DEMAND

In a FREE ENTERPRISE ECONOMY- the prices are determined by the

forces of DEMAND and SUPPLY.
-Demand (D) is a schedule that shows the various amounts of product
consumers are willing and able to buy at each specific price in a series of
possible prices during a specified time period.
-Quantity demanded (Qd) is the amount of a good or service that individuals
are willing and able to buy at a particular price at a particular time.
Levels of Demand
1. Individual Demand
2. Market Demand is the summation of all of the individual demand curves
for a particular item.
Law of Demand - Price Demand inverse relationship (Ceteris Paribusother things equal assumption)
Determinants of Demand
1. Non-Price Factors
a. Number of Consumers
b. Taste
c. Income (Kita)- households income affects the amount demanded at
any price. Change in income affects the consumption of two goods
namely:
i. Normal Goods- a good whose consumption increases as income
rises. Ex.: Luxury goods
ii. Inferior Goods- one whose consumption decreases when
income increases. Ex.: Dried fish
2. Prices of other goods
a. Substitute Goods
b. Complementary Goods
3. Price Expectation
Change in Demand: A term used in economics to describe that there has been
a change, or shift in, a market's total demand. This is represented graphically in
a price vs. quantity plane, and is a result of more/less entrants into the market,
and the changing of consumer preferences. The shift can either be parallel or
nonparallel.
Change in Quantity Demanded is a change from one price-quantity pair on an
existing demand curve to a new price-quantity pair on the SAME demand curve.
In other words, this is a movement along the demand curve. A change in quantity
demanded is caused by a change in price.
Elasticity of Demand- The degree to which demand for a good or service varies
with its price. Normally, sales increase with drop in prices and decrease with rise
in prices. (% r QD) / (% r P)
Types of Elasticity:
A. Elastic- EQd > 1
B. Inelastic- EQd < 1
C. Unitary: EQd = 1
-In Theory, the demand has elasticity for each of its many determinants. This
includes:

A. Price Elasticity: (% r QD) / (% r P)

B. Income Elasticity of Demand: (% r QD) / (% r I)
C. Cross-Price Elasticity of Demand: (% r QD) / (% r P)
Mathematical Approach:
Market Demand:
A Market function is estimated as:
Qd= f(P) = 100 10p
1. What is the quantity demanded if the price is Php 5?
Qd= f(5) = 100 10(5)
= 100 50
Qd = 50 units
2. If the quantity demanded is 75 units, what is the estimated price?
Qd
= 100 10p
75
= 100 10p
10p
= 100 75
p
= 2.5

How Do We Interpret the Income Elasticity of Demand?

Income elasticity of demand is used to see how sensitive the demand for
a good is to an income change. The higher the income elasticity, the more
sensitive demand for a good is to income changes. A very high income elasticity
suggests that when a consumer's income goes up, consumers will buy a great
deal more of that good. A very low price elasticity implies just the opposite, that
changes in a consumer's income has little influence on demand.
Often an assignment or a test will ask you the follow up question "Is the
good a luxury good, a normal good, or an inferior good between the income
range of $40,000 and $50,000?" To answer that use the following rule of thumb:
If IEoD > 1 then the good is a Luxury Good and Income Elastic
If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income
Inelastic
If IEoD < 0 then the good is an Inferior Good and Negative Income
Inelastic

How Do We Interpret the Cross-Price Elasticity of Demand?

The cross-price elasticity of demand is used to see how sensitive the
demand for a good is to a price change of another good. A high positive crossprice elasticity tells us that if the price of one good goes up, the demand for the
other good goes up as well. A negative tells us just the opposite, that an increase
in the price of one good causes a drop in the demand for the other good. A small
value (either negative or positive) tells us that there is little relation between the
two goods. Often an assignment or a test will ask you a follow up question such
as "Are the two goods complements or substitutes?". To answer that question,
you use the following rule of thumb:
If CPEoD > 0 then the two goods are substitutes
If CPEoD =0 then the two goods are independent (no relationship
between the two goods
If CPEoD < 0 then the two goods are complements

Using Calculus To Calculate Price Elasticity of Demand

Suppose you're given the following question:
Demand is Q = 110 - 4P. What is price (point) elasticity at $5?
We saw that we can calculate any elasticity by the formula:
Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z)
In the case of price elasticity of demand, we are interested in the
elasticity of quantity demand with respect to price. Thus we can use the following
equation:
Price elasticity of demand: = (dQ / dP)*(P/Q)
In order to use this equation, we must have quantity alone on the lefthand side, and the right-hand side be some function of price. That is the case in
our demand equation of Q = 110 - 4P. Thus we differentiate with respect to P
and get: dQ/dP = -4
So we substitute dQ/dP = -4 and Q = 110 - 4P into our price elasticity of
demand equation:
Price elasticity of demand: = (dQ / dP)*(P/Q)
Price elasticity of demand: = (-4)*(P/(110-4P)
Price elasticity of demand: = -4P/(110-4P)
We're interested in finding what the price elasticity is at P = 5, so we substitute
this into our price elasticity of demand equation:
Price elasticity of demand: = -4P/(110-4P)
Price elasticity of demand: = -20/90
Price elasticity of demand: = -2/9
Thus our price elasticity of demand is -2/9. Since it is less than 1 in absolute
terms, we say that Demand is Price Inelastic

Using Calculus To Calculate Income Elasticity of Demand

Suppose you're given the following question:
Demand is Q = -110P +0.32I, where P is the price of the good and I is
the consumers income. What is the income elasticity of demand when income is
20,000 and price is $5?
We saw that we can calculate any elasticity by the formula:
Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z)
In the case of income elasticity of demand, we are interested in the elasticity of
quantity demand with respect to income. Thus we can use the following
equation:
Price elasticity of income: = (dQ / dI)*(I/Q)
In order to use this equation, we must have quantity alone on the left-hand side,
and the right-hand side be some function of income. That is the case in our
demand equation of Q = -110P +0.32I. Thus we differentiate with respect to I and
get:
dQ/dI = 0.32
So we substitute dQ/dP = -4 and Q = -110P +0.32I into our price elasticity of
income equation:

Income elasticity of demand: = (dQ / dI)*(I/Q)

Income elasticity of demand: = (0.32)*(I/(-110P +0.32I))
Income elasticity of demand: = 0.32I/(-110P +0.32I)
We're interested in finding what the income elasticity is at P = 5 and I = 20,000,
so we substitute this into our income elasticity of demand equation:
Income elasticity of demand: = 0.32I/(-110P +0.32I)
Income elasticity of demand: = 6400/(-550 + 6400)
Income elasticity of demand: = 6400/5850
Income elasticity of demand: = 1.094
Thus our income elasticity of demand is 1.094. Since it is greater than 1 in
absolute terms, we say that Demand is Income Elastic, which also means that
our good is a luxury good.

Using Calculus To Calculate Cross-Price Elasticity of Demand

Suppose you're given the following question:
Demand is Q = 3000 - 4P + 5ln(P') , where P is the price for good Q, and
P' is the price of the competitors good. What is the cross-price elasticity of
demand when our price is $5 and our competitor is charging $10?
We saw that we can calculate any elasticity by the formula:
Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z)
In the case of cross-price elasticity of demand, we are interested in the elasticity
of quantity demand with respect to the other firm's price P'. Thus we can use the
following equation:
Cross-price elasticity of demand = (dQ / dP')*(P'/Q)
In order to use this equation, we must have quantity alone on the left-hand side,
and the right-hand side be some function of the other firms price. That is the
case in our demand equation of Q = 3000 - 4P + 5ln(P'). Thus we differentiate
with respect to P' and get:
dQ/dP' = 5/P'
So we substitute dQ/dP' = 5/P' and Q = 3000 - 4P + 5ln (P') into our cross-price
elasticity of demand equation:
Cross-price elasticity of demand = (dQ / dP')*(P'/Q)
Cross-price elasticity of demand = (5/P')*(P'/(3000 -4P + 5ln(P')))
We're interested in finding what the cross-price elasticity of demand is at P = 5
and P' = 10, so we substitute these into our cross-price elasticity of demand
equation:
Cross-price elasticity of demand = (5/P')*(P'/(3000 -4P + 5ln(P')))
Cross-price elasticity of demand = (5/10)*(10/(3000 - 20 + 5ln(10)))
Cross-price elasticity of demand = 0.5 * (10 / 3000 - 20 + 11.51)
Cross-price elasticity of demand: = 0.5 * (5 / 2991.51)
Cross-price elasticity of demand: = 0.5 * 0.00167
Cross-price elasticity of demand: = 0.000835
Thus our cross-price elasticity of demand is 0.000835. Since it is greater than 0,
we say that goods are substitutes.