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CHAPTER
DEFINITION OF DEMAND
PUBLIC GOODS
Public goods are goods that
are for common use and will
benefit everyone.
LAW OF DEMAND
P Qdd
P Qdd
NEGATIVE RELATIONSHIP
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Demand Schedule
Price
Quantity
Demand Curve
12
10
10
DD
0
2
10
Consumers
income
Tastes and
trends
Price of
related goods
Supply of
money in
circulation
Level of taxation
Population or
number of
buyers
DETERMINANTS
OF DEMAND
Festive
seasons and
climate
Expectation
about future
prices
Advertisement
CHANGES IN DEMAND
Price
Price
D1
DD
Quantity
D0
Quantity
EXCEPTIONAL DEMAND
Exceptional Demand is the opposite of the
Law of Demand where as price increases,
demand will also increase and vice versa.
GIFFEN GOODS
SPECULATION
EMERGENCIES
STATUS SYMBOL GOODS
HIGHLY-PRICED GOODS
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
INTER-RELATED DEMAND
CROSS DEMAND
Price of pizza
DD
Negative relationship exists
between complement
goods
P2
P1
P2
P1
DD
Q1
Q2
Joint Demand
Q1
Q2
Quantity of
soft drinks
Competitive Demand
DEFINITION:
Measures the
sensitivity/responsiveness of
the quantity demanded due to a
change in its price.
FORMULA:
d
% Quantity Demanded
% Price
d
Q 2 Q1 x
Q1
P1
P2 P1
DEGREE OF ELASTICITY
Price (RM)
d =0
d < 1
not changeofaschange
the price
changes.
A large percentage
in the
price of a good
will only affect a small percentage of change in the
quantity
demanded.
Elastic
Demand
d =
d = 1
Quantity Demanded
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Existence of
substitutes
Frequently
purchased
products
Complementary
goods
Proportion of the
expenditure on a
product
DETERMINANTS
OF PRICE
ELASTICITY OF
DEMAND
Habits
Nature of
goods
Income level
Time
dimension
RELATIONSHIP TO TOTAL
REVENUE
Total Revenue (TR) = Price (P) x Quantity (Q)
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.
Price
DEMAND IS ELASTIC
RM30
Total Revenue
RM20 x 10 = RM200
RM20
10
Quantity Demanded
All Rights Reserved
Ch. 2: 17
RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)
Price
DEMAND IS INELASTIC
Total Revenue
RM2
RM1 x 15 = RM15
If seller increases price to RM2
RM1
15
Quantity Demanded
All Rights Reserved
Ch. 2: 18
RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)
Price
Total Revenue
RM1 x 20 = RM20
RM2
RM1
TR = 0
D
10
20
Quantity Demanded
All Rights Reserved
Ch. 2: 19
DEFINITION:
Measures the sensitivity/responsiveness
of the quantity demanded due to a
change in income.
FORMULA:
Y
% Quantity Demanded
% Income
d
Q 2 Q1 x
Q1
Y1
Y2 Y1
RESPONSES OF INCOME
ELASTICITY
Elastic Income
Income
y =0
Inelastic Income
-Type of good: Normal goods such as food
and clothing
0 < y < 1
y > 1
y< 0
Quantity Demanded
DEFINITION:
Measures the sensitivity/responsiveness of
the quantity demanded of one product due to
a change in the price of a related product.
FORMULA:
X = % Quantity Demanded of good X
% Price of good Y
Qx2 Qx1 x
Py1
Qx1
Py2 Py1
RESPONSES OF CROSS
ELASTICITY
Price of Good X
x =0
x > 0
x < 0
Quantity Demanded
of Good Y
DEFINITION OF SUPPLY
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
Supply Schedule
Supply Curve
Price
Quantity
12
10
10
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.
Cost of
production
Expected
future price
Price of
related goods
DETERMINANTS
OF SUPPLY
Improvement in
infrastructure
Government
Policies
Technological
advancement
Number of
sellers
CHANGE IN SUPPLY
Price
Price
s0
s1
SS
Quantity
Quantity
EXCEPTIONAL SUPPLY
Exceptional Supply is the opposite of the Law of
Supply where as price increases, the quantity supplied
decreases and vice versa
Wage Rate
20
Income Effect
(Exceptional Supply
Curve)
15
10
Substitution Effect
Labour
DEFINITION:
Measures the sensitivity/responsiveness of
the quantity supplied due to a change in the
price of a product or service.
FORMULA:
ss
= % Quantity Supplied
% Price
SS
Q 2 Q1 x
Q1
P1
P2 P1
DEGREE OF ELASTICITY
Elastic Supply
A small percentage of change in the price of a good will lead to
larger percentage of change in the quantity supplied.
Price (RM)
Inelastic Supply
ss =0
ss < 1
ss = 1
ss =
ss > 1
Quantity Demanded
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Time Period
Technology
improvements
DETERMINANTS
OF PRICE
ELASTICITY OF
SUPPLY
Perishability
Availability and
mobility of
factors of
production
Nature of the
market