PRINCIPLES

OF

ECONOMICS

PowerPoint Slides
by Ambigah d/o Sandran

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 Learning Objectives
Student will be exposed to:
The definition of demand and the law of demand.
The internal and external determinants of demand.
Change in quantity demanded versus change in
demand.
The definition of an exceptional demand.
The definition of supply and the law of supply.
Seven determinants of supply.
Change in quantity supplied versus change in
supply.
The definition of an exceptional supply.

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 Learning Outcomes
At the end of the lesson, students should be able to:
Explain the meaning of demand, law of demand and market demand.
Construct a demand schedule and demand curve relate to
determinants of demand.
Distinguish between a change in quantity demanded and a change in
demand.
Explain and construct exceptional demand curve.
Explain the meaning of supply, law of supply and market supply.
Construct a supply schedule and supply curve relate to determinants
of supply.
Distinguish between a change in quantity supplied and a change in
supply.
Explain and construct exceptional supply curve.

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 Introduction

The word demand has a precise meaning in

economics. It refer to the willingness and ability of
buyers to purchase different quantities of a good at
different prices during a specific time period.
Supply refers to the willingness and ability of sellers
to produce and offer to sell different quantities of a
good at different prices during a specific time period .

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Definition of Demand (D)
willingness to buy + ability to buy a specific
quantities of goods in a given period of time
at a particular price, Ceteris paribus.

ceteris paribus = means holding other

factors constant while some other factors
change.

desire, want and wish = only desire but not

able to purchase the product

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Law of Demand

Definition: the law of demand states that

the higher the price of a product, the
lower the quantity demanded of that
product and the lower the price of a
product, the higher is the quantity
demanded, ceteris paribus.

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Law of Demand: Assumptions
1. Tastes and preference of consumers
remain unchanged.
2. Consumers income remains the same.
3. Price of related goods (complement or
substitutes) should remain unchanged.
4. Goods should not have any prestige value.

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Law of Demand

Based on law of demand : A negative

relationship exists between price (P) and
quantity demanded (Qd).
P : Qd
P : Qd

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Demand schedule

is a list of the quantity that a buyer is

willing to buy at different prices at one
particular time.
represents a functional relationship
between price and quantity demanded.
assumes that other demand
determinants are all constant (e.g. income,
preferences, price related goods).
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 Table 1: Demand schedule for goods X

Point Price of (RM) Quantity Demanded (units)

a 0 5
b 2 4
c 4 3
d 6 2
e 8 1
f 10 0

(Deviga & Karunagaran, 2010, pp. 29)

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 Demand curve

shows the relationship between the

quantities demanded of a product and its
price.
must slope downwards because of the
inverse relationship between price and
quantity goods demanded [Law of
demand].

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 Figure 1: Demand curve for goods X

Price of good X (RM)

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0 1 2 3 4 5 Quantity of good X (unit)

(Deviga & Karunagaran, 2010, pp. 30)

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Individual Demand

The relationship between the

quantity of product demanded by
single individual and its price.

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Market Demand
The relationship between the total quantity of a
product demanded by adding all the quantities
demanded by all consumers in the market and
its price.
The aggregate of the demands of all potential
customers (market participants) for a specific
product over a specific period in a specific
market.

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 Market demand is the
combination of individual
demands (D)

Individual D1 + Individual D2 = Market Demand

Market Demand = Total individual Demand

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 Table 2: Market Demand for Energy Drinks

Price (RM) Individual 1 Individual 2 Market Demand

(D1) (D2) (MD)
2 10 8 18
3 8 7 15
4 6 6 12
5 4 5 9
6 2 4 6

(Deviga & Karunagaran, 2010, pp. 30)

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 Assume:
only 2 individual in a
Figure 2: market

Individual demand and market

demand for Energy Drinks
Price Price Price

5 5 5

D1 D2 MD

4 5 9

Individual 1 Individual 2 Market demand

(Deviga & Karunagaran, 2010, pp. 31)

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 Determinants of Demand
Internal Factors External Factors
1. Price of goods 1. Price of related goods
2. Service policies a) Substitute goods
3. Profit margin b) Complementary goods
2. Consumers income
3. Tastes and fashion
4. Population/number of buyer
5. Expectation about future prices
6. Advertisements
7. Festive seasons and climate
8. Level of taxation

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 Determinants of Demand

Determinants
of demand
Internal External
factors Internal factors
factors
External
Change in factors Change in
quantity
demand
demanded

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Changes in Quantity Demanded
Figure 3
Changes in Quantity Demanded
movement along demand
Price curve
occurs when price of
product changes
P1
P2 other factors are constant
P3 upward movement

P4
- in quantity demanded
(contraction)
downward movement
0 Q1 Q2 Q3 Quantity
- in quantity demanded
(expansion)

(Deviga & Karunagaran, 2010, pp.33) 23

 Changes in Demand
Figure 4
Changes in Demand

Price
Shift in the demand curve
P1 Occurs when change in other
P2 factors
P3 - population, income, price of related
DD2 goods
P4
DD1 Price of product remains constant

0 Q1 Q2 Q3 Quantity Increase in DD (D D)
Decrease in DD (D D

(Deviga & Karunagaran, 2010, pp. 33) 24

 Exceptional Demand
Figure 5
Exceptional demand curve
Definition: Against the law of
Price
demand where as the price
increases, the quantity
DD demanded will also increase.
Exceptional demand where the
price of product increases, the
demand for it will also increase
0 Quantity
(different from normal demand
curve)

(Deviga & Karunagaran, 2010, pp. 34)

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Exceptional Demand
Exceptional demand occurs in the following
instances:
1. Giffen Goods / inferior goods: potato
2. Status symbol goods / Veblens Effect:
diamonds
3. Speculation: sugar
4. Emergencies: war, natural disasters
5. Highly priced Goods: Nike shoes

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 Definition of Supply (S)

The ability and willingness to sell or

produce a particular product and service
in a given period of time at a particular
price, ceteris paribus.

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Law of Supply

The law of supply states that the higher

the price of a product, the greater is the
quantity supplied of that product and the
lower the price, the lower is the quantity
supplied, ceteris paribus.

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Law of Supply: Assumptions

1. Cost of production remain constant.

2. Number of seller remain the same.
3. Price of related goods (complements or
substitutes do not change).
4. Availability of other inputs remain
unchanged.

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Law of Supply
Based on the law of supply, a positive
relationship exists between the price and the
quantity supplied.

P : Qs
P : Qs

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Law of Supply
Table 3
Supply Schedule
Price (RM) Quantity Supplied (Qs)
5 10
4 8
3 6
2 4
1 2

(Deviga & Karunagaran, 2010, pp. 50)

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 Figure 6
Supply Curve
Price
S
5
4
3
2
1

Quantity
0 2 4 6 8 10
(Deviga & Karunagaran, 2010, pp. 50)
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Individual Supply
Relationship between the quantity of a product
supplied by a single seller and its price

Market Supply
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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Market Supply

Market Supply
= ( individual S1 + individual S2 )
= total individual supply

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Market Supply
Table 4
Market Supply Schedule
Price Supplier 1 Supplier 2 Market Supply
(RM) (S1) (S2) (Ms)
5 10 8 18
4 8 7 15
3 6 6 12
2 4 5 9
1 2 4 6

(Deviga & Karunagaran, 2010, pp. 51)

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 Market Supply
Figure 7
Market Supply Curve
Price Price Price
S2
S1 MS

0 Quantity 0 Quantity 0 Quantity

(Deviga & Karunagaran, 2010, pp. 51)

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 Determinants of Supply
Determinants of Supply

Price of related Goods

a) Substitutes goods 2. Cost of production
b) Complementary goods

3. Expected future price 4. Technological advance

6. Government Policies
5. Number of sellers Taxes
Subsidies

7. Improvement in
infrastructure
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 Change in Quantity Supplied
Figure 8 : Change in Quantity Supplied
movement along the
supply curve
Price
price of product
S changes
30 a other factors remain
constant
20 upward movement:
b price increases and
quantity increases (b to a).
10 c downward movement:
price decreases cause the
quantity dropped (b to c).
0 5 10 15 Quantity
(Deviga & Karunagaran, 2010, pp. 53) 38
 Change in Supply
Figure 9: Change in Supply

Price S3
S1
30 S2

20

10

Quantity
0 5 10 15
(Deviga & Karunagaran, 2010, pp. 53)
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 Change in Supply
Figure 10: Supply curve shift to right
Price of substitutes goods
Price
Price of complementary
S1 goods
30 S2 Price of input
Expected future price
20 in number of sellers
Government provides
10 subsidy to sellers

Quantity
0 5 10 15
(Deviga & Karunagaran, 2010, pp. 53)
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 Change in Supply
Figure 11 : Supply curve shift to left

Price of substitutes goods

Price Price of complementary goods
S3 Price of input
30 S1
Expected future price
in number of sellers
20
Government impose tax on
sellers
10

Quantity
0 5 10 15
(Deviga & Karunagaran, 2010, pp. 53)
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 Exceptional supply :
Figure 12: Exceptional supply curve

P : SS
SS curve negatively sloped
Price
Happens in the SS of labor

backward Bending Labor SS

Curve

S
Quantity
0
(Deviga & Karunagaran, 2010, pp. 54) 42
Summary
Demand is defined as the ability and willingness to buy specific

quantities of goods in a given period of time at particular price, ceteris

paribus.

Ceteris paribus means holding other factors constant.

Law of demand states that the higher the price of a good, the lower the

quantity demanded for that good and vice versa, other things being

equal.

Demand schedule is a list of the amount that a buyer is willing to buy at

different price at one particular time.

Demand curve is a downward slop curve which shows the inverse

relationship between the quantities demanded of a good and its price.

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Summary
Individual demand is the relationship between the quantity of

a good demanded by a single buyer and its price.

Market demand is the relationship between the total

quantities of a good demanded by all consumers in the

market and its price.

Change in quantity demanded is a movement along the

demand curve due to a change in price while other factors

remain constant.

Change in demand is a shift of the demand curve due to a

change in other factors while price remains constant.

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Summary
Normal goods are goods that increase as income increases.

Inferior goods are goods that decrease as income increases.

Exceptional demand is against the law of demand where as

price increases, demand will also increase and vice versa.

Supply is defined as the ability and willingness to sell specific

quantities of goods in a given period of time at a particular
price, with everything else held constant.

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Summary
Law of supply states that the higher the price of a good, the
higher is the quantity supplied for that good and vice versa,
ceteris paribus.
Supply schedule is a list of the quantity supplied at each
different price assuming all other influences are constant.
Supply curve is a line on graphs which shows the direct
relationship between the quantities supplied of a good and its
price.
Individual supply is the relationship between the quantity
supplied by a single seller and its price.

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Summary
Market supply is the relationship between the total quantity
supplied by all sellers in the market and its price.
Change in quantity supplied occurs when the price of a good
changes and there is a movement along the supply curve,
ceteris paribus.
Change in supply occurs when other factors change and the
price of a good remains constant, supply curse will shift.
Exceptional supply is against the Law of Supply where as
price increases, quantity supplied decreases.

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 Key terms:
Term Definition
Demand The ability and willingness to buy specific quantities of
goods in a given period of time at a particular price,
ceteris paribus.
Ceteris paribus Means holding other factors constant while some other
factors change.

Free Goods Goods that have no production cost.

Goods that have a common use and are benefit to

Public Goods everyone.

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 Key terms:
Term Definition
Goods that involve a production cost and things of
Economic goods
value that can be seen and touched.
States that the higher the price of a product, the
Law of demand lower is the quantity demanded for that product and
vice versa, ceteris paribus.
Individual Relationship between the quantity demanded by a
demand single buyer and its price.
Relationship between the quantity demanded by a
Market demand total quantity demanded by all buyer in the market
and its price.
A product that can be used in place of another
Substitute goods
product.

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Key terms:
Term Definition
Complementary A product that is used in conjunction with another
goods product.
A product that increased in demand with an increase
Normal goods
in income.
A product that decrease in demand with an increase
Inferior goods
in income.

Exceptional Against the law of demand where as the price

demand increases, the quantity demanded will also increase.
The ability and willingness to sell particular goods
Supply and services within a given period of time at a
particular price, ceteris paribus.

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Key terms:
Term Definition
States that the higher the price of a product, the
Law of supply higher is the quantity of the product supplied and vice
versa, ceteris paribus.
Exceptional Is against the law of supply where as the price
supply increases, the quantity supplied decreases.

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