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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

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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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