1. PRINCIPLES OF ECONOMICS

2. THEORY OF DEMAND
AND SUPPLY
TOPIC 2:

3. DEFINITION AND LAW OF
DEMAND
• WHAT IS DEMAND? :
 DEMAND IS THE DESIRE TO OWN
ANYTHING, THE ABILITY TO PAY FOR IT, AND
THE WILLINGNESS TO PAY DURING A SPECIFIC
PERIOD

4. DEMAND SCHEDULE AND
DEMAND CURVE
• DEMAND SCHEDULE:
 A LIST SHOWING THE QUANTITY OF A GOOD
THAT CONSUMERS WOULD CHOOSE TO PURCHASE AT
DIFFERENCES PRICES, WITH ALL OTHER VARIABLES
HELD CONSTANT
• DEMAND CURVE:
 GRAPHICALLY SHOWS THE RELATIONSHIPS
BETWEEN THE PRICE OF A GOOD AND THE QUANTITY
WITH ALL DEMANDED, HOLDING CONSTANT ALL
OTHER VARIABLES THAT INFLUENCES DEMAND.

5. RM 5
Price
Demand
10,000
RM 10
6,000
RM 15
4,000
(P3)
(P2)
(P1)
EXAMPLE
OF
DEMAND
CURVE

6. DEFINITION AND LAW OF
DEMAND
• LAW OF DEMAND :
 THE LAW OF DEMAND STATES THAT OTHER
FACTORS BEING CONSTANT, PRICE AND
QUANTITY OF DEMAND OF ANY GOOD AND
SERVICE ARE INVERSELY RELATED TO EACH
OTHER. WHEN THE PRICE OF THE PRODUCT
INCREASES, THE DEMAND FOR THE SAME
PRODUCT WILL FALL.

7. ASSUMPTIONS AND LIMITATIONS
OF THE LAW OF DEMAND
ASSUMPTIONS:
• INCOME CONSTANT.
• NO CHANGE IN TASTE,
FASHION AND HABIT.
• NO FUTURE
EXPECTATIONS.
• NO CHANGE IN
WEATHER AND
POPULATIONS.
LIMITATIONS:
• VERY HIGH PRICED
GOODS
• VERY LOW PRICED GOODS
• IGNORANCE OF THE
CONSUMER
• NECESSITIES

8. DETERMINANTS OF DEMAND
• TASTES AND FASHIONS
• THE NUMBER AND PRICE OF RELATED GOODS
• INCOMES
• EXPECTATIONS OF FUTURE PRICE CHANGE
• POPULATIONS
• WEATHER

9. DISTINCTION BETWEEN CHANGES
IN QUANTITY DEMANDED AND
CHANGES AND DEMAND
CHANGE IN QUANTITY
DEMANDED
1) OCCURS DUE TO CHANGE
IN PRICE
2) RESULTS IN MOVEMENT
FROM ONE POINT TO
ANOTHER ON A FIXED
DEMAND CURVE
3) ALSO CALLED EXTENSION
AND CONTRACTION OF
DEMAND
CHANGE IN DEMAND
1) OCCURS DUE TO CHANGE
IN DETERMINANTS OTHER
THAN PRICE
2) RESULTS IN SHIFTING OF
THE DEMAND CURVE
EITHER TO THE RIGHT OR
TO THE LEFT
3) ALSO CALLED RISE AND
FALL OF DEMAND

10. PRICE ELASTICITY OF DEMAND
• A MEASURE OF THE RELATIONSHIP BETWEEN
CHANGES IN THE QUANTITY DEMANDED OF A
PARTICULAR GOOD AND A CHANGE IN ITS PRICE.
PRICE ELASTICITY OF DEMAND IS A TERM IN
ECONOMICS OFTEN USED WHEN DISSCUSSING
PRICE SENSITIVITY
• ELASTICITY MEASURES THE RELATIONSHIP
BETWEEN A GOOD AND ITS PRICE BASED ON
CONSUMER DEMAND, CONSUMER INCOME AND
ITS AVAILABLE SUPPLY.

11. DETERMINANTS OF PRICE
ELASTICITY OF DEMAND
• THE DEGREE OF NECESSITY OR WHETHER THE
GOOD IS A LUXURY > NECESSITIES TEND TO HAVE
AN INELASTIC DEMAND WHEREAS LUXURIES
TEND TO HAVE A MORE ELAS TIC DEMAND.
• THE PROPOTION OF A CONSUMER INCOME
ALLOCATED TO SPENDING ON THE GOOD >
PRODUCTS THAT TAKE UP A HIGH PERCENT OF
INCOME WILL HAVE A MORE ELASTIC DEMAND.

12. DEFINITION OF SUPPLY AND
EXPLANATION OF SUPPLY CURVE
• DEFINITION OF SUPPLY
QUANTITY OF OUTPUT BROUGHT FOR
SALE IN THE MARKET AT THE CERTAIN PRICE
THE AMMOUNT OF A GOOD PRODUCERS
WOULD WANT TO PRODUCE AND SELL AT THE
SPECIFIC PRICE

13. DEFINITION OF SUPPLY AND
EXPLANATION OF SUPPLY CURVE
• SUPPLY CURVE
THE GRAPHYCAL REPRESENTATION OF THE
RELATION BETWEEN THE QUANTITIES SUPPLY OF A
GOOD THAT PRODUCERS ARE WILLING AND ABLE TO
SELL AND THE PRICE OF THE GOOD
GRAPH CURVE THAT NORMALLY SLOPES UPWARD
TO THE RIGHT OF THE CHART, SHOWING THE
QUANTITY OF THE PRODUCT SUPPLIED AT DIFFERENT
PRICE LEVELS

14. The supply curve shown here is
drawn with the following data.
Price
(P) $2 4 6 8 10
Quantity Supplied (Qs)0 10 20
30 40
Price and quantity supplied are
positively related.
EXAMPLE OF SUPPLY CURVE

15. DETERMINANT OF SUPPLY
• PRODUCTION COST
• TECHNOLOGY
• NUMBER OF SELLERS
• EXPECTATION

16. DIFFERENCES BETWEEN CHANGES IN
QUANTITY SUPPLIED AND CHANGES IN
SUPPLY
QUANTITY SUPPLIED
• OCCURS DUE TO CHANGE
IN THE MARKET PRICE
• IS REPRESENTATED BY
MOVEMENT FROM ONE
POINT TO ANOTHER ON
THE SAME SUPPLY CURVE
• ALSO CALLED EXTENSION
AND CONTRACTION OF
SUPPLY
CHANGES IN SUPPLY
• OCCURS DUE TO CHANGE IN
DETERMINANTS OF SUPPLY
OTHER THAN PRICE
• IS REPRESENTATED BY A
SHIFT IN THE SUPPLY CURVE
EITHER TO THE RIGHT OR TO
THE LEFT
• ALSO CALLED RISE AND FALL
IN SUPPLY

17. PRICE ELASTICITY OF SUPPLY
• MEASURE THE RELATIONSHIP BETWEEN
CHANGE IN THE QUANTITY SUPPLIED AND A
CHANGE IN PRICE.
• MEASURE THE RATE OF RESPONSE OF
QUALITY DEMAND DUE TO PRICE CHANGE

18. DETERMINANTS OF PRICE
ELASTICITY OF SUPPLY
• THE PRICE ELASTICITY OF SUPPLY DESCRIBES
THE MAGNITUDE OF THE CHANGE IN
QUANTITY SUPPLIED TO A CHANGE IN PRICE
• MEASURE THE RESPONSIVENESS OF
QUANTITY SUPPLIED TO A CHANGE IN THE
PRODUCT PRICES

19. DETERMINANTS OF PRICE
ELASTICITY OF SUPPLY
THE MAIN FACTORS WHICH DETERMINE THE
DEGREE OF PRICE ELASTICITY OF SUPPLY:
TIME PERIOD
ABILITY TO STORE OUTPUT
FACTOR MOBILITY

20. THE END
THANK YOU
