Unit 2 · Topic 1
Demand & Suppy
and Price Determination
Lesson Objectives
By the end of the lesson, you should be able to
1. Define the term “Demand” and “Supply”
2. Distinguish the difference between “Quantity
Demanded” and “Demand”
3. Interpret the features of Demand and Supply Curves
4. Understand how prices in a market can be determined
by intersections of demand and supply curves.
What is a Market?
Market
A market is a place where two parties
can gather to facilitate the exchange
of goods and services.
What does
Demand mean?
Needs ≠ Wants = ? Demands
Which apple is your demand?
Demand is defined as consumers’
willingness to purchase and ability
to pay for goods and services.
Effective Demand
Complete your Demand
Schedule
Imagine your favourite chocolate bar was on offer at a
number of possible prices. How many bars of chocolate
would you be prepared to buy each month at each price?
Price of a Chocolate Bar Your Demand Per
(Yuan) Month?
5 ?
10
15
20
25
30
Discussion
Short Discussion
○ What information does the curve tell?
● What is the relationship between price and
quantity demanded?
Demand Curve
Demand Curve is downward sloping
because price and quantity demanded
a r e in ve r se ly r e la te d
As price increases, quantity demanded
c on tr a c ts, vic e ve r sa - Law of D e m a nd
From this diagram, when price decreases
from PA to PB, quantity demanded
extends from QA to QB, indicating a
movement along the demand curve from
Point A to B.
C ha nge s in pr ic e w ill r e sult in a c hange
in qua nt it y de m a nde d, N OT de m and
It is called quantity demanded extension
o r c on tr a c tio n
1 Income
Determinants of 2 Taste & Prefence
Demand
3 Substitutes & Complements
Market demand will be influenced by
several important determinants,
causing a shift of the demand curve 4 Population
5 Advertisement
Factor 1 - Income
Higher income gives a higher purchasing power, and hence a
higher demand from consumers.
Normal Goods
vs Inferior Goods
Normal Goods: Demand for a
product rises when your income rises
Inferior Goods: Demand for a
product falls when your income rises
Factor 2
Taste & Preference
Consumer taste and preference on a product
will determine whether there is a demand for
this pr o du c t or no t.
People hating coriander will never spent a
single cent on it, whereas those who love it
w ill lik e ly p ur c ha se a lo t.
Factor 3
Substitutes and
Complements
Substitutes (替代品)
• The increase in the price of Good X will increase
the demand for Good Y as consumers will look
for cheaper alternatives to purchase.
• The decrease in the price of Good X will
decrease the demand for Good Y
Complements (组合商品)
• The increase in the price of Good X will
decrease the demand for Good Y as they must be
purchased together.
• The decrease in the price of Good X will
increase the demand for Good Y
Factor 4
Advertisement
The use of advertisement and celebrity endorsement
will influence and change consumer taste and
preference and therefore affect demand.
That is the reason why you will see advertisements
everywhere
Factor 5 - Population
Larger the population, higher the demand; vice
versa
Determinants of Demand
Determinants
Explanation
(Non-Price Factors)
• Demand for Normal goods will increase when income increases, vice versa; (Direct
Income relationship)
• Demand for Inferior goods will increase when income falls, vice versa; (Inverse relationship)
Preference • Change in taste and preference will directly impact the demand for a good
• Ads serve the aim to influence consumer preference
Advertisement
• e.g. Celebrity Endorsements
• Increase in the price of substitute goods will increase demand for their rival products, vice
Substitutes
versa
• Increase in the price of a product will lead to a decrease in the demand of its complements,
Complements
vice versa
• Increase in the size of the population is likely to increase the demand for various goods and
Population
services.
Shifts in Demand Curves
A c ha nge in m ar ke t de m a nd ( o th e r
tha n pr ic e s) w ill r e sult in shif t s of
de ma n d c ur ve s
Shifting Rules
An increase in demand will cause the
demand curve to shift to the right,
and a decrease in demand will shift
de ma n d c ur ve to th e le f t
Based on the graph, an increase in
demand causes a rightward shift of
the demand curve from D to D1,
indicated by an increase in quantity
sold from 400 to 500 units whilst
pr ic e r e ma ins u nc h a n ge d
Demand vs Quantity Demanded
Category Demand Quantity Demanded
Definition Willingness & Ability Amount purchased
Description of Change Increase or Decrease Contraction or Extension
Determinants Income, Preference etc Price
How it changes Leftward or Rightward Shift Movement along Demand curve
Impact of a Price Change Nil Change in Quantity Demanded
Practice Time!
Task: Show how the following might affect the
demand for coffee
○ A decrease in the price of coffee
○ An increase in the price of sugar
○ An increase in the price of tea
○ An increase in the price of leather
○ An increase in the income of the average coffee
drinker
○ A new scientific study shows that too much caffeine
can cause anxiety
Supply
Supply is defined as the
suppliers’ willingness to
produce goods and services and
abilit y to se ll a t d if f e r e n t p r ic e s.
Quantity Supplied is the
amount of goods and services
a v a ila b le to se ll to c ustome r s.
There is a direct relationship
between price and quantity supplied
In the diagram, when price moves up
from P1 to P2, quantity supplied
extends from Q1 to Q2.
Determinants of 1 Cost of Production (COP)
Supply
Supply will also be influenced by 2 Tax & Subsidy
several key factors and cause a shift
of the supply curve.
3 Technology Advancement
4 Natural Disasters
5 Future Expectation
Cost of Production (COP) Change in Cost of Production
will have a profound impact on
supply due to the profit-driven
nature of suppliers.
Increase in CoP will shift
supply curve to the left,
suppliers will produce less
Decrease in CoP will shift
supply curve to the right,
suppliers will have the
incentive to produce more.
Different Ingredients
Tax and Subsidy
Taxes are legal contributions levied on individuals
or corporations by the government as tax revenues.
An increase in tax will increase CoP and therefore
decrease supply, vice versa.
Subsidies are a form of financial support given by
the government to promote the production of certain
goods and services.
An increase in subsidies provided will decrease CoP
and therefore increase supply, vice versa.
Technology
Advancement
With the use of advanced technology,
more outputs can be produced within the
same amount of time. Therefore, CoP
decreases and supply will increase.
Natural Disasters
Natural disasters will
destroy everything,
and hence supply will
be cut off immediately
Future
Expectations
If suppliers expect that there is going to
be a big rise in price in the future, they
will tend to produce more and hence
supply will increase.
logo
Determinants of Supply
Determinants
Explanation
(Non-Price Factors)
• Increase in CoP will decrease profit margin for suppliers and cause in a decrease in supply,
Cost of Production
vice versa.
• Imposing a tax will increase CoP and hence decrease supply, vice versa
Taxes/Subsidies
• Providing a subsidy will decrease CoP and hence increase supply, vice versa.
Technology/
• Improvement in techonology/productivity will increase supply, vice versa
Productivity
Natural Disaster • Natural disaster will decrease supply as all will be destroyed
• If suppliers is optimistic about the future and expect an increase in the market price, supply
Future Expectations
will increase, vice versa.
Demand vs Supply
Comparison Demand Supply
Consumers’ willingness to Suppliers’ willingness to supply
Definition
purchase and ability to pay and offer to sell at different prices
Relationship
Inverse relationship Direct relationship
with Price
Curve Trending Downward sloping Upward sloping
Income, Preferences, Cost of Production,
Determinants
Substitutes etc Natural Disaster etc
↑ DD/SS → Rightward shift of DD/SS curve
Shifting Rules
↓ DD/SS → Leftward shift of DD/SS curve
When Demand
Intersects with Supply...
In a free market, when demand intersects with supply,
it is when the market price will be determined.
Price Mechanism (价格机制) refers to the system in
which the market forces of supply and demand
interact and determine a price that will allocate
scarce resources between competing uses.
The system is also referred as the “Insivible Hand”
Adam Smith
Father of Modern Economics
When Demand
Intersects with Supply
The intersection point of demand
and supply curve is where the
market p r i c e i s s e t . I t i s a l s o c a l l e d
“ Equilibrium Price”
At this point, there is no tendency
for market price or quantity to
change
i.e. Quantity demanded = Quantity
Supplied
Market Clearing Point
Market
Disequilibrium
When quantity demanded and
quantity supplied are not equal
○ Shortage
○ Surplus
Let’s explore the 2 conditions
using graphs!
Market At prices higher than the
Disequilibrium market price, suppliers tend to
supply more than consumer
demand, causing Excessive
Supply or Sur plus. ( QS>QD -
供大于求)
A t pr ic e s lo w e r tha n the ma r ke t
price, quantity demanded by
consumers exceeds what firms
will supply, causing Excessive
Demand or Shortage (QD>QS
- 供不应求)
L a w o f D e ma n d a nd Su pp ly
Price Changes
Increase in market demand or
supply will cause a rightward shift
of demand or supply curve, vice
versa.
Increase in demand will increase
the market price, increase in
supply will decrease the market
price, vice versa.
Price Changes
Shifts of demand and supply curves
will result in new equilibrium prices
in the market.
Practice Time
With the help of diagrams, determine how
each of the following changes will affect
the equilibrium price and equilibrium
quantity in the market of ham.
○ An increase in the price of chicken
drumstick
○ An increase in the price of pig feed
○ A simultaneous increase in the price of
chicken drumstick and the price of pig
feed.
