Teaching PowerPoint Slides - Chapter 2.ppt

Teaching PowerPoint Slides - Chapter 2

1. All Rights Reserved
PRINCIPLES OF ECONOMICS Third Edition
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 2– 1

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PRINCIPLES OF ECONOMICS Third Edition
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 2– 2
CHAPTER 2
DEMAND AND SUPPLY

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PRINCIPLES OF ECONOMICS Third Edition
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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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PRINCIPLES OF ECONOMICS Third Edition
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CLASSIFICATION OF GOODS
AND SERVICES
Free goods are goods that have no production
cost.
Public goods are goods that are for common
use and will benefit everyone.
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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PRINCIPLES OF ECONOMICS Third Edition
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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  Q
dd  P  Q
dd

NEGATIVE RELATIONSHIP

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DEMAND SCHEDULE AND
CURVE
Price Quantity
5 2
4 4
3 6
2 8
1 10
Demand Schedule Demand Curve
10
8
6
4
2
0
12
2 4 6 8 10
DD

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PRINCIPLES OF ECONOMICS Third Edition
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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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PRINCIPLES OF ECONOMICS Third Edition
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Level of taxation
Festive
seasons and
climate
Price of
related goods
Consumers’
income
Tastes and
trends
Population or
number of
buyers
Supply of
money in
circulation
Expectation
about future
prices
Advertisement

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PRINCIPLES OF ECONOMICS Third Edition
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CHANGES IN QUANTITY DEMANDED
VS. CHANGES IN DEMAND
CHANGES IN QUANTITY DEMANDED CHANGES IN DEMAND

Price
DD
Quantity
Movement along DD curve
Price changes and other factors are
constant
Upward movement  Decrease in
quantity demanded (Contraction)
Downward movement  Increase in
quantity demanded (Expansion)

Price
D
1
D
0
Quantity
Shift in the demand curve
Occurs when there are changes in
other factors but price remains
constant
Increase in Demand (D
0
 D
1
)
Decrease in Demand (D
1
 D
0
)

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EXCEPTIONAL DEMAND
Exceptional Demand is the opposite of the Law of Demand where
as price increases, demand will also increase and vice versa.
STATUS SYMBOL GOODS
SPECULATION
EMERGENCIES
HIGHLY-PRICED GOODS

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INTER-RELATED DEMAND
The demand for a good is also affected by the price of
its substitute or complementary goods. Cross demand can be
divided into two: Joint demand and competitive demand.
Derived demand is the demand for a good
which is derived from other goods.

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CROSS DEMAND: JOINT DEMAND
VS. COMPETITIVE DEMAND
Q
1
Q
2
Price of pizza
Q
1
Q
2
P2
P1
Negative relationship exists
between complement
goods
Quantity of soft drinks
Q
1
Q
2
Quantity of
soft drinks
P1
P2
DD
Positive relationship exists
between substitute goods
Cross Demand
Price of pizza
Joint Demand Competitive Demand
DD

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DERIVED DEMAND
Q
1
Q
2
Price of pizza
Q
1
Q
2
P2
P1
Negative relationship exists
between complement
goods
Quantity of soft drinks
Q
1
Q
2
Quantity of
soft drinks
P1
P2
DD
Positive relationship exists
between substitute goods
Cross Demand
Price of pizza
Joint Demand Competitive Demand
DD
Price (RM’000)
Q
0
Q
1
P1
P0
D
0
Quantity
Q
0
Q
0
Quantity of
workers
WR0
WR1
Wage rate (RM per hour)
Demand and supply for house Demand and supply for carpenters
D
1
S
0
D
0
D
1
S
0

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INTERRELATED DEMAND
Composite demand is demand for a good
that has multiple uses
For example: oil can be used for petrol,
kerosene and diesel

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COMPOSITE DEMAND
Price
Q
0
Q
1
P1
P0
D
0
Quantity
Q
1
Q
0
Quantity of
workers
P0
P1
Demand and supply for petrol Demand and supply for diesel
D
1
S
0
D
0
S
1
Price
S
0

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PRICE ELASTICITY OF DEMAND
DEFINITION :
Measures the sensitivity/responsiveness
of the quantity demanded
due to a change in its price.

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PRICE ELASTICITY OF
DEMAND (cont.)

d
= Q
2
– Q
1
x P
1

Q
1
P
2
– P
1
FORMULA:

d = %  Quantity
Demanded
%  Price

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DEGREE OF ELASTICITY
Price (RM)
Quantity Demanded
Unitary Elastic
Demand
A condition in which
percentage changes in price
equals to percentage
changes in quantity
demanded.
Inelastic Demand
A large percentage of change in the price of a good
will only affect a small percentage of change in the
quantity demanded.
Elastic Demand
A small percentage of change in the
price of a good will lead to larger
percentage of change in quantity
demanded.
Perfectly Inelastic Demand
A condition in which the quantity demanded does
not change as the price changes.
Perfectly Elastic
Demand
A condition in which a small
percentage of change in
price leads to an infinite
percentage of change in the
quantity demanded.
d
> 1

d
< 1

d
= 1

d
=0

d
= 

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Existence of
substitutes
Frequently
purchased
products
Time
dimension
Complementary
goods Habits
Proportion of the
expenditure on a
product
Nature of
goods
Income level
Existence of
substitutes
Proportion of the
expenditure on a
product

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RELATIONSHIP TO TOTAL
REVENUE
Price
D
RM30
10
DEMAND IS ELASTIC
Total Revenue
RM20 x 10 = RM200
If seller increases price to RM30
New Total Revenue
= RM30 x 5 = RM150
 TR =  RM50
RM20
5
Quantity Demanded
The information on price elasticity of demand will be useful
for the seller to adjust their selling price since it will affect
the total revenue.
Total Revenue (TR) = Price (P) x Quantity (Q)

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RELATIONSHIP TO TOTAL
REVENUE (cont.)
Price
D
RM2
15
DEMAND IS INELASTIC
Total Revenue
RM1 x 15 = RM15
If seller increases price to RM2
New Total Revenue
= RM2 x 10 = RM20
 TR =  RM5
RM1
10
Quantity Demanded
Total Revenue (TR) = Price (P) x Quantity (Q)

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RELATIONSHIP TO TOTAL
REVENUE (cont.)
Price
D
RM2
20
DEMAND IS UNITARY ELASTIC
Total Revenue
RM1 x 20 = RM20
If seller increases price to RM2
New Total Revenue
= RM2 x 10 = RM20
 TR =  0
RM1
10
Quantity Demanded
Total Revenue (TR) = Price (P) x Quantity (Q)

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INCOME ELASTICITY OF
DEMAND
DEFINITION :
Measures the sensitivity/responsiveness
of the quantity demanded
due to a change in income.

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INCOME ELASTICITY OF
DEMAND (cont.)

Y
= Q
2
– Q
1
x Y
1

Q
1
Y
2
– Y
1
FORMULA:

Y = %  Quantity
Demanded
%  Income

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RESPONSES OF INCOME
ELASTICITY
Negative Income Elasticity
-Type of good: Giffen/ Inferior goods such
as used car and low grade potatoes
Income
Quantity Demanded

y
< 0

y
> 1

y
=0
Inelastic Income
-Type of good: Normal goods such as food
and clothing
Elastic Income
-Type of good: Luxury goods such as antique
furniture and diamonds
0 < 
y
< 1 Zero Income Elasticity
-Type of good: Necessity Goods such as rice
and vegetables

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CROSS ELASTICITY OF
DEMAND
DEFINITION :
Measures the sensitivity/responsiveness
of the quantity demanded of one product
due to a change in the price of a related product.

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INCOME ELASTICITY OF
DEMAND

X
= Q
X2
– Q
X1
x P
Y1


Q
X1
P
Y2
– P
Y1
FORMULA:

X
= %  Quantity Demanded of good
X
%  Price of good Y

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PRINCIPLES OF ECONOMICS Third Edition
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RESPONSES OF CROSS
ELASTICITY
Price of Good X
Quantity Demanded
of Good Y

x
< 0

x
> 0

x
=0
Zero Cross Elasticity
-Good X and Y have no relationship
Positive Cross Elasticity
-Good X and Y are substitute goods
Negative Cross Elasticity
-Good X and Y are complementary goods

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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
P  Q
ss  P  Q
ss 
POSITIVE RELATIONSHIP
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.

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PRINCIPLES OF ECONOMICS Third Edition
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SUPPLY SCHEDULE AND
CURVE
Price Quantity
5 10
4 8
3 6
2 4
1 2
Supply Schedule Supply Curve
10
8
6
4
2
0
12
1 2 3 4 5
Supply

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PRINCIPLES OF ECONOMICS Third Edition
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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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Price of related
goods
Number of
sellers
Improvement in
infrastructure
Government
Policies
Proportion of the
expenditure on a
product
Expected
future price
Technological
advancement
Cost of production

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CHANGE IN QUANTITY SUPPLIED
VS. CHANGE IN SUPPLY
CHANGE IN QUANTITY SUPPLIED CHANGE IN SUPPLY
Price
SS
Quantity
Movement along supply curve
Price changes and other factors are
constant
Downward movement  Decrease in
quantity supplied (Contraction)
Upward movement  Increase in
quantity supplied (Expansion)
Price
s
0
s
1
Quantity
Shift in the supply curve
Occurs when there are changes in
other factors but the price remains
constant
Increase in Supply (S
0
 S
1
)
Decrease in Supply (S
1
 S
0
)

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EXCEPTIONAL SUPPLY
Wage Rate
Labour
15
4 5
5
10
20
0
1 2 3
Income Effect
(Exceptional Supply
Curve)
Substitution Effect
Exceptional Supply is the opposite of the Law of
Supply where as price increases, the quantity supplied
decreases and vice versa
6

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INTERRELATED DEMAND
Increase in the supply of one good
brings to an increase in the supply
of another related goods.

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PRINCIPLES OF ECONOMICS Third Edition
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PRICE ELASTICITY OF
SUPPLY
DEFINITION :
Measures the sensitivity/responsiveness
of the quantity supplied due to a change
in the price of a product or service.

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PRINCIPLES OF ECONOMICS Third Edition
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PRICE ELASTICITY OF SUPPLY
(cont.)

SS
= Q
2
– Q
1
x P
1


Q
1
P
2
– P
1
FORMULA:

ss = %  Quantity Supplied
%  Price

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PRINCIPLES OF ECONOMICS Third Edition
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DEGREE OF ELASTICITY
Price (RM)
Quantity Demanded
Unitary Elastic Supply
Percentage change in price equals the percentage
change in the quantity supplied.
Inelastic Supply
A large percentage of change in the price of a good
will only affect a small percentage of change of the
quantity supplied.
Elastic Supply
A small percentage of change in the price of a good will lead to
larger percentage of change in the quantity supplied.
Perfectly Inelastic Supply
A percentage of change in price has no effect on
the percentage of change in the quantity supplied.
Perfectly Elastic Supply
An almost zero percentage of change in price brings
a very large percentage of change in the quantity
supplied.

ss
> 1

ss
< 1

ss
= 1

ss
=0

ss
= 

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Technology
improvements
Perishability
Availability and mobility of
factors of production
Nature of the
market
Time Period