UNIT 2_CHANGES IN DEMAND AND SUPPLY (2).pptx

CHANGES IN DEMAND AND SUPPLY

1. PRINCIPLES OF MICROECONOMICS Changes in demand and supply TOPIC 2

2. Change in Quantity Demanded Movement along the demand curve: Change in price of the goods will result in the change in quantity demanded (ceteris peribus) Shift of the demand curve: Change in other factors except price of the goods will result in the shift of the demand curve DEMAND Change in Demand

3. Change in Quantity Demanded A Movement along the Demand Curve When the price of the good changes and everything else remains the same, the quantity demanded changes and there is a movement along the demand curve. DEMAND

4. Change in Demand A Shift of the Demand Curve If the price remains the same but one of the other influences on buyers’ plans changes, demand changes and the demand curve shifts. DEMAND

5. Determinants of demand Price When price of goods fall, demand for the goods increase and vice versa; ceteris peribus Price of related goods Substitute goods A substitute goods are goods that can be used in place of another goods. Increase in the price of one goods can cause an increase in the demand for its substitutes. The price of goods and the quantity of substitute goods has positive relationship. Example: Coffee and Tea, Palm oil and Corn oil DEMAND

6. Determinants of demand DEMAND At present, the price of coffee is at P0 and the quantity demanded is at Q0. When price of coffee increases to P1, the quantity demanded for coffee decreases to Q1. Since tea is a substitute for coffee. The increase in price of coffee cause consumers to switch to tea. Therefore, the demand for tea increases. As a result, the demand curve shift from D0 to D1 and quantity demanded increases from Q0 to Q1 Quantity (units) Quantity (units)

7. Determinants of demand Complement goods A complement goods are goods that are used together with other goods to complete the function of an object. Increase in the price of one goods can cause a decrease in the demand for its complement. The price of goods and the quantity of complement goods has an inverse relationship. Example: Car and Petrol DEMAND

8. Determinants of demand DEMAND At present, the price of car is at P0 and the quantity demanded is at Q0. When price of car decreases to P1, the quantity demanded for car increases to Q1. Thus, demand for petrol increases. As a result, the demand curve for petrol shifts from D0 to D1 and quantity demanded increases from Q0 to Q1. Quantity (units) Quantity (units)

9. Determinants of demand Expected future price If the price of a good is expected to rise in the future, current demand for the good increases and the demand curve shifts rightward. Income When income increases, consumers buy more of most goods and the demand curve shifts rightward. A normal good is one for which demand increases as income increases. An inferior good is a good for which demand decreases as income increases. DEMAND

10. Determinants of demand Expected Future Income and Credit When income is expected to increase in the future or when credit is easy to obtain, the demand might increase now. Population The larger the population, the greater is the demand for all goods. Preferences, taste People with the same income have different demands if they have different preferences. DEMAND

11. Change in Quantity Supplied Movement along the supply curve: Change in price of the goods will result in the change in quantity supplied (ceteris peribus) Shift of the supply curve: Change in other factors except price of the goods will result in the shift of the supply curve SUPPLY Change in Supply

12. Change in Quantity Supplied A Movement along the Supply Curve When the price of the good changes and everything else remains the same, the quantity supplied changes and there is a movement along the supply curve. SUPPLY

13. Change in Supply A Shift of the Supply Curve If the price remains the same but one of the other influences on producers’ plans changes, supply changes and the supply curve shifts. SUPPLY

14. Determinants of supply Price When price of goods increase, the higher the quantity will be supplied and vice versa; ceteris peribus. Price of related goods Substitute goods A substitute goods are goods that can be used in place of another goods. Increase in the price of one goods can cause a decrease in the supply for its substitutes. The price of goods and the quantity of substitute goods has an inverse relationship. Example: Coffee and Tea, Palm oil and Corn oil SUPPLY

15. Determinants of supply Complement goods A complement goods are goods that are used together with other goods to complete the function of an object. Increase in the price of one goods can cause an increase in the supply for its complement. The price of goods and the quantity of complement goods has a positive relationship. Example: Car and Petrol SUPPLY

16. Determinants of supply Production cost of the goods An increase in the price of resources reduces the profitability of producing the goods and services. Thus, producer will reduce production at each price. The supply curve will shift leftwards. Technology Technological improvements increase the productivity of labor; results in lower production costs and higher profitability. The supply curve shift rightward. SUPPLY

17. Determinants of supply Number of suppliers The larger the number of suppliers, the greater is the supply for the goods; increasing market supply. Therefore, supply curve shift rightward. Weather Weather condition will affect supply for certain industries. SUPPLY

18. Determinants of supply Tax Tax is a financial charges, fee levied enforced by the government on individuals or businesses to fund public spending. An increase in tax will increase the cost of production. Subsidies Subsidy is a benefit or financial aid given by the government to individuals and businesses to ease financial burden in consideration of overall public interest. An increase in subsidy will reduce the cost of production. SUPPLY

19. Definition Equilibrium is a situation when market demand curve intersect with market supply curve. Equilibrium price: Price at equilibrium point Equilibrium quantity: Quantity at equilibrium point MARKET EQUILIBRIUM

20. MARKET EQUILIBRIUM

21. Conditions for market equilibrium Quantity demanded = Quantity supplied If, : Shortage or excess demand : Surplus or excess supply   MARKET EQUILIBRIUM

22. Conditions for market equilibrium Price (RM) Quantity demanded (units) Quantity supplied (units) Effect on quantity demanded/ supplied Effect on price 1 32 18 Shortage of 14 units Increase 2 28 21 Shortage of 7 units Increase 3 24 24 Equilibrium Stable 4 20 27 Surplus of 7 units Decrease 5 16 30 Surplus of 14 units Decrease MARKET EQUILIBRIUM

23. Conditions for market equilibrium MARKET EQUILIBRIUM

24. Determining equilibrium MARKET EQUILIBRIUM Numerical analysis

25. Determining equilibrium Graphical analysis MARKET EQUILIBRIUM Equilibrium point

26. Mathematical analysis Since equilibrium is found when , therefore Example: Given Determine the equilibrium point.   MARKET EQUILIBRIUM Determining equilibrium

27. Determining equilibrium Equilibrium point is found at price of RM 3 and quantity of 24 units   MARKET EQUILIBRIUM

28. All Possible Changes in Demand and Supply A change in demand or supply or both demand and supply changes the equilibrium price and the equilibrium quantity. Changes in Price and Quantity MARKET EQUILIBRIUM

29. Change in Demand with No Change in Supply When demand increases, equilibrium price rises and the equilibrium quantity increases . (vice versa) Changes in Price and Quantity MARKET EQUILIBRIUM

30. Change in Supply with No Change in Demand When supply increases, the equilibrium price falls and the equilibrium quantity increases . (vice versa) Changes in Price and Quantity MARKET EQUILIBRIUM

31. Increase in Both Demand and Supply in Unequal Magnitude An increase in demand and an increase in supply increase the equilibrium quantity. The change in equilibrium price is uncertain because the increase in demand raises the equilibrium price and the increase in supply lowers it. Changes in Price and Quantity MARKET EQUILIBRIUM

32. Changes in Price and Quantity Increase in Both Demand and Supply in Equal Magnitude An increase in demand and an increase in supply increase the equilibrium quantity. The equilibrium price is constant or unchanged. MARKET EQUILIBRIUM

33. Decrease in Both Demand and Supply in Unequal Magnitude A decrease in both demand and supply decreases the equilibrium quantity. The change in equilibrium price is uncertain because the decrease in demand lowers the equilibrium price and the decrease in supply raises it. Changes in Price and Quantity MARKET EQUILIBRIUM

34. Changes in Price and Quantity Decrease in Both Demand and Supply in Equal Magnitude A decrease in both demand and supply decreases the equilibrium quantity. The equilibrium price is constant or unchanged MARKET EQUILIBRIUM

35. Decrease in Demand and Increase in Supply in Unequal Magnitude A decrease in demand and an increase in supply lowers the equilibrium price. The change in equilibrium quantity is uncertain because the decrease in demand decreases the equilibrium quantity and the increase in supply increases it. Changes in Price and Quantity MARKET EQUILIBRIUM

36. Changes in Price and Quantity Decrease in Demand and Increase in Supply in Equal Magnitude A decrease in demand and an increase in supply lowers the equilibrium price. The equilibrium quantity is constant or unchanged. MARKET EQUILIBRIUM

37. Increase in Demand and Decrease in Supply in Unequal Magnitude An increase in demand and a decrease in supply raises the equilibrium price. The change in equilibrium quantity is uncertain because the increase in demand increases the equilibrium quantity and the decrease in supply decreases it. Changes in Price and Quantity MARKET EQUILIBRIUM

38. Changes in Price and Quantity Increase in Demand and Decrease in Supply in Equal Magnitude An increase in demand and a decrease in supply raises the equilibrium price. The equilibrium quantity is constant or unchanged MARKET EQUILIBRIUM

39. Government Intervention Price Ceiling Price Floor Definition A legally mandate maximum price that sellers are allowed to charge the consumers A legally mandate minimum price that buyers are required to pay for the goods Purpose To protect consumers To protect sellers How Price is set BELOW equilibrium price Price is set ABOVE equilibrium price Effect Action Rationing Government purchase and supply it Example of goods Necessity goods Agricultural price support Price Ceiling Price Floor Definition A legally mandate maximum price that sellers are allowed to charge the consumers A legally mandate minimum price that buyers are required to pay for the goods Purpose To protect consumers To protect sellers How Price is set BELOW equilibrium price Price is set ABOVE equilibrium price Effect Action Rationing Government purchase and supply it Example of goods Necessity goods Agricultural price support MARKET EQUILIBRIUM

40. Government Intervention Price floor (min price): Price of the good is set above the market equilibrium price - to help producers Price ceiling (max price) : Price of the good is set below the market equilibrium price - to help consumers MARKET EQUILIBRIUM