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Demand
• Demand: desire/want/plan and ability to buy
• Demand refers to the whole demand curve
• Demand schedule: a table which shows the
quantity demanded of a good at different prices at
a certain time.
• Demand curve is a graphical representation of the
demand schedule.
• Quantity demanded: the amount the consumer
plans to buy at a particular price
CE : demand and supply
1
Demand
• Individual demand curve/schedule
• Market demand: horizontal summation of
the individual demand curves/schedules.
CE : demand and supply
2
The Demand Curve and the Law of
Demand
The demand curve for a good is a graphical
presentation of the demand schedule. It
shows the quantity demanded for a good at
different prices.
It is downward sloping.
CE : demand and supply
3
Price
P1
P2
D
Quantity
Q1
Q2
The CE
demand
for good X
: demand curve
and supply
4
The Law of Demand
• The law of demand states that the quantity
demanded of a good decreases as the price
of the good increases, vice versa, other
things constant.
• The demand curve is downward sloping.
• The law of demand is represented by a
movement along the demand curve.
CE : demand and supply
5
Factors Affecting the Demand for a Good
•
•
•
•
•
•
•
•
The price of the good
The income of the consumer
The price of other related goods
The change in preference/fashion
Expectation of future price
The size of the population
Derived demand ( factors of production )
Other possible factors
CE : demand and supply
6
Price of the good: Change in quantity
demanded
• The higher the price, the lower the quantity
demanded will be, vice versa, other things
constant. ( The law of demand )
• It is represented by a movement along the
demand curve
CE : demand and supply
7
Movement along the Demand Curve
Price
P1
P2
D
Q1
CE : demand and supply
Q2
Quantity
8
Shift of the Demand Curve: Change in
Demand
• The income of the consumer: Normal and
inferior good
When the income of a consumer increases, the
quantity demanded of a good increases at each
price level. The good is called a normal good
( Positive income effect )
For some goods, when income increases, the
quantity demanded decreases at each price level.
These goods are called inferior goods. ( Negative
income effect )
CE : demand and supply
9
Shift of the Demand Curve
• The price of other goods
Substitute goods ( Good X and Good Y )
When the price of good X increases, the
demand for good Y increases.
Complements ( Good X and Good Y )
When the price of good X increases, the
demand for Good Y decreases.
CE : demand and supply
10
Shift of the Demand Curve
• The change in preference/fashion
The demand for a good increases when it
becomes fashionable to consume the good.
CE : demand and supply
11
Shift of the Demand Curve
• Expectation of future price
When consumers expect the price of a good
to increase in the future, they will consume
more of it now.
CE : demand and supply
12
Shift of the Demand Curve
• The size of the population
An increase in the size of population will
increase the demand for goods.
CE : demand and supply
13
Shift of the Demand Curve
• Derived demand ( the demand for factors of
production ) ( 衍生 需求 )
When the demand for a good increases, the
demand for the factor inputs will increase.
For instance, when the demand for medical
services increases, the demand for doctors
and nurses also increases.
CE : demand and supply
14
Shift of the Demand Curve: Increase in
demand
Price
P
D2
D1
Q1
CE : demand and supply
Q2
15
Quantity
Shift of the Demand Curve: Decrease in
demand
Price
P
D1
D2
Q2
CE : demand and supply
Q1
Quantity
16
Shift of the Demand Curve
• Increase in demand
• Decrease in demand
When the demand for
When the demand for
a good increases, the
a good decreases, the
demand curve for the
demand curve for the
good shifts to the right.
good shifts to the left.
More of the good is
Less of the good is
d e m a n d ed a t eac h
demanded at each
p r i c e l e v e l .
p r i c e l e v e l .
CE : demand and supply
17
Supply
• Supply: desire/want/plan and ability to sell
• Supply refers to the whole supply curve.
• Supply schedule: a table which shows the quantity
supplied of a good at different prices, at a certain
time.
• Supply curve is a graphical representation of the
supply schedule.
• Quantity supplied: the amount the consumer plans
to sell at a particular price
CE : demand and supply
18
Supply
• Individual supply curve/schedule
• Market supply: horizontal summation of the
individual supply curves/schedules.
CE : demand and supply
19
The Supply Curve
The supply curve of a good is a graphical
presentation of the supply schedule. It shows the
quantity supplied of a good at different prices.
It is upward sloping.
CE : demand and supply
20
Price
S
P1
P2
Q2
Q1
CE : demand and
supply
Quantity
21
Factors affecting the Supply of a Good
•
•
•
•
•
•
•
•
The price of the good
Price of other goods
Price of factor input/Production cost
State of technology
Per unit sales tax
Per unit subsidy
Number of sellers
Other possible factors.
CE : demand and supply
22
The Price of the Good:Change in
Quantity Supplied
• The higher the price, the higher the quantity
supplied will be, vice versa, other things
constant.
• It is represented by a movement along the
supply curve
CE : demand and supply
23
Movement along the Supply Curve
Price
S
P1
P2
Q2CE : demand
Q1and supply
24
Quantity
Shift of the Supply Curve: Change in
Supply
• Price of other goods
• Competitive supply ( Good X and Good Y )
When the price of Good X increases, the supply of
Good Y decreases.
• Joint supply ( Good X and Good Y )
When the price of Good X increases, the supply of
Good Y also increases.
CE : demand and supply
25
Shift of the Supply Curve: Change in
Supply
• Price of factor input/Production cost
An increase in the cost of production will lead
to a decrease in the supply of the good.
CE : demand and supply
26
Shift of the Supply Curve: Change in
Supply
• State of technology
An improvement in the state of technology
will lead to an increase in the supply of a
good.
CE : demand and supply
27
Shift of the Supply Curve: Change in
Supply
• Per unit sales tax (t)
The imposition of a per unit sales tax ‘t’ leads
to a decrease in the supply of the good. The
vertical distance of the supply curves measures
the per unit sales tax ‘t’.
CE : demand and supply
28
Shift of the Supply Curve: Change in
Supply
• Per unit subsidy (s)
The imposition of a per unit subsidy ‘s’ leads to
an increase in the supply of the good. The
vertical distance of the supply curves measures
the per unit subsidy ‘s’.
CE : demand and supply
29
Shift of the Supply Curve: Change in
Supply
• Number of sellers
An increase in the number of sellers leads to
an increase in the supply of the good.
CE : demand and supply
30
Shift of the Supply Curve: Increase in supply
Price
S1
S2
P
Q1
Q2
CE : demand and supply
Quantity
31
Shift of the Supply Curve: Decrease in supply
S2
Price
S1
P
Q2
CE : demand and supply
Q1
Quantity
32
Shift of the Supply Curve
• Increase in supply
• Decrease in supply
When the supply of a
When the supply of a
good increases, the
good decreases, the
supply curve of the
supply curve of the
good shifts to the right.
good shifts to the left.
More of the good is
Less of the good is
supplied at each price
supplied at each price
level.
level.
CE : demand and supply
33
Equilibrium Price and Quantity
Price
S
Excess supply
P1
P*
P2
Excess demand
D
Q*
CE : demand and supply
Quantity 34
Change in Equilibrium Price and Quantity
Price
S
P2
P1
D2
D1
Q1
Q2
: demand and supply
IncreaseCEin
demand
Quantity
35
Change in Equilibrium Price and Quantity
Price
S
P1
P2
D2
Q2
Q1
Decrease
in demand
CE : demand
and supply
D1
Quantity
36
Change in Equilibrium Price and Quantity
Price
S1
S2
P1
P2
D
Q1 Q2
Increase
in and
supply
CE : demand
supply
Quantity
37
Change in Equilibrium Price and Quantity
Price
S2
S1
P2
P1
D
Q2
Q1
Decrease
in supply
CE : demand and supply
Quantity
38
Change in Equilibrium Price and Quantity
Question: What happen to the
equilibrium price and quantity when
both the demand and supply change?
CE : demand and supply
39
Quantity demanded, Quantity supplied and
Quantity transacted
• Quantity demanded refers to the quantity of a
good a consumer plans to buy at each price.
• Quantity supplied refers to the quantity of a good
a consumer plans to sell at each price.
• Quantity transacted/exchanged = quantity bought
and sold
It refers to the quantity of a good a consumer
actually buys/a producer actually sells at each
price.
CE : demand and supply
40
Quantity demanded, Quantity supplied and Quantity transacted
Price
S
P2
P1
D
Quantity
Q2
Q1
Q3
At P1, Quantity transacted = Quantity demanded and supplied = Q1
CE : demand and supply
At P2, Quantity transacted = Q2; Quantity demanded < Quantity supplied
41
Quantity demanded, Quantity supplied and Quantity transacted
Price
S
P1
P3
D
Quantity
Q4
Q1
Q5
At P1, Quantity transacted = Quantity demanded and supplied = Q1
At P3, Quantity transacted = Q4; Quantity demanded > Quantity supplied
CE : demand and supply
42
Elasticity of demand
Definition
The price elasticity of demand measures
the percentage change in quantity
demanded in response to a percentage
change in the price of a good.
CE : demand and supply
43
Elasticity of demand
= % change in quantity demanded
% change in price
CE : demand and supply
44
Elasticity of demand ( Ed )
Types of Ed
Meaning
Value
Elastic
%  in Qd > % in
P
Ed > 1
Inelastic
%  in Qd < % in
P
Ed < 1
Perfectly inelastic Qd does not change
Ed = 0
when P changes
Perfectly elastic
Qd drops to zero
when P increases or it
increases indefinitely
when price falls.
Unitary elastic
%  in Qd = %
in
P
CE : demand and supply
Ed = infinity
Ed = 1
45
Elasticity of demand and Total
Revenue
Total revenue/Sales revenue ( Producer’s
viewpoint ) = Total Expenditure
( Consumer’s viewpoint )
TR/TE = P.Q
P = Price
Q = Quantity transacted
CE : demand and supply
46
Elasticity of demand and Total
Revenue ( An increase in Price )
Elastic
Total revenue falls
Inelastic
Total revenue rises
Perfectly
inelastic
Unitary
elastic
Total revenue rises
Total revenue remains
unchanged
CE : demand and supply
47
Elastic demand and Total Revenue (An
increase in Price )
P
Increase in
revenue
＜
Loss in revenue
P2
Increase in revenue
P1
Loss in
revenue
D
CE : demand and supply
Q2
Q1
Q
48
Inelastic demand and Total Revenue (An
increase in Price )
P
＞
Gain in revenue
Loss in revenue
P2
Gain in
revenue
P1
Loss in
revenue
D
CE : demand and supply
Q2
Q1
Q
49
Perfectly inelastic demand and Total
Revenue (An increase in Price )
Price
D
P2
Increase in
revenue
P1
Q
CE : demand and supply
Quantity
50
Maximum Price Control ( Price Ceiling )
Price ceiling: the maximum price paid for a
good or service
Objective: ‘to protect the buyers of a good or
service such that they buy at a lower price”
Examples:
Rent control
Rental for public housing units
Price of public medical services
Effective Price ceiling: below the
equilibrium price
CE : demand and supply
51
Maximum Price Control
( Price Ceiling )
Price
S
P1
Price Ceiling
Pc
Excess
demand
Q2
Q1
D
Q3
CE : demand and supply
Quantity52
Maximum Price Control ( Price Ceiling )
Cont’d
Economic consequence: Excess demand
Excess demand: Methods of non-price allocation







First come first served or queuing
Drawing lots or lottery
Age
Gender
Intelligence
Ability, Speed
Black market and etc.
CE : demand and supply
53
Minimum Price Control ( Price Floor )
Price floor: the minimum price paid for a good
or service
Objective: ‘to protect the sellers of a good or
service”
Examples:
minimum wage paid to foreign domestic
helpers in Hong Kong;
minimum price on agricultural products in
Europe
Effective Price floor: above the equilibrium
price
CE : demand and supply
54
Minimum Price Control
( Price Floor )
Price
S
Excess Supply
Price
Floor
Pf
P1
D
Q2
Q1
CE : demand and supply
Q3
Quantity55
Minimum Price Control ( Price Floor )
Cont’d
Economic consequence: Excess supply
Excess supply:
unemployment ( minimum wage )
government buys up excess supply of
agricultural products
CE : demand and supply
56
Quota: Setting the maximum quantity of good sold
in the market
What happens to the supply curve?
CE : demand and supply
57
Effective Quota
Price
S’
S
P2
Q2 =
Quota
P1
D
Q2
Q1
CE : demand and supply
Quantity 58
Effective Quota
The imposition of an effective quota results in
 a decrease in quantity transacted; and
 an increase in price
CE : demand and supply
59
A decrease in effective Quota: the supply
curve shifts to the left.
Price
S2
S1
Q1: Original quota
Q2: New quota
S
P2
P1
D
Q2
Q1
CE : demand and supply
Quantity
60
A decrease in effective quota means that the
maximum quantity allowed is smaller. So the
vertical supply curve shifts to the left. It results in:
• a fall in quantity transacted and
• a rise in price.
CE : demand and supply
61
An increase in effective quota: the supply
curve shifts to the right
Price
S1
S2
P1
S
P2
D
Q1
CE : demand and supply
Q2
Quantity62
An increase in effective quota means that the
maximum quantity allowed is larger. So the
vertical supply curve shifts to the right. It
results in:
• a rise in quantity transacted and
• a fall in price.
CE : demand and supply
63
A Per Unit Tax on a Good: The supply curve
shifts up to the left
Price
S2
t
P2
P1
P3
S1
Consumer’s tax
burden
Seller’s tax burden
t = per unit sales tax
D
Quantity
CE : demand and supply
Q2
Q1
64
A Per Unit Tax on a Good:
Who bears a higher tax burden? The consumers
or the sellers ?
Draw separate diagrams to show the sharing of
the tax burden between the consumers and the
sellers when:
The demand curve is perfectly price inelastic
The demand curve is perfectly price elastic
The supply curve is price elastic and
The supply curve is price inelastic.
CE : demand and supply
65
Consumer’s tax burden is larger
if
• The demand for the
good is price
inelastic
• The supply of the
good is price elastic
CE : demand and supply
66
Seller’s tax burden is larger if
• The demand for the • The supply of the
good is price elastic
good is price
inelastic
CE : demand and supply
67
A Per Unit Subsidy on a Good: The supply
curve shifts to the right
Price
S1
D
S= per unit subsidy
P3
P1
Producers’ benefit
S2
Consumers’ benefit
P2
Quantity
Q2
CE : demand and
supply
Q1
68