ENGINEERING

ECONOMICS
BFC 4013
Demand & Supply
By : En. Mohd Luthfi Ahmad Jeni
University Tun Hussein Onn Malaysia
MARKETS DEFINED

POTENTIAL POTENTIAL
BUYERS SELLERS

MARKETS
 DEMAND DEFINED

P QD A schedule or a curve that shows the

$5 10 various amounts of a product that
4 20 consumers are willing and able to
3 35 purchase at each of a series of possible
2 55 prices.
1 80 DEFINITION OF DEMAND
Sum of goods and services available in the
market which are consumed and affordable by
the customers on every price level for specific
period of time.
 LAW OF DEMAND
• DEMAND LAW
Price (Px) Depletion of
– The price for a product is demand
D
inversely proportional to
B
the quantity demand. Expansion of
A demand

C
– DDx = f (Px) ceteris
paribus* D
DDx = a – bPx
0
Quantity Demand (DDx)
* Demand of product is directly
determined by price Figure 1A.1 Graph Demand for a Product
LAW OF DEMAND
An inverse relationship exists
between price and quantity
demanded
• As Price Falls…
…Quantity Demanded Rises
• As Price Rises…
…Quantity Demanded Falls
LAW OF DEMAND
• Diminishing Marginal Utility
LAW OF DEMAND
• Diminishing Marginal Utility
• Income Effect
LAW OF DEMAND
• Diminishing Marginal Utility
• Income Effect
• Substitution Effect
LAW OF DEMAND
• Diminishing Marginal Utility
• Income Effect
• Substitution Effect
• Demand Curve
• Individual and Market
Demand
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 5055 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80
35 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD
Connect the Points
4
$5 10
4 20 3
3 35
2 55 2

1 80
1
D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD What if
4
$5 10
4 20 3
Demand
3 35 Increases?
2 55 2

1 80
1
D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P Increase
CORN $5

P QD in Quantity
$5 1030
4
Demanded
4 2040 3
3 3560
2 5580 2 Increase
1 80 + in D’
1
Demand D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD What if
4
$5 10
4 20 3
Demand
3 35 Decreases?
2 55 2

1 80
1
D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P Decrease
CORN $5

P QD in Quantity
4
$5 10-- Demanded
4 2010 3
3 3520
2 5540 2 Decrease
1 8060 in
1
Demand D
D’
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
 DETERMINANTS OF
DEMAND
• Tastes
• Number of Buyers
• Income
– Normal (Superior) & Inferior Goods
• Prices of Related Goods
– Substitutes & Complements
– Unrelated Goods
• Expectations
 Demand Theory
• PRICE DEMAND
FLEXIBILITY Price (Px)
Percentage of change in quantity
Ep  Ep=0
Percentage of change in price
Ep<1

• TYPES OF PRICE DEMAND

E p= 
FLEXIBILITY
Ep>1
– Flexible Demand (Ep>1)
Ep=1
– Non-flexible Demand (Ep<1)
– Single flexible Demand (Ep=1) 0

– Imperfect flexible Demand (Ep=0)
Quantity on demand (DDx)
Figure 1A.3 Graph showing Price Demands with
– Perfect flexible Demand (Ep= ) Different Flexibilities
 Demand Theory
• POINT DEMAND FLEXIBLE 3
E A 5  3
• EXAMPLE 1A Price (Px) p
5
2
E B 5 1
Determine
E  ( )
p the point
Percentage of change in quantity
Percentage of change in price
p
10
1 1
flexibility
E  ( )
p  for each types of
Q P
P Q
o
D A E C  5
p

15 3
0
3
demand below: P B
2
Q C
POIN PRICE 1
T (RM) QUANTITY D

A 3 5 0 5 10 15
Quantity on demand (DDx)
B 2 10
C 1 15 Figure 1A.4 Graph showing demand of different
flexiblibilty
 Demand Theory
• RELATIONSHIP BETWEEN PRICE CHANGE (P), TOTAL REVENUE (TR)
AND FLEXIBLE PRICE DEMAND (Ep)
– TR = P x Q
• TR : Total Revenue
• P : Price of Product
• Q : Quantity of Product

– P is inversely proportional with Q

• P ascending, Q descending
• P descending, Q ascending

– TR depend on the flexible demand value for the products (Ep)

• Effect on Price ascending
– Non-flexible Demand Ep <1 :P xQ = TR
– Flexible Demand Ep >1 :P xQ = TR
• Effect on Price descending
– Flexible Demand Ep >1 :P xQ = TR
– Non-flexible Demand Ep <1 :P xQ = TR
 Demand Theory
• EXAMPLE 2A • RESULT
– When Ep>1
P Q Ep TR • Price (P) ascending from RM3 to
RM6 will decreases TR from
6 0 infinity 0 RM900 to RM0
5 100 5 500 • Price (P) descending from RM6
to RM3 will increases TR from
4 200 2 800 RM0 to RM900
3 300 1 900 – When Ep<1
2 400 0.5 800 • Price (P) ascending from RM1 to
RM3 will increases TR from R500
1 500 0.2 500 to R900
0 600 0 0 • Price (P) descending from RM3
to RM1 will decreases TR from
RM900 to RM500
– When Ep=1 : TR MAXIMUM
 Demand Theory
• FLEXIBLE INCOME (EI) • CROSS FLEXIBILITY(EXY)
– Determine percentage of – Determine percentage of change
in quantity demand based on 1%
change in quantity demand price change on other products.
based on 1% change of
income – Result:
• EXY > 1:
Ascending price on product Y
– Can be used to categorize will increase the quantity
products: demand on product X ( X will
replace Y).
• LUXURY : EI > 1
• NORMAL : 0 < EI < 1 • EXY < 1:
Percentage of change on :quantity
•EI NECESSITY EI < 0 Ascending price on product Y
Percentage of change on income
will decrease the quantity of
Q Io
EI   demand for product X
I Q 0
(X&Y– complimentary products)

Percentage of demand change for X

EXY 
Percentage of price change for product Y
 Demand Theory
Factors to changes on flexible
price demand (Ep)
1. Closed alternatives to products
2. Type of products
3. Customers’ income
4. Normal demand of customers
5. Percentage of income spent on
certain products.
6. Time frame to make decision
Conclusion:
• If product demand is flexible
(Ep>1), the seller need to lower the
price of product .
• If product demand is non-flexible
(Ep<1 ), the seller need to increase
the price.
• If product demand is single flexible
(Ep=1), change in price does not
effect the TR.
SUPPLY / OFFER DEFINED
CORN
- Quantity of product and services affordable by P QS
the producer for sale in the market for every price $1 5
range for specific period of time. 2 20
- Supply is a schedule or a curve showing 3 35
the amounts of a product that producers 4 50
are willing and able to make available for
sale at each of a series of possible prices.
5 60
LAW OF SUPPLY / OFFER
A direct relationship exists between price and
quantity supplied •

• As Price Rises…
…Quantity Supplied Rises
• As Price Falls…
…Quantity Supplied Falls
 Supply / Offer Theory
OFFER LAW

Price and quantity of product offered : POSITIVE

RELATIONSHIP (+)
– When price ascends, producer will increases the quantity of
offer to
achieve high profit.
– When price descends, the producer will decreases the quantity
of offer, to avoid lost.
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 5 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 3035 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P
$5 S CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5
Connect the Points
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P
$5 S CORN
P QS
4
What if $5 60
3
Supply 4 50
3 35
2
Increases? 2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Increase S’
$5 S CORN
in P QS
4
Supply $5 6080
3 4 5070
3 3560
2
Increase 2 2045
1 in Quantity
1 530
Supplied
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P
$5 S CORN
P QS
4
What if $5 60
3
Supply 4 50
3 35
2
Decreases? 2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn Decrease
P S’
$5 in S CORN
Supply P QS
4
$5 6045
3 4 5030
3 3520
2 Decrease 2 20 0
in Quantity 1 5 --
1
Supplied
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
 Supply / Offer Theory
Market Price Market Price
Depletion in Expansion in
Expansion in offer offer
Depletion in offer
S2 S S1
offer B S
4
A
3 P
C
2

1 S
S2 S S1

0 20 30 40 0 Q2 Q Q1
Quantity of product offered Quantity of product offered

Figure 1A.6 Offer Graph by seller Figure 1A.7 Change in offer for similar price
 Supply / Offer Theory
• FLEXIBLE OFFER flexible • FLEXIBLE POINT OFFER

Percentage of quantity change offered

ES  Q Po
Percentage on price change ES  
P Q0
• TYPES OF FLEXIBLE PRICE
OFFER
– Flexible Demand (ES>1)
– Non-flexible demand (ES<1)
– Single flexible demand (ES=1)
– Imperfect flexible demand(ES=0)
– Perfect flexible demand (ES= )
 Offer Theory
• KEANJALAN PENAWARAN
Change Factors on
Flexible Price Offer (ES) Market Price

S0 S1
1. Time Factor
P1 S2
- Current term
- Short term P

- Long term

2. Characteristic of product
0 Q0 Q1 Q2
3. Manufacturing factor used
Quantity of products offered
- Fixed factor
Figure 1A.9 Offer flexible graph
- Variable factor
 Supply / Offer Theory
Factor Cost
Technology
Of Production

Expected Sum of
Price Producers

Price of
Climate
other product

Tax
and Subsidy
Factors on Decision of Offer
Figure 1A.8
 DETERMINANTS OF
SUPPLY
• Resource Prices
• Technology
• Taxes & Subsidies
• Prices of Other Goods
• Price Expectations
• Number of Sellers
 DETERMINANTS OF
SUPPLY
• Resource Prices
• Technology
Combining
• Taxes & with
Subsidies
• Prices Demand
of Other Goods
• Price Expectations
• Number of Sellers
 MARKET DEMAND &
SUPPLY
BUSHELS BUSHELS
OF CORN OF CORN
MARKET MARKET
P QD 200 DEMAND P QS 200 SUPPLY

$5 10 B 2,000 $5 60 S 12,000

4 20
3 35 x U 4,000
Y 7,000
E
4 50
3 35 x E
L
L
10,000
7,000
2 55 11,000 2 20 4,000
R E
1 80 16,000 1 5 1,000
S R
S
l l y…
ica
EQUILIBRIUM a ph
Gr
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5 S MARKET
P QD P Q
4
$5 2,000 Market $512,000
S
Clearing
4 4,000 3
Equilibrium 410,000
3 7,000 3 7,000
211,000 2
2 4,000
116,000 1 1,000
1
D
o 2 4 6 78 10 12 14 16 Q
Quantity of Corn
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5
Surplus S MARKET
P QD At a $4 price P Q
4
$5 2,000 more is being $512,000
S

4 4,000 3 supplied than 410,000

3 7,000 3 7,000
demanded
211,000 2
2 4,000
116,000 1 1,000
1
D
o 2 4 6 78 10 12 14 16 Q
Quantity of Corn
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5 S MARKET
P QD P Q
At a $2 price
4
$5 2,000 more is being $512,000
S

4 4,000 3 410,000
demanded than
3 7,000 3 7,000
supplied
211,000 2
2 4,000
116,000 Shortage 1 1,000
1
D
o 2 4 6 78 101112 14 16 Q
Quantity of Corn
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5
Surplus S MARKET
P QD P Q
4
$5 2,000 $512,000
S

4 4,000 3 410,000
3 7,000 3 7,000
211,000 2
2 4,000
116,000 Shortage 1 1,000
1
D
o 2 4 6 78 101112 14 16 Q
Quantity of Corn
 Market Equilibrium
• MARKET ECONOMY
– Demand Vs Offer of product Price
– Demand : USER
D S
– Offer : PRODUCER 50

• E
MARKET 30
A place where buyer and seller interact
between one another. 10
S D
• MARKET EQUILIBRIUM
0 200 600 1000
Quantity offered by the producer Quantity
at a particular price = quantity
demanded by the buyer at that Figure 1A.10 Example of relationship between
price & quantity of product X
price.
 Market Equilibrium
• DEMAND FORMULA

QD = a – bP Note

QD : quantity demand
• OFFER FORMULA QS : quantity offer@supply
P : target price
a dan f : constants
QS = f + gP b : demand gradient
g : offer gradient
• FOR EQUILIBRIUM TO Facts
OCCUR
QD = Qs Gradient of demand (b) : ( - )
Gradient of offer (g) : ( + )
or
a – bP = f + gP
 Change of Point of Equilibrium

Price D1 Price S2

D S D S
D2 E1 E2 S1
P1 E0 P2 E0
P0 P0 E1
E2 D1 S2
P2 P1
D S
S D2 S1 D

0 Q2 Q0 Q1 0 Q2 Q0 Q1
Quantity Quantity

Figure 1A.11 Demand Change – Offer Fix Figure 1A.12 Offer Change – Demand Fix
MARKET EQUILIBRIUM
• Equilibrium Price & Quantity
• Rationing Function of Prices
• Changes in Demand
• Changes in Quantity
Demanded
• Changes in Supply
• Changes in Quantity Supplied
 Complex Cases
Multiple Shifts…
• Supply Increases;
Demand Decreases
– Prices Decrease
– Quantity Indeterminate
• Supply Decreases;
Demand Increases
– Price Increases
– Quantity Indeterminate
 Complex Cases
Multiple Shifts…
• Supply Increases;
Demand Increases
– Prices Indeterminate
– Quantity Increases
• Supply Decreases;
Demand Decreases
– Price Indeterminate
– Quantity Decreases
Government Set Prices
• Price Ceilings
–Shortages
–Rationing Problem
–Black Markets
–Rent Controls
• Price Floors
–Surpluses
 Price Ceiling
•A maximum price that sellers may charge for a
good, usually set by government.

• Excess Demand
(Shortage)
Created by a
Price Ceiling
 Price ceiling
• Price Rationing :The process by which the market system
allocates goods and services to consumers when quantity
demanded exceeds quantity supplied.
• Ration coupons Tickets or coupons that entitle
individuals to purchase a certain amount of a given
product per month.
• Black market A market in which illegal trading takes
place at market-determined prices.
•PRICE FLOORS

•Price floor A minimum price below

which exchange is not permitted.

•Minimum wage A price floor set

under the price of labor.

•Agricultural Products
 Effect of Tax & Subsidy
• TAX
– Determined by government
• Commonly need to be paid by producer and consumers
– AIM :
• Source of revenue
• Reducing usage of products
• SUBSIDY
– Offer by government, in term of aid.
– Given to the producer.
– AIM :
• To reduce cost engaged by the producer
• Reducing price of product.
• To help local producer to be at par with foreign producer (high quality
product but cheaper price)
 Effect of Tax – Market Equilibrium
TAX PAID BY CONSUMERS > PRODUCER TAX PAID BY CONSUMERS < PRODUCER

Price S2 Price S2
D
D
B S1
P2 B P2
S1 Consumer A
P1
Consumer E
Producer D
SS22 E S2
P1 A P0
Producer F
P0
F D S1
S1

0 Q2 Q1 0 Q2 Q1
Quantity Quantity
Figure 1A.13 Tax paid by consumer and Producer Figure 1A.14 Tax paid by consumer and
(Imperfect flexible Product) Producer (Flexible Product)
 Effect on Tax- Market Equilibrium

TAX PAID BY CUSTOMERS CUSTOMER NOT WILLING TO BUY

(ex : luxury products, highly income group) PRODUCT IF P >OP1

Price S2 Price
D S2 S1
P2 S1

B A
P1 D
S2
P1

S1 S2 S1

0 Q 0 Q2 Q1
Quantity Quantity
Figure 1A.15 Tax paid by Customer & Producer Figure 1A.16 Tax paid by Customer & Producer
( Imperfect flexible Product Demand) (Perfect flexible Product Demand)
Effect on Subsidy- Market Equilibrium

Price S1
D
A
P1 S2
Customer
B
P2
S2 C
Producer D
P0
S2 E

0 Q1 Q2
Quantity

Figure 1A.17 Subsidy & its effect on Demand

 Government Intervention – Price System
PROTECTS PRODUCER’S RIGHT PROTECTS CUSTOMERS’ RIGHT

Price
Price
D1 S
D S0
E0 D0 E1
S1
P1 P1
A B A B Maximum
P2 P2 Price
E1 Minimum P0 E0
P1 Price
S0 D1

S1 D S D0

0 Q2 Q1 0 Q0 Q1
Quantity Quantity
Figure 1A.19 Maximum Price Concept
Figure 1A.18 Minimum Price Concept