand with examples.

4. Apply the economic equilibrium to the market analysis.


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Supply

Quantity of goods or services which suppliers are willingto supply or provide for certain amount of price in some

duration of time.


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Law of supply

Law of supply states that other

factors remaining constant, price and

quantity supplied of a good are

directly related to each other.

A movement occurs when a change

in quantity supplied is caused only

by a change in price, and vice versa.

Price increase Quantity increase,

Price decrease Quantity decrease

Figure 2.1: Supply curve


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Shift in supply

Shift in supply curve occurs when a good's quantitydemanded or supplied changes even though price remains

the same.


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Example 1

If the price for a nasi lemak was $2and the quantity supplied decreasedfrom Q1 to Q2, then there would bea shift in the supply of nasi lemak.

Like a shift in the demand curve, ashift in the supply curve implies that

the original supply curve has changed,meaning that the quantity supplied isaffected by a factor other than price.A shift in the supply curve wouldoccur if, for instance, a natural

disaster caused a mass shortage ofhops.

Nasi lemak manufacturers would beforced to supply less nasi lemak forthe same price.

Figure 2.2: Shift in supply curve


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Factors influencing supply

The price of inputs Technology

Producer’s expectation

Number of producers in the market


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Activity 1

A flood wipes out half the mango trees. What happens tothe supply of mangoes?


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Demand

Quantity of goods or services which buyers are desiredand willing to pay for certain amount of price in some

duration of time.


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Law of Demand

Figure 2.3: Demand curve

The law of demand states thatother factors being constant, price

and quantity demand of any good

and service are inversely related to

each other.

A movement occurs when a

change in the quantity demanded

is caused only by a change in price,

and vice versa.

Price increase Quantity decrease,

Price decrease Quantity increase


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Shift in Demand

Shift in a demand curve occurs when a good's quantitydemanded or supplied changes even though price remains

the same.


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Example 2

If the price for a nasi lemak was$2 and the quantity of nasi lemakdemanded increased from Q1 toQ2, then there would be a shiftin the demand for nasi lemak.

Shifts in the demand curve implythat the original demandrelationship has changed, meaningthat quantity demand is affectedby a factor other than price. A

shift in the demand relationshipwould occur if, for instance, nasilemak suddenly became the onlytype of food available forconsumption.

Figure 2.4: Shift in demand curve


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1. Increase in demand Increase in price at the same quantity

Increase in quantity at the same price

2. Decrease in demand

Decrease in price at the same quantity

Decrease in quantity at the same price


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Factors influencing demand

Income of the people Changes in prices of the related goods

Eg. Tea and coffee are substitute’s goods but pen and ink are

complementary commodities.

Tastes and preferences of the consumer Future expectation

Population

Income distribution


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Activity 2

The price of bread goes up. What happens to the demandfor butter?


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Elasticity demand (Em)

Measuring the response or sensitivity of the buyers on

the changes in price of goods or services.

Where

P0 = initial price

P1 = current price

Q0 = initial quantity

Q1 = current quantity


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Where E > 1, ( )

E < 1, ( )

= 1, ( )


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Factors influencing elasticity demand

1. Nature of goods2. Availability of substitutes

3. Proportion of income spent


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Activity 3

Do you think the price elasticity of demand for ToyotaPrius will increase, decrease, or remain the same when

each of the following events occurs? Explain your answer.

1. Other car manufacturers, such as Proton, decide to

make and sell Hybrid cars.2. Hybrid cars produced in foreign countries are banned

from the Malaysian market.

3. The time period over which you measure the elasticity

lengthens. During that longer time, new models such assuper-hybrid cars appear.


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Economic equilibrium

• Balanced economic forces.

• The point where supply equals demand for a product.

• Everyone (individuals, firms, or countries) is satisfied with the condition.

•

At the given price, suppliers are selling all the goods that they have produced andconsumers are getting all the goods that they are demanding.

Figure 2.6:Economic equilibrium


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Disequilibrium

Disequilibrium occurs whenever the price or quantity is notequal to P* or Q* (crossing point between supply and

demand).


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a) Excess Supply

If the price is set too high,

excess supply will be created

within the economy and there

will be allocative inefficiency.

At price P1, the quantity ofgoods that the producers wish

to supply is indicated by Q2 and

the quantity that the consumers

want to consume is at Q1.

Q2 > Q1, which indicates that

too much is being produced and

too little is being consumed.


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b) Excess Demand

When price is set below the

equilibrium price, excess demand willbe created because the price is toolow.

At price P1, the quantity of goodsdemanded by consumers at this price

is Q2 and producers are willing toproduce at this price is Q1.

Due to the low cost, manyconsumers want to buy goods butproducers are not producing enough

goods. However, as consumerscompete with each other to buy thegood at this price, the demand willpush the price up, making supplierswant to supply more and bringingthe price closer to its equilibrium.


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Relation to design project?

Predicting raw material & product prices The direct manufacturing cost and the total revenue of

products will then affect the payback period.


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Summary

Supply refers to how much the market can offer. Demand refers to how much of a product or service is

required by consumer.

Law of supply states that the higher the price, the higher

the quantity supplied. Law of demand states that the higher the price, the lower

the quantity demanded.

Economy equilibrium state that supply and demand are

equal.


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Questions1. Explain the relationship between supply and demand.

2. If there is an excess supply in market, what will happen to supply and demand?3. If there is an excess demand in market, what will happen to supply and demand?

4. If technology improved in market, what will happen to supply curve in market?

5. If the income of people increased, will it affect demand of wants in market?

Explain.

6. Supply and demand of Needs in markets won’t be affected by any factors. Explain.

7. If the supply curve in economy equilibrium graph shift to right, what will happen

to the price and quantity in the graph?

8. If the demand curve in economy equilibrium graph shift to left, what will happen to

the price and quantity in the graph?

9. By referring to the figure below, calculate the price elasticity of demand for frozen

orange juice between the prices of $1.00 and $1.50. Is the demand elasticity elasticor inelastic?

Supply, Demand and Price

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