1. BAEB602
MICROECONOMICS
CHAPTER 2
DEMAND AND SUPPLY
PREPARED BY:
Nur Suhaili Ramli
School of Marketing and
Entrepreneurship (SoME)
FACULTY OF BUSINESS AND MANAGEMENT

2. CHAPTER 2: DEMAND AND SUPPLY
Learning outcome
TOPIC
 Student able to define theory of demand
 Student able to understand the Law of Demand
 Student able to understand change in quantity demanded versus change in
demand
 Student able to understand factors that influence market demand
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3. CHAPTER 2: DEMAND AND SUPPLY
Learning objectives
TOPIC
 Identify the x and y axes.
 Identify the origin. on a graph.
 Identify x and y coordinates of a point.
 Plot points on a graph
 Applying demand and supply concepts
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4. CHAPTER 2: DEMAND AND SUPPLY
Elements of a graph
TOPIC
 We often use graphs to give us a picture of the relationships between variables.
Let's first look at the basic construction of graphs.
 A graph is a visual representation of a relationship between two variables, x
and y.
 A graph consists of two axes called the x (horizontal) and y (vertical) axes.
These axes correspond to the variables we are relating. In economics we will
usually give the axes different names, such as Price and Quantity.
 The point where the two axes intersect is called the origin. The origin is also
identified as the point (0, 0).
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5. CHAPTER 2: DEMAND AND SUPPLY
Elements of a graph
TOPIC
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6. CHAPTER 2: DEMAND AND SUPPLY
Coordinates of points – Identify x coordinate
TOPIC
 A point is the basic relationship displayed on a graph.
 Each point is defined by a pair of numbers containing two coordinates. A
coordinate is one of a set of numbers used to identify the location of a point on
a graph.
 Each point is identified by both an x and a y coordinate. In this unit you will
learn how to find both coordinates for any point. You will also learn the correct
notation for labeling the coordinates of a point. You will first begin by identifying
the x-coordinate of a point.
 The x-coordinate of a point is the value that tells you how far from the origin
the point is on the horizontal, or x-axis.
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7. CHAPTER 2: DEMAND AND SUPPLY
Exercise 2.2
TOPIC
Refer to diagram below, I identify the following:
1) Draw a straight line from the point directly to the x-axis.
2) The number where the line hits the x-axis is the value of the x-coordinate.
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8. CHAPTER 2: DEMAND AND SUPPLY
Exercise 2.2
TOPIC
Refer to diagram below, I identify the following:
1) Draw a straight line from the point directly to the x-axis.
2) The number where the line hits the x-axis is the value of the x-coordinate.
Answer:
At the above is a graph with two points, B and D. In this figure:
The x-coordinate of point B is 100.
The x-coordinate of point D is 400.
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9. CHAPTER 2: DEMAND AND SUPPLY
Coordinates of points – Identify y coordinate
TOPIC
 As we already mentioned, each point is defined by two coordinates, the x and
the y coordinate. Now that you know how to find the x-coordinate of a point, you
have to be able to find the y-coordinate. The y-coordinate of a point is the
value that tells you how far from the origin the point is on the vertical, or y-axis.
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10. CHAPTER 2: DEMAND AND SUPPLY
Exercise 2.3
TOPIC
According to the given diagram, Identify the following:
1) To find the y-coordinate of a point on a graph: Draw a straight line from the point
directly to the y-axis.
2) The number where the line hits the axis is the value of the y-coordinate.
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11. CHAPTER 2: DEMAND AND SUPPLY
Exercise 2.3
TOPIC
According to the given diagram, Identify the following:
1) To find the y-coordinate of a point on a graph: Draw a straight line from the point
directly to the y-axis.
2) The number where the line hits the axis is the value of the y-coordinate.
Answer:
At above graph, we now identify the y-coordinate for each.
The y-coordinate of point B is 400.
The y-coordinate of point D is 100.
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12. CHAPTER 2: DEMAND AND SUPPLY
Notation for Identifying Points
TOPIC
 Once you have the coordinates of a point you can use the ordered pair notation
for labeling points. The notation is simple. Points are identified by stating their
coordinates in the form of (x, y). Note that the x-coordinate always comes
first. For example, in the figure we've been using, we have identified both the x
and y coordinate for each of the points B and D. The x-coordinate of point B is
100.
 The y-coordinate of point B is 400.
 Coordinates of point B are (100, 400)
 The x-coordinate of point D is 400.
 The y-coordinate of point D is 100.
 Coordinates of point D are (400, 100)
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13. CHAPTER 2: DEMAND AND SUPPLY
Exercise 2.4
TOPIC
Based on the following graph, identify the following:
1) Which point is on the y-axis?
2) Which point is labeled (20, 60)?
3) Which point(s) have a y-coordinate of 30?
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14. CHAPTER 2: DEMAND AND SUPPLY
Exercise 2.4
TOPIC
Based on the following graph, identify the following:
1) Which point is on the y-axis? Answer: Point A
2) Which point is labeled (20, 60)? Answer: Point B
3) Which point(s) have a y-coordinate of 30? Answer: Point A & C
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15. CHAPTER 2: DEMAND AND SUPPLY
Plotting graph
TOPIC
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16. CHAPTER 2: DEMAND AND SUPPLY
Law of demand
TOPIC
 According to the law of demand, the lower the price of a good, the larger the
quantity consumers wish to purchase.
 The relationship will hold only if the other factors affecting consumption, such as
income and preferences.
Tips: In drawing a demand curve, we assume that incomes, the
prices of related goods, and preferences are the same at all
points on the curve.
Why?
It is because to identify the independent influence
of the good’s own price on consumer purchases. If
incomes, price of related goods or preferences do
change, the entire demand curve shifts.
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17. CHAPTER 2: DEMAND AND SUPPLY
Law of demand
TOPIC
 The law of demand states that, if all other factors remain equal, the higher the
price of a good, the less people will demand that good. In other words, the
higher the price, the lower the quantity demanded. The amount of a good that
buyers purchase at a higher price is less because as the price of a good goes
up, so does the opportunity cost of buying that good. As a result, people will
naturally avoid buying a product that will force them to forgo the consumption of
something else they value more. The chart below shows that the curve is a
downward slope.
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18. CHAPTER 2: DEMAND AND SUPPLY
Law of demand
TOPIC
A, B and C are points on the demand curve. Each point on the curve reflects a
direct correlation between quantity demanded (Q) and price (P). So, at point A,
the quantity demanded will be Q1 and the price will be P1, and so on. The
demand relationship curve illustrates the negative relationship between price
and quantity demanded. The higher the price of a good the lower the quantity
demanded (A), and the lower the price, the more the good will be in demand (C)
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19. CHAPTER 2: DEMAND AND SUPPLY
A demand curve
TOPIC
 The demand curve D shows the quantity of DVD players that consumers will
purchase at alternative prices. Its negative slope reflects the law of demand:
more DVD players are purchased at a lower price.
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20. CHAPTER 2: DEMAND AND SUPPLY
An increase in demand
TOPIC
 For a demand curve, other influences besides the price of the good being
examined (consumers’ income, consumers’ preferences, prices of related
goods, and so on) are held constant at all points along the curve. Changes
in these underlying factors normally cause the demand curve to shift. Here, an
increase in consumers’ incomes causes the demand curve to shift from D to D’
because DVD players are assumed to be a normal good.
Exam Hint:
1) Identify what is a normal good definition?
2) What are the factors that affect increase
in demand?
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21. CHAPTER 2: DEMAND AND SUPPLY
An Increase in demand
TOPIC
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22. CHAPTER 2: DEMAND AND SUPPLY
Law of supply
TOPIC
 According to the law of supply, the higher the price of a good, the
larger the quantity firms want to produce.
Supply curves for most goods
slope upward. Basically, the
upward slope reflects the fact that
per-unit opportunity costs rise
when more units are produced, so
a higher price is necessary to elicit
a greater output.
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23. CHAPTER 2: DEMAND AND SUPPLY
Law of supply
TOPIC
 Like the law of demand, the law of supply demonstrates the quantities that will
be sold at a certain price. But unlike the law of demand, the supply
relationship shows an upward slope. This means that the higher the price,
the higher the quantity supplied. Producers supply more at a higher price
because selling a higher quantity at a higher price increases revenue.
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24. CHAPTER 2: DEMAND AND SUPPLY
A supply curve
TOPIC
The supply curve S shows
the quantity of DVD
players firms will be willing
to produce at alternative
prices. It generally slope
upwards, indicating that a
higher price will result in
increased output.
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25. CHAPTER 2: DEMAND AND SUPPLY
An increase in supply
TOPIC
For a supply curve, technology
and input supply conditions are
held constant at all point
alone curve. Changes in these
underlying factors normally
cause the supply curve to shift.
Here, a technological change
causes the supply curve to shift
from S to S’
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26. CHAPTER 2: DEMAND AND SUPPLY
Shift in Versus Movement along Supply Curve
TOPIC
1) Movement along a given supply curve
 A change in quantity supplied that occurs in response to a change in the
good’s selling price, other factors holding constant.
2) Shift of a supply curve
 A change in the supply curve itself that occurs when the other factors,
besides price, that affect output change.
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27. CHAPTER 2: DEMAND AND SUPPLY
Shift Vs Movement
TOPIC
 For economics, the “movements” and “shifts” in relation to the supply and
demand curves represent very different market phenomena:
1. Movements
A movement refers to a change along a curve. On the demand curve, a
movement denotes a change in both price and quantity demanded from one
point to another on the curve. The movement implies that the demand
relationship remains consistent. Therefore, a movement along the demand
curve will occur when the price of the good changes and the quantity demanded
changes in accordance to the original demand relationship. In other words, a
movement occurs when a change in the quantity demanded is caused only by a
change in price, and vice versa.
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28. CHAPTER 2: DEMAND AND SUPPLY
Shift Vs Movement
TOPIC
Like a movement along the demand curve, a movement along the supply
curve means that the supply relationship remains consistent. Therefore, a
movement along the supply curve will occur when the price of the good
changes and the quantity supplied changes in accordance to the original
supply relationship. In other words, a movement occurs when a change in
quantity supplied is caused only by a change in price, and vice versa
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29. CHAPTER 2: DEMAND AND SUPPLY
Shift Vs Movement
TOPIC
2. Shifts
A shift in a demand or supply curve occurs when a good's quantity
demanded or supplied changes even though price remains the same. For
instance, if the price for a bottle of beer was $2 and the quantity of beer
demanded increased from Q1 to Q2, then there would be a shift in the demand
for beer. Shifts in the demand curve imply that the original demand relationship
has changed, meaning that quantity demand is affected by a factor other than
price. A shift in the demand relationship would occur if, for instance,
beer suddenly became the only type of alcohol available for consumption.
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30. CHAPTER 2: DEMAND AND SUPPLY
TOPIC
Conversely, if the price for a bottle of beer was $2 and the quantity supplied
decreased from Q1 to Q2, then there would be a shift in the supply of beer.
Like a shift in the demand curve, a shift in the supply curve implies that the
original supply curve has changed, meaning that the quantity supplied is
effected by a factor other than price. A shift in the supply curve would occur
if, for instance, a natural disaster caused a mass shortage of hops; beer
manufacturers would be forced to supply less beer for the same price.
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31. CHAPTER 2: DEMAND AND SUPPLY
Example: Supply and demand relationship
TOPIC
 Imagine that a special edition CD of your favorite band is released for $20.
Because the record company's previous analysis showed that consumers will
not demand CDs at a price higher than $20, only ten CDs were released
because the opportunity cost is too high for suppliers to produce more. If,
however, the ten CDs are demanded by 20 people, the price will subsequently
rise because, according to the demand relationship, as demand increases, so
does the price. Consequently, the rise in price should prompt more CDs to be
supplied as the supply relationship shows that the higher the price, the higher
the quantity supplied.
 If, however, there are 30 CDs produced and demand is still at 20, the price will
not be pushed up because the supply more than accommodates demand. In
fact after the 20 consumers have been satisfied with their CD purchases, the
price of the leftover CDs may drop as CD producers attempt to sell the
remaining ten CDs. The lower price will then make the CD more available to
people who had previously decided that the opportunity cost of buying the CD at
$20 was too high.
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32. CHAPTER 2: DEMAND AND SUPPLY
Equilibrium
TOPIC
 When supply and demand are equal (i.e. when the supply function and
demand function intersect) the economy is said to be at equilibrium. At this
point, the allocation of goods is at its most efficient because the amount of
goods being supplied is exactly the same as the amount of goods being
demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the
current economic condition. At the given price, suppliers are selling all the
goods that they have produced and consumers are getting all the goods that
they are demanding.
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33. CHAPTER 2: DEMAND AND SUPPLY
Class Task/Preparation/Activity
TOPIC
 Revise the following for next week Assignment 1 (Individual)
1) Law of demand
2) Law of supply
3) Demand curve
4) Supply curve
5) Increase in demand
6) Increase in supply
7) Shift vs. Movement
8) Equilibrium
9) Plotting graph
10) Analysis, based on all topic discuss.
Type of questions: Multiple Choice, Fill in the blanks, Structure, Analysis.
Tips: Read all today’s chapter.
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34. CHAPTER 2: DEMAND AND SUPPLY
References
TOPIC
Download directly from this link
 http://www.4shared.com/file/rGrBUbXr/Baeb602_02.html
 http://www.4shared.com/file/vV0RCkvD/Baeb602_02_Part2_.html
If you have facebook, please go to my page, click on
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35. CHAPTER 2: DEMAND AND SUPPLY
Exercise 2.5 – Individual
TOPIC
Answer all of the following:
1) Illustrate with a diagram what is demand?
2) Illustrate with a diagram what is supply?
3) Illustrate with a diagram what is equilibrium?
4) Plot the following within the same graph
a) A = When the quantity of x is 10, it’s equal to $20
b) B = When the quantity of x is 20, it’s equal to $40
c) C = When the quantity of x is 30, it’s equal to $60
Full name:
Student ID/ Passport / IC:
Subject code: BAEB602
Date:
Please submit before you leave class.
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