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ECN1014 Introductory Economics

Lecture 2: Demand, Supply and the Market

Section A
Demand

The law of demand, the change in quantity demanded and the change in demand

Change in Quantity Demanded Change in Demand

price price

quantity quantity

Factors: Factors:
Price 1. Tastes and preferences
2. Number of Buyers
3. Income (increase)
-normal good (increase)
-inferior good (decrease)
4. Number and price of related goods
-substitutes
Pcoca Inc D decrease
Ppepsi remain D increase
Key observations: -compliments
Movement along the same curve Pi increase D decrease
Ppen remain D dec

5. Consumer expectations of future price

6. Government policies

Key observations:
Shift of the entire curve
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Section B
Supply

The law of supply, the change in quantity supplied and the change in supply

Change in Quantity Supplied Change in Supply

price price

quantity quantity

Factors: Factors:
Prices 1. Costs of production
2. Profitability of other products
3. Profitability of goods in joint supply
4. Random Shocks
5. Producer expectations
6. Number of sellers

Key observations:
Key observations:
Shift the entire curve
Movement along the curve
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Market Surplus Market Shortage

price

quantity

Remarks: Remarks:
At P1, Qs>Qd.
What they do during surplus?
sellers forced to decrease price to P2 in
order to clear the excess stock.
On the buyer’s side (Qd), at a lower price,
according to the law of demand, as P falls,
Qd increases from Qd to Qe. Movement
along the demand curve from Point A to C.
(since they are decrease price, they are
adjusting their demand)
On seller’s side, at a lower price, according
to the law of supply, as P falls, Qs
decreases from Qs to Qe. Movement along
the supply curve from point B to C.
Form equilibrium again at point C
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Self-Assessment Activity:

The multi-functionality of the mobile devices has displaced sales of digital cameras,
camcorders, and GPS navigation devices.

With reference to the above statement and the aid of demand-supply analysis, consider how the
‘multi-functionality of the mobile services’ has posed challenges for digital cameras,
camcorders, and GPS navigation devices.

Price

Surplus A
P1 B C
P2

D1
D2
0 Quantity
Q2 Q3 Q1

Step 1: Demand or Supply?

Demand decrease, shifting the demand curve leftwards from D1 to D2

Step 2: Shortage or Surplus?

(When D of those product change, and the price still at P1)
At the existing price of P1, there is surplus of AB (Quantity demanded at Q2< Quantity
supplied at Q3)

Step 3: Adjustment Process

As a result of surplus, the supplier of digital cameras, camcorders, and GPS navigation
devices could probably reduce the price from P1 to P2 so they can get rid of the surplus.

As a result of reducing of price, according to Law of Demand, consumers will increase

their purchases for digital cameras, camcorders, and GPS navigation devices since
they are cheaper now. Thus, the quantity of demanded for digital cameras, camcorders,
and GPS navigation devices increases from Q2 to Q3. This can be shown by the
movement along the new demand curve D2 from point B to C.

According to Law of Supply, digital cameras, camcorders, and GPS navigation

devices will decrease in supply because the price is now less profitable to them. Thus, the
quantity of supply decreases from Q1 to Q3. This is shown by the movement along the
supply curve from point A to C.
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Section D
Price Controls

Price Ceiling (Maximum Price) Price Floor (Minimum Price)

price price
S
D S Surplus
Pf

Pe Pe

Pc
D
Shortage

Qs Qe Qd quantity Qd Qe Qs quantity

Remarks: Remarks:
Purpose: Purpose:
To support consumers by making the price To support producers by allowing them to
of basic necessities more affordable. (Eg: receive a higher price, so as to raise their
Rent, rice) income. (Eg: Farmers, Fisherman)
Fixed Below Market Price Fixed above market price
Permanent Shortage (Qd> Qs) Permanent Surplus (Qs>Qd)
Problems: Problems:
1. Queeing – Big waste of time & 1. Need to build storage facilities to
resources because of waiting. keep the surplus – Expensive to
build and provide
2. Rationing – Leads to discrimination
(Suppliers allocate the scarce goods 2. Advertising - Encourage buyers to
by distributing only to preferred purchase
customers)
3. Firms have lower incentive to cut
3. Black Market – Price Higher cost – Protected by high prices.

4. Import from other countries due

to scarcity – Higher price,
worsening country’s balance of
payment.
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