CHAPTER 2

DEMAND AND SUPPLY

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 CLASSIFICATION OF GOODS AND
SERVICES

FREE GOODS PUBLIC GOODS

 

Free goods are goods that Public goods are goods that
have no production cost. are for common use and will
benefit everyone.

ECONOMIC GOODS AND SERVICES

 

Economic goods are goods of value that can be seen and

touched.
 

Economic services are intangible things (with value) that

cannot been seen or touched.

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 Luxury goods. Eg: jewellery,
luxury car etc.

Comfort goods. Eg.

car, handphone

Basic goods. Eg: food,

shelter, clothes

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 DEFINITION OF DEMAND

Demand is defined as the ability and

willingness to buy specific quantities of
goods in a given period of time at a particular
price, ceteris paribus.

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 LAW OF DEMAND

Law of demand states that the higher the price of a good, the
lower is the quantity demanded for that good and the lower
the price, the higher is the quantity demanded, ceteris
paribus.

P  Qdd  P  Qdd 

NEGATIVE RELATIONSHIP

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 DEMAND SCHEDULE AND CURVE

Demand Curve
Demand Schedule P

6
Price Quantity
5
5 2
4
4 4
3
3 6 DD
2
2 8
1
1 10
0 Q
2 4 6 8 10

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 INDIVIDUAL AND MARKET
DEMAND

INDIVIDUAL DEMAND
The relationship between the quantity of a good
demanded by a single individual and its price.
 
MARKET DEMAND
The relationship between the total quantity of a
good demanded by adding all the quantities
demanded by all consumers in the market and
its price.

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 Example

Price of Qd of green tea ice-cream (unit) Total Qd of green

green tea tea ice-cream
ice-cream (unit)
(RM)
Sofia Sara Sumi Market Demand

5 10 30 20

4 20 40 30

3 30 50 40

2 40 60 50

1 50 70 60

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 Consumers’ Tastes and
income trends

Price of
related goods Population or
number of
buyers

Supply of Expectation
money in about future
circulation prices

Festive
Level of taxation
seasons and Advertisement
climate
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 CHANGES IN QUANTITY DEMANDED VS. CHANGES IN
DEMAND
CHANGES IN QUANTITY CHANGES IN DEMAND (due to
DEMANDED change in non-price
(due to change in price) determinants of demand)
Price
Price

DD D1
Quantity
D0
 Movement along DD curve Quantity
 Price changes and other factors are
constant  Shift in the demand curve
 Upward movement  Decrease in  Occurs when there are changes in
quantity demanded (Contraction) other factors but price remains
constant
 Downward movement  Increase in  Increase in Demand (D0  D1)
quantity demanded (Expansion)
 Decrease in Demand (D1  D0)
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 EXCEPTIONAL DEMAND

Exceptional demand is against the law of demand where

as the price increases, the quantity demanded also
increase.

Example of exceptional demand:

Status symbol goods / luxury goods– not for
satisfaction but for ostentation / prestige.
Basic necessities such as salt, rice, sugar, oil during
emergencies/war.

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 EXERCISE 1

1. Based on the above table, plot the demand curve on a graph paper.

2. What is the effect of increase in income level on demand for normal goods
and inferior goods? Show the effect on the demand curve.

3. If there is an increase in the price of tea, what is the effect on the demand
for coffee? Show the effects on both the demand curve of tea and the
demand curve of coffee.

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 DEFINITION OF SUPPLY

Supply is defined as the ability and

willingness to sell or produce a particular
product and services in a given period of
time at a particular price, ceteris paribus.

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 LAW OF SUPPLY

Law of supply states that the higher the price of a good, the
greater is the quantity supplied for that good and the lower the
price of a good, the lower is the quantity supplied, ceteris paribus.

P  Qss  P  Qss 

POSITIVE RELATIONSHIP

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 SUPPLY SCHEDULE AND CURVE

Supply Schedule Supply Curve

Price Quantity
5 10 5

4 8 4

3 6 3
Supply
2 4 2

1 2 1

0
2 4 6 8 10

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 INDIVIDUAL AND MARKET SUPPLY

INDIVIDUAL SUPPLY
The relationship between the quantity of a product
supplied by a single seller and its price.
 

MARKET SUPPLY
The relationship between the total quantity of a
product supplied by adding all the quantities
supplied by all sellers in the market and its price.

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 Cost of
production Expected
future price

Price of
related goods

Technological
advancement

Improvement in Number of
infrastructure Government sellers
Policies

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 CHANGE IN QUANTITY SUPPLIED VS. CHANGE IN
SUPPLY
CHANGE IN QUANTITY SUPPLIED CHANGE IN SUPPLY (due to
(due to change is price) change in non-price factor)
Price Price

s0
SS s1
Quantity Quantity

 Movement along supply curve

 Price changes and other factors are  Shift in the supply curve
constant  Occurs when there are changes in
 Downward movement  Decrease in other factors but the price remains
quantity supplied (Contraction) constant
 Upward movement  Increase in  Increase in Supply (S0  S1)
quantity supplied (Expansion)  Decrease in Supply (S1  S0)

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 EXERCISE 2

1. Based on the above table, plot the supply curve on a graph paper.

2. If government decides to raise the minimum wages of factory workers, what is the
effect on the supply curve of cloth? Show the effect on the supply curve.

3. Suppose there is technological advancement in the production of cars, what is the

effect on the supply of cars? Show the effects on the supply curve.

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