CHAPTER 2

DEMAND AND SUPPLY

2.1 CLASSIFICATION OF GOODS AND SERVICES
2.1.1 Conventional
a) Free good
Free goods can be defined as goods with zero opportunity cost (no production cost).
The supply is unlimited and considered ‘gifts of nature’. Examples are air, sunlight, rain and snow.
b) Public goods and private goods
Public goods (social goods) can be defined as goods and services provided by the government or the
central authorities for community use. Everyone in the community has right to consume the goods
without any exemption. Examples are street lighting, roads, public phone, hospital and national
defense.
Private goods can be defined as goods owned by individual or private sector and only the owner is
allowed to consume the goods. Other people can be prevented from using them. Examples are car
and house.
c) Economic goods
Economic goods can be defined as goods where supply is limited and require costs to purchase
them. Opportunity cost is involved in obtaining them. Can be seen and touched. They can be divided
into 2 groups: 
Commodities (tangible goods) i.e. books, clothes, cars

Services (intangible goods) i.e. insurance, loan

2.1.2 Islamic
In Islam, goods are bounties bestowed by Allah SWT. They are useful, consumable and beneficial,
which bring about moral and spiritual betterment. In Al – Quran, they are referred to as:
a. al – tayyibat (good and pure things).
b. al – rizq (heavenly gifts).
Goods in Islam are classified into four according to the hierarchy of needs. They are:
i. Dharuriyyah goods
Dharuriyyah goods are basic goods. They are the basic necessities and without them, men will not be
able to continue their life. Some examples are food, shelter, clothes and education.
ii. Hajiyyah goods
Hajiyyah goods are comfort goods. These goods provide comfort and without them, men will feel
less comfortable in life. Example is refrigerators.
iii. Tahsiniyyah or Kamaliyyah goods
Tahsiniyyah or Kamaliyyah goods are luxury goods. These goods complete the needs of men but
without them, men can still survive and live in comfort. Some examples are bungalow houses, gold
and Mercedes cars.
iv. Tarafiyyah goods
Tarafiyyah goods are not permissible (haram). These goods bring negative impact on the society. They
are not only extravagant, which lead to wastage, but they can also cause harm to man. Examples of
such goods are golden chairs and cutlery that are

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not only extravagant but are against the principle Goods and services also can be divided based on
the consumption preference or hierarchy of needs.

2.2 DEMAND
2.2.1 DEFINITION OF DEMAND
Demand is defined as the ability and willingness to buy product at a particular price, ceteris paribus.
Ceteris paribus is a Latin phrase that means holding other factors constant while some other factors change.
Quantity demanded (Qd) for goods or services that is purchased at certain price in a given period of time.
Demand illustrates the relationship between quantity demand and price of the good and services. Demand
can be illustrate using demand curve. Demand curve can be obtained by combining all the quantity
demanded at a certain price in a given period of time.

2.1.2 LAW OF DEMAND

The law of demand states that the higher the price of the product, the lower the quantity demanded of
the product and the lower the price of a product, the higher the quantity demanded, ceteris paribus.

2.1.3. INDIVIDUAL DEMAND CURVE

Individual demand shows the relationship between the quantity of a product demanded by a single
buyer and its price. Individual demand can be obtained by joining all the point of quantity demanded for
each price level.
Table and diagram 2.1: Individual demand curve

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2.1.4 MARKET DEMAND CURVE
Market demand shows the relationship between the quantity of a product demanded by all the buyers in
the market and its price. Market demand can be obtained by adding all the quantity demanded for all buyers
at a certain price in a given period of time.
Table and diagram 2.2: Market demand curve
2.1.5 CHANGE IN QUANTITY DEMANDED VS CHANGE IN DEMAND
Change in quantity demanded Change in demand
• Change in quantity demanded is shown by the
movement along the demand curve.
• It is occurs due to the change in its price and
other factors is constant (ceteris paribus)
• Upward movement is shown when price
increases, quantity demanded decreases. If
the price of good increase from P0 to P2,
quantity supplied decrease from Q0 to Q2
• Downward movement is shown when price
decreases, quantity demanded increases. If
the price of good decrease from P0 to P1,
quantity demanded increase from Q0 to Q1
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• Change in demand is shown by the shift in
demand curve
• It is occurs due to the change of other factors
such as taste and preference, season, income
etc, whereas the price is remain constant.
• Increase demand means demand shift to the
right (D0 to D2). Price remains at P0, but the
quantity demanded has increased from Q0 to
Q2 .
Decrease demand means demand shift to the
left (D0 to D1). Price remains at P0, but the
quantity supplied has decreased from Q0 to
Q1 .
2.1.6 DETERMINANTS OF DEMAND
1. Taste and preference
Taste and fashion of consumers change significantly. If a product become more fashionable, the demand
for it will increase. If the same product became outdated, the demand for it will fall. As taste and fashions
change, demand will also change. For example, change in fashion trends, technology etc.
Price

P0
DD1

DD0
Quantity
0 Q0 Q1

2. Expectation about future price

If the price expected will increase in the future, the demand for today will be increase. This is because to
consumer would want to store for future use. However, if the price expected to decrease in the future, the
demand for today will also decrease. This is because the consumers will wait for the price to fall.

Price expected to increase tomorrow, Price expected to decrease tomorrow,

DD today will increase DD today will decrease

3. Population and number of buyers

Demand depends on the size of the total population or the number of the buyer in the market. If the total
population increase, number of buyers also increase, so this will lead to the increasing demand for good
and service. However, if total population decrease, number of buyer decrease and this lead to decreasing
demand for good and service.
Population increase Population decrease

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 4. Festive season and climate change
Demand for several product will change due to festive season and climate change. During the festive
season, demand for several product will increase. For example, during Hari Raya, demand for lemang, baju
raya, kuih raya etc will increase.

If hot weather hit the country, demand several product such as mineral water, air-condition et will
increase.

Hari Raya- DD rendang increase Hot weather -DD Air-condition increase

5. Income
Income will affect the demand for the product. However the effect is different depend on the type of the
goods. For the normal good such as car, shirt and books, when income increase, the demand for normal
goods also will increase while when income decrease, the demand also will decrease.

Income increase, demand car increase Income decrease, demand car decrease

However for the giffen or inferior goods such as used car, low-quality of rice and others, when income
decrease, the demand for this good will be increase while when income increase, the demand for this good
will be decrease.

Income increase, demand low quality of Income decrease, demand low quality of
rice decrease rice increase

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 6. Advertisement
Advertisement will attract people to purchase the product. Good advertisement lead to the higher
demand will poor advertisement lead to the lower demand. Eg: Good and attractive advertisement for
some beauty products in social media can attract the people to buy the product and this lead higher
demand of beauty product.
Good advertisement Poor advertisement

7. Price of related product

The demand of the product also influenced by the price of related product. Related product falls into
two categories which are:-
a) Substitute goods are goods or services that can be used in place of another product or
service. Eg: coffee and tea. The increasing price of coffee will lead to increase demand
of tea because the consumer will look to another alternative to replace the use of coffee.
However if the price of coffee decrease, demand of tea will decrease.

Price coffee increase, So demand tea? Price coffee decrease, So demand tea?

b) Complement goods are goods that are used in conjunction with another product. For
example, sugar and tea. When the price of sugar increase, the quantity of demanded
sugar will decrease. Because of sugar will be used together with tea, the demand of tea
will also decrease.
However, when the price of sugar decrease, demand tea also increase.
Price sugar increase, so demand sugar? Price sugar decrease, so demand tea?

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2.3 SUPPLY
2.3.1 DEFINITION OF SUPPLY
Supply can be defined as ability and willingness to sell of produce the product at a certain price level at
the given time period, ceteris paribus.

Quantity supplied (Qs) for goods or services that is sold or produced at certain price in a given period of
time.

Supply illustrates the relationship between quantity supplied and price of the good and service. Supply can
be illustrate using supply curve. Supply curve can be obtained by combining all the quantity supplied at a
certain price in a given period of time.

2.3.2 LAW OF SUPPLY

The law of supply state that the higher the price of the product, the greater the quantity supplied of that
product and the lower the price of a product, the lower the quantity supplied, ceteris paribus.

2.3.3 INDIVIDUAL SUPPLY

Individual supply shows the relationship between the quantity of a product supplied by a single seller
and its price. Individual supply can be obtained by joining all the point of quantity supplied for each
price level.

Table and diagram 2.3: Individual supply curve

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2.3.4 MARKET SUPPLY
Market supply is the relationship between the total quantity of a product supplied by adding all the
quantities supplied by all sellers in the market and its price.
Table and diagram 2.4: Market supply curve

2.3.5 CHANGE IN QUANTITY SUPPLIED VS CHANGE IN SUPPLY

Change in quantity supplied Change in supply

• Change in quantity supplied is shown by the
movement along the same supply curve.
• It is occurs due to the change in its price and
other factors is constant (ceteris paribus)
• Upward movement is shown when price
increases, quantity supplied increases. If the
price of good increase from P0 to P2, quantity
supplied also decrease from Q0 to Q2 .
• Downward movement is shown when price
decreases, quantity supplied decreases. If the
price of good decrease from P0 to P1,
quantity supplied also increase from Q0 to Q1
. Q1 .
• Change in supply is shown by the shift in
supply curve
• It is occurs due to the change of other factors
such as technological advancement, seller,
cost etc, whereas the price is remain constant.
• Increase supply means supply shift to the
right (S0 to S2). Price remains at P0, but the
quantity supplied has increased from Q0 to
Q2 .
• Decrease supply means supply shift to the
left (S0 to S1). Price remains at P0, but the
quantity supplied has decreased from Q0 to

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2.3.6 DETERMINANTS OF SUPPLY
1. Technological advancement
Advancement of technology can increase the production and increase the supply of the product. New
technology that enable producer to use fewer factors of production will lower the cost of production and
increase supply.
The use of modern technology in bakery
shop.
Price SSo
SS1 Eg: The use of modern technology in
bakery will increase the production of
Po bakery product. This lead the supply
bakery product shift to the right from SSo
to SS1
Quantity
0 Qo Q1

2. Expectation about future price

When the price expected to increase in the future, the supply for today will be decrease because supplier
want to gain higher profit with the new price in the future. So SS today will shift to the left.
However, when the price is expected to decrease in the future, the supply for today will increase due to lower
profit will gain in the future with the new price. So SS today will shift to the right
Perodua price expected to increase next Perodua price expected to decrease next
year year
SS1
Price
SS0

0 Q1 Q0 Quantity

3. Government policy
a) Taxes
Taxes will decrease supply because taxes will increase cost of production and discourage the producer to
producing extra product. So SS will shift to the left.
b) Subsidies
Subsidies will increase supply as subsidies encourage producer to increase more. So SS will shift to the
right.
Tax Subsidy

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4. Cost of production
Increasing cost of production will reduce the production and lead to decreasing supply and lead SS will
shift to the left while decreasing cost of production will increase production and lead to increasing
supply and lead SS will shift to the right
Cost of production increase Cost of production decrease

5. Improvement of infrastructure
Improvements in infrastructure such as transportation and communication will facilitate free and fast
movement of goods and services within the country. This increases the supply of the product. So SS
will shift to the right
Improvement of transportation

6. Number of sellers
If the number of sellers supplying the product increase, the supply of the product will be increase and
SS will shift to the right. However, if the number of sellers supplying product decrease, the supply of
the product will be decrease. So SS will shift to the left.
Number of sellers increase Number of sellers decrease

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7. Price of related product
The supply of the product can be influenced by the price of related products:-

a) Substitute goods
Supply of a product will decrease when there is an increase in the price of a substitute product, eg. Beef
burger and chicken burger. If the price of beef burger increase, Supply for chicken burger will decrease
because the seller use the allocation of resources to produce more beef burger to gain high profit. So SS
chicken will shift to the left.
However, the price of beef burger deccrease, Supply for chicken burger will increase because the seller
use the allocation of resources to produce more chicken burger to gain high profit. So SS chicken will
shift to the right.
If the price of beef burger increase, If the price of beef burger decrease,
Supply for chicken burger decrease Supply for chicken burger increase

b) Complement goods
An increase in the price of a product will increase the supply of complementary product, eg. mutton
and wool. If the price of mutton increase, producer will increase the quantity supplied of mutton. This
will cause the supply of wool also increase. So SS mutton will shift to the right,
However, if the price of mutton decrease, producer will decrease the quantity supplied of mutton. This
will cause the supply of wool also decrease. So SS mutton will shift to the left.
Price mutton increase, supply wool increase Price mutton decrease, supply wool?

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2.4 EXCEPTIONAL DEMAND AND EXCEPTIONAL SUPPLY
Exceptional demand Exceptional supply
The law of demand is general statement. According to law of supply, the higher the
However, there are a few exception to this rule. price, the higher the quantity supplied.
This is called as Exceptional demand where as However, this rule is for not applicable for the
the price of product increases, the demand for it certain case and it is known as exceptional
will also increase. It is positive relationship. supply
Price
DD Exceptional supply occurs when the price
increases and the quantity supplied decrease or
when the price decrease and the quantity
supplied increase. It has negative relationship.
Normally this happen in the supply of labour
Quantity and this is known as the “Backward Bending
Exceptional demand occurs due in several Labour Supply Curve”.
instances such as:-
1. Giffen goods Wages
Giffen goods are normally consumed by those
in the lower income group. Examples are low 10
quality potatoes and broken rice.
- As price broken rice increases, while 8
holding other factors constant, the real
income of consumer will fall. The monthly 5
income allocated for buying broken rice will
now be smaller than before. So, more
broken rice is demanded to avoid starvation. 0 6 12 Working
- As price broken rice falls, while holding hours
other factors constant, the real income of Refer on the figure above, if the wage rate
consumer will increase. The monthly RM5 per hour, the workers are willing to
income allocated for buying broken rice will supply the working hours equal to 6 hours. If
now be larger than before. So, less broken the wage rate increase to RM8 per hour, the
rice is demanded because consumer now worker are willing to increase to supply 12
switch to buy better quality of goods hours working hours. (This is follow to law of
supply)
2. Luxury goods
Luxury goods are goods bought by people in Exceptional supply occurs at the hiher wage
higher income to show off their status. For rate. For example, if the wage rate increase to
example are diamonds, luxury car etc. RM10 per hour, the workers are going to
- When the price of diamond increases, more decrease the quantity supply of working hours.
will be bought at the higher price. This is because the worker tend to choose to
- When the price of diamonds falls, then spent time on leisure and relaxation instead,
diamonds will no longer be considered as since the given wage is sufficient for them
prestige goods. The rich may stop buying already. This situation known as e supply of
diamonds and start considering them as labour and this is known as the “Backward
cheap product. Therefore, quantity Bending Labour Supply Curve”.
demanded of diamond will decrease

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