Professional Documents
Culture Documents
Definition of supply
Price Quantity
$0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
Supply Curve
Price of
Ice-Cream
Cone
$3.0 Price Quantity
0 $0.00 0
2
.50 0.50 0
2 1.00 1
.00 1.50 2
1 2.00 3
.50 2.50 4
1
.00
3.00 5
0
.50
Quantity
0 1 2 3 4 5 6 7 8 9 1 1 1 of Ice-
0 1 2 Cream
Determinants of supply
A movement P1 a
along the supply
curve due to the
changes in the
price of the good
itself. Q1 Q2
Quantity
Price
Changes in supply
S1 S2
$2.00
$1.50
Shortage Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Shortage:
When the price is below the equilibrium
price, the quantity demanded exceeds the
quantity supplied. There is excess
demand or a shortage. Suppliers will raise
the price due to too many buyers chasing
too few goods, thereby moving toward
equilibrium.
The Supply & Demand
for Tennis Shoes
$90
S
$60
$30
D
1,000 2,000 3,000 4,000 Q
The Supply & Demand
for Tennis Shoes
$90
S
Surplus
$60
Shortage
$30
D
1,000 2,000 3,000 4,000 Q
What causes a change in
market equilibrium?
A change in demand
A change in supply
What can cause a shift in a demand
curve?
S
$900
Shortage
$600
$300 D2
D1
4 8 12 16 Q
The Effects of Shift in Demand
on Market Equilibrium
S
Surplus
$20
$10 D1
D2
10 20 30 40
Increase in
Quantity
Supplied
Increase in
Equilibrium
Price
Increase in
Demand
Decrease in
Quantity
Demanded
Increase in
Equilibrium
Price
Decrease
in Supply
7. ELASTICITY OF DEMAND
Definition:
Elasticity means responsiveness or sensitivity.
Therefore elasticity of demand means the
responsiveness of demand due to the
changes of the factors that influence demand.
Types of Elasticity:
Price elasticity of demand
Cross elasticity of demand
Income elasticity of demand
Price elasticity of supply
i. Price Elasticity of Demand (Ep)
Q
ii. Inelastic demand (Ep < 1)
%Δ Q < %Δ P
Q
iii. Unitary elastic (Ep = 1)
%Δ Q = %Δ P
X
iv. Perfectly Elastic (Ep = ∞)
P0 D
Q
v. Perfectly Inelastic (Ep = 0 )
P2
P1
Q0 Q
Determinants of Price Elasticity of Demand
Availability of substitutes
Habits
Two possibilities:
Ec = +ve
- an increase in Py would increase the demand for
good x, goods x and y are substitutes
Ec = -ve
- an increae in Py would reduce the demand for
good x, goods x and y are complementary goods.
Formula:
Ec = % ∆ in Qx
% ∆ in Py
= ∆ Qx x Py0
∆ Py Qx0
= (Qx1 – Qx0) x Py0
(Py1 – Py0) Qx0
Example:
Price of Y Quantity x Quantity Y
RM10 60 15
RM18 40 25
RM25 20 30
= ∆ Qx x Py0
∆ Py Qx0
= (Qx1 – Qx0) x Py0
(Py1 – Py0) Qx0
= 30 - 25 x 18
25 - 18 25
= 0.51
Conclusion;
If Ec is positive, goods x and y are substitutes
Income Elasticity of Demand (Ey)
Three possibilities:
i. If Ey is positive = normal goods -
Ey >1 - luxury
Ey ≤ 1 – necessity
ii. If Ey is negative = inferior goods
iii. If Ey is zero = essential goods
Formula:
Ey = % ∆ in Q
% ∆ in Y
= ∆Q x Y
∆Y Q
= (Q1 – Q0) x Y0
(Y1 – Y0) Q0
Example:
Income Qty A Qty B Qty C
100 10 20 20
120 15 20 18
150 17 20 14
= 0.53
= - 0.27
Es =% Δ QS > % Δ P Q
P
S
2. Inelastic Supply
(fairly inelastic)
% change in quantity
supplied is less than
% change in price.
Q
Es =% Δ QS > % Δ P
S1
S2
Unitary Elastic
% change in
quantity supplied
is equal to the %
change in price
Es =% Δ QS > % Δ P
Q
Perfectly Inelastic
% change in quantity supplied is zero
despite the change in the price.
P
S
Perfectly Elastic
P0 S
Q
mathematical formula
= % Δ QS
%ΔP
= Δ QS x P0
ΔP Q0
= Q1 - Q0 x P0
P1 - P0 Q0
When the price of cars in RM 20,000 each the supply is 1000 units
per month. When price increase to RM 30,000 each, the supply is
1200 units per month.
Therefore, the elasticity of supply of cars is :-
= % Δ QS
%ΔP
= Δ QS x P0
ΔP Q0
= Q1 - Q0 x P0
P1 - P0 Q0
= 0.4
Factors Influencing Elasticity of Supply
1. TIME
In the short run, supply would be inelastic, it is not
possible to increase supply immediately in response to
change in price. However, in the long run, supply would
be more responsive to price changes, i.e. is more elastic.
combinations of
B
two goods which C
yields the same
or equal
0 Product X
satisfaction.
Indifference Curve
Properties of Indifference curve:
i. downward sloping – explains the tradeoff
between the two goods for the consumer
to be equally satisfied.
IC3
IC2
IC1
Product X
Budget Line
Budget line shows the alternative
combinations of two goods which can be
purchased with a given money income
based on the prices of the gods.
Budget Line:
Y
Given : Money income
= RM100, 4
Px = 20
Py = 25
Consumer will be
in equilibrium if the
indifference curve a
is tangent to the e
b IC1
0 X