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Demand

The document defines demand and differentiates between willingness and ability to pay. It discusses the three preconditions for demand - desire, purchasing power, and willingness to pay. Quantity demanded depends on price of the good, income, prices of substitutes and complements, preferences, and expectations of future prices. The law of demand states that quantity demanded decreases when price increases, holding all other factors constant. A demand schedule shows quantity demanded at different price levels, while a demand curve graphs this relationship, sloping downward. The document also discusses exceptions to the law of demand, shifts versus movements along the demand curve, and how substitute and complement prices can shift the demand curve.

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Stive John
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21 views

Demand

The document defines demand and differentiates between willingness and ability to pay. It discusses the three preconditions for demand - desire, purchasing power, and willingness to pay. Quantity demanded depends on price of the good, income, prices of substitutes and complements, preferences, and expectations of future prices. The law of demand states that quantity demanded decreases when price increases, holding all other factors constant. A demand schedule shows quantity demanded at different price levels, while a demand curve graphs this relationship, sloping downward. The document also discusses exceptions to the law of demand, shifts versus movements along the demand curve, and how substitute and complement prices can shift the demand curve.

Uploaded by

Stive John
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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DEMAND

Meaning:
Used in the language to mean almost any kind
of wish or desire or need.

• But to an economist, demand refers to both


willingness and ability to pay including desire
for a thing.
• There are 3 preconditions
--1. desire for the commodity
--2. purchasing power or ability
• --3. willingness to pay for the commodity:

• Many people have money to buy Apple


computer but they are not willing to buy at
BDt 1,00,000.
• Many people may desire to buy a car but all
desires are not demand
Quantity demanded (Qd) is the total amount of
a good that buyers would choose to purchase
under given conditions. The given conditions
include:
• • price of the good
• • income and wealth
• • prices of substitutes and complements
• • preferences (tastes)
• • expectations of future prices
• Factors= price + determinants
• We refer to all of these things except the price
of the good as determinants of demand.

• We could talk about the relationship between


quantity demanded and any one of these
things.

• But when we talk about a demand curve, we


are focusing on the relationship between
quantity demanded and price (while holding
all the others fixed).
Demand: Types
i)Price demand: Various quantities that a consumer
would purchase at various hypothetical prices.
ii)Income demand: Various quantities that a
consumer would purchase at different level of
income.
iii) Cross demand: Quantities of a good that would
be purchased not because of changing price of
this good but for changing price of other goods.
Ex: Demand for coffee may be increased when
price for tea increase.
LAW OF DEMAND
• The Law of Demand states that when the price of a
good rises, and everything else remains the same,
the quantity of the good demanded will fall. In
short,
↑P → ↓Qd
• “everything else remains the same” is known as the
“ceteris paribus” or “other things equal”
assumption. In this context, it means that income,
wealth, prices of other goods, population, and
preferences all remain fixed. Law of demand tells us
that demand curves virtually always slope
downward
• Generally, when price increases, people buy less.
That means at higher price demand decreases if
other things remain the same.

• There is negative relation between price and


demand. When price ↑ demand ↓ if other
things remain the same.

• The reverse is also true. When price ↓ demand


↑ .We can only say the direction but not
amount. If price decreases by 10%, demand may
not increase by exactly 10%.
Exception of law of demand:/ determinants
• a) change in taste:
• b) change in income: when income increases
demand may not decrease even when price
..........
• c) change in price of related goods: When tea
price decreases, demand for tea may not
increase if for coffee also decreases
significantly.
DEMAND FUNCTION &EQUATION
• Qd=f (P, T, I, Op, W)
• Here,
• Qd= quantity demanded
• P= price T= taste
• I =income Op = price of other
goods
• W =weather
For good x, the demand equation is--------
Qdx = 8-Px, ceteris peribus
DEMAND SCHEDULE
• Mathematical presentation of demand at
various price level. Generally expressed in a
tabular form.

• A list showing the quantity of a good that


consumers would choose to purchase at
different prices, with all other variables held
constant.
DEMAND CURVE
• A Demand Curve is a graphical representation
of the relationship between price and quantity
demanded (ceteris paribus).
• It is a curve or line, each point of which is a
price- Qd pair. That point shows the amount
of the good buyers would choose to buy at
that price.
• This demand schedule and the same
information can be put into graph. Then this is
called demand curve.
• Geometric presentation of how demand varies
with change in price.

• X axis (Horizontal axis) shows demand.


• Y axis ( vertical axis) shows price.
• There is negative relation between price and
demand.
Demand Schedule and
Demand Curve for DVDs
• We get 5 points from the combination of price
and quantity demanded and adding these
points we get D demand curve.

• This shows negative relationship between


price and quantity. For this reason demand
curve is downward slopping .
Movement along demand curve

• When demand changes because of change in


price.
• Here demand moves at the same demand
curve, but in different points.
Exceptional demand curve
• Giffen paradox: For certain goods, people buy
more when price rises.
• Professor Giffen found the idea that sometime
there is positive relationship between price and
demand.
• Why?:
• i) people expect that price may increase further.
• ii) if it is feared that there may shortage of supply.
• iii) Lack of foresightness
• iv) irrational consumer.
price Demand
Curve

Quantity
0
demanded
Shift in demand curve
• If demand changes, not because of changing
price then it is called shift or change in
demand.
• Example: Price of a laptop is 50,000. If income
of people increases by 10%, then demand may
increase.
• Here demand has been increased without
change in price.
Shift in Demand

Change in demand
(a shift of the curve)
$2
Price (per unit)

B A
$1

D0

D1
100 200 250
Quantity demanded (per unit of time)
Shifts vs. Movements Along The
Demand Curve
• A change in the price of a good causes a
movement along the demand curve

• A fall (rise) in price would cause a movement


to the right (left) along the demand curve

• A change in income or other factors causes a


shift in the demand curve itself right or left.
– Demand curve has shifted to the right of
the old curve as income has risen

– A change in any variable that affects


demand—except for the good’s price—
causes the demand curve to shift
Prices of Related Goods: Factors that Shift
the Demand Curve
• Substitute—good that can be used in place of some
other good and that fulfills more or less the same
purpose, e.g., different types of meat.

– A rise in the price of a substitute increases the


demand for a good, shifting the demand curve to
the right.
• Complement—used together with the good we
are interested in, e.g., bat and ball.

• It has joint demand

– A rise in the price of a complement


decreases the demand for a good, shifting
the demand curve to the left

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