NSS Exploring Economics 1 (3rd Edition)

Revision Notes

Chapter 3 Demand and supply

Demand and quantity demanded

1. Meaning of demand and quantity demanded:

Demand Quantity demanded

The quantities that a buyer is The quantity that a buyer is willing
willing and able to buy at different and able to buy at a particular price
prices over a period of time, other over a period of time.
factors being constant.

2. Demand shows the relationship between the prices of a good and the quantities demanded.

3. Demand is wants supported by purchasing power.

4. Quantity demanded (plan to buy) ≠ Quantity actually bought

5. To find the market demand, we add up the quantities demanded of all individual buyers in the
market at different prices. This process is called horizontal summation.

Law of demand

6. The law of demand states that the lower (higher) the price of a good, the greater (smaller) its
quantity demanded, other factors being constant (i.e., ceteris paribus).

7. The law of demand implies that:

a. The quantity demanded and the price of a good are negatively related.
b. The demand curve is downward sloping.

Demand schedule Demand curve

Price Quantity demanded P ($ / unit)
($ / unit) (units / week) 5
5 1 4
4 2 3

3 3 2
1
2 4 D
Q (units /
0
1 5 1 2 3 4 5
week)

NSS Exploring Economics 1 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 3)
Supply and quantity supplied

8. Meaning of supply and quantity supplied:

Supply Quantity supplied

The quantities that a seller is The quantity that a seller is willing
willing and able to sell at different and able to sell at a particular price
prices over a period of time, other over a period of time.
factors being constant.

9. Supply shows the relationship between the prices of a good and the quantities supplied.

10. Supply is willingness to sell supported by the ability to sell.

11. Quantity supplied (plan to sell) ≠ Quantity actually sold

12. To obtain the market supply, we add up the quantities supplied of all individual sellers in the
market at different prices.

Law of supply

13. The law of supply states that the higher (lower) the price of a good, the greater (smaller) its
quantity supplied, other factors being constant.

14. The law of supply implies that:

a. The quantity supplied and the price of a good are positively related.
b. The supply curve of a good is upward sloping.

Supply schedule Supply curve

Price Quantity supplied P ($ / unit)
($ / unit) (units / week) S
5
5 5 4
4 4 3

3 3 2
1
2 2
Q (units /
1 1 0 1 2 3 4 5
week)

NSS Exploring Economics 1 (3rd Edition) 2 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 3)
Determination of equilibrium price

Price Quantity demanded Quantity supplied

($ / unit) (units / week) (units / week)
Surplus (= QS – Qd)
5 2 10
= 8 units
4 4 8
3 6 6 Equilibrium
2 8 4
Shortage (= Qd – QS)
1 10 2 = 8 units
Price
Surplus S
5

3 Equilibrium

1
Shortage D
Quantity
0 2 6 10

15. Market equilibrium: Quantity demanded = Quantity supplied

16. Excess demand (or a shortage): Quantity demanded > Quantity supplied
It occurs when the price is set below the equilibrium price. The price will tend to rise.

17. Excess supply (or a surplus): Quantity supplied > Quantity demanded
It occurs when the price is set above the equilibrium price. The price will tend to fall.

18. Shortage ≠ Scarcity:

Scarcity Shortage
Qd > QS at zero price
Meaning Qd > QS at a price below Pe
(Quantity wanted > Quantity available)
Cause Unlimited wants Price is fixed below Pe

NSS Exploring Economics 1 (3rd Edition) 3 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 3)
Relative price and the law of demand

19. Full price = Money price + Non-money price

20. Relative price is the price of a good expressed in terms of another good.
Relative price of Good X (in terms of Good Y)
Money prices of Good X
=
Money prices of Good Y

21. The lower (higher) the relative price of a good, the greater (smaller) the relative quantity
demanded of the good, other factors being constant.

22. When the same unit cost is added to the money prices of higher-priced and lower-priced goods:
 The relative price of the higher-priced good will decrease.
 The relative price of the lower-priced good will increase.
According to the law of demand, people will buy relatively more of the higher-priced good. The
average quality of the good will increase.

NSS Exploring Economics 1 (3rd Edition) 4 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 3)