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SUPPLY, DEMAND AND PRICE

SUPPLY, DEMAND AND PRICE


At the end of this topic, you should able to:
1.
2.

3.
4.

Understand and apply the concept of supply and


demand.
Relate the law of supply and demand with examples.
Determine the elasticity demand with examples.
Apply the economic equilibrium to the market analysis.

Supply

Quantity of goods or services which suppliers are willing


to supply or provide for certain amount of price in some
duration of time.

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.

Figure 2.1: Supply curve

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

Shift in supply

Shift in supply curve occurs when a good's quantity


demanded or supplied changes even though price remains
the same.

Example 1

If the price for a nasi lemak was $2


and the quantity supplied decreased
from Q1 to Q2, then there would be
a shift in the supply of nasi lemak.
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
affected 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.
Nasi lemak manufacturers would be
forced to supply less nasi lemak for
the same price.

Figure 2.2: Shift in supply curve

Factors influencing supply

The price of inputs


Technology
Producers expectation
Number of producers in the market

Activity 1

A flood wipes out half the mango trees. What happens to


the supply of mangoes?

Demand

Quantity of goods or services which buyers are desired


and willing to pay for certain amount of price in some
duration of time.

Law of Demand

Figure 2.3: Demand curve

The law of demand states that


other 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

Shift in Demand

Shift in a demand curve occurs when a good's quantity


demanded or supplied changes even though price remains
the same.

Example 2
If the price for a nasi lemak was
$2 and the quantity of nasi lemak
demanded increased from Q1 to
Q2, then there would be a shift
in the demand for nasi lemak.
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, nasi
lemak suddenly became the only
type of food available for
consumption.

Figure 2.4: Shift in demand curve

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

Factors influencing demand

Income of the people


Changes in prices of the related goods

Eg. Tea and coffee are substitutes goods but pen and ink are
complementary commodities.

Tastes and preferences of the consumer


Future expectation
Population
Income distribution

Activity 2

The price of bread goes up. What happens to the demand


for butter?

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

Where

E > 1, ( )
E < 1, ( )
= 1, ( )

Factors influencing elasticity demand


1.
2.

3.

Nature of goods
Availability of substitutes
Proportion of income spent

Activity 3
Do you think the price elasticity of demand for Toyota
Prius 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 as
super-hybrid cars appear.

Economic equilibrium

Figure 2.6: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 and
consumers are getting all the goods that they are demanding.

Disequilibrium
Disequilibrium occurs whenever the price or quantity is not
equal to P* or Q* (crossing point between supply and
demand).

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 of
goods 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.

b) Excess Demand
When price is set below the
equilibrium price, excess demand will
be created because the price is too
low.
At price P1, the quantity of goods
demanded by consumers at this price
is Q2 and producers are willing to
produce at this price is Q1.
Due to the low cost, many
consumers want to buy goods but
producers are not producing enough
goods. However, as consumers
compete with each other to buy the
good at this price, the demand will
push the price up, making suppliers
want to supply more and bringing
the price closer to its equilibrium.

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.

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.

Questions
1. 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 wont 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 elastic
or inelastic?