NEED

WANT

DEMAND
Demand
 Demand for a commodity refers to the quantity
of the commodity which an individual household
is willing to purchase per unit of time at a
particular price.
Demand for a commodity implies:
(a) Desire to acquire it,
(b) Willingness to pay for it, and
(c) Ability to pay for it.
Law of Demand
Marshall law states that, all other factors
being equal, as the price of a good or
service increases, consumer demand for
the good or service will decrease and vice
versa. 
 Exceptions to law of demand
1. Giffen goods: Inferior goods on which the consumer spends a large part
of his income and the demand for which falls with a fall in their price.. a
rise in their price drains their resources and the poor have to shift their
consumption from the more expensive goods to the giffen goods,

2. Articles of snob appeal: Goods which serve ' status symbol ' do not
follow the law of demand. these are goods of ' conspicuous
consumption

3. Expectations regarding future prices: If the price of a commodity is

rising and is expected to rise in future the demand for the commodity
will increase.

4. Emergency: At times of war, famine etc. consumers have an abnormal

behaviour..

5. Quality-price relationship: people assume that expensive goods are of

a higher quality then the low priced goods.
Demand Schedule
Demand Curve
 Market Demand
 Market demand refers to the sum of
all individual demands for a
particular good or service.

 Graphically, individual demand

curves are summed horizontally to
obtain the market demand curve.
Demand functions

 simple demand functions

Qd = a – bP

 more complex demand functions

Qd = a – bP + cY + dPs – ePc
 Demand curve for equation: Qd = 10 000 – 200P
50

40

P 30

20

10

D
0
0 2 4 6 8 10
Q (000s)
 Demand curve for equation: Qd = 10 000 – 200P
50

P Qd (000s)
40 5 9

P 30

20

10

D
0
0 2 4 6 8 10
Q (000s)
 Demand curve for equation: Qd = 10 000 – 200P
50

P Qd (000s)
40 5 9
10 8

P 30

20

10

D
0
0 2 4 6 8 10
Q (000s)
 Demand curve for equation: Qd = 10 000 – 200P
50

P Qd (000s)
40 5 9
10 8
15 7
P 30

20

10

D
0
0 2 4 6 8 10
Q (000s)
 Demand curve for equation: Qd = 10 000 – 200P
50

P Qd (000s)
40 5 9
10 8
15 7
20 6
P 30

20

10

D
0
0 2 4 6 8 10
Q (000s)
 Prices of Related Goods
Substitutes & Complements
 When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
(Tea & Coffee)
 When a fall in the price of one good
increases the demand for another
good, the two goods are called
complements.(Car & petrol)
Determinants of demand
 Tastes & Preferences

 number and price of substitute goods

 number and price of complementary goods

 Income (Taxes & Subsidies)

 Advertisings

 Expectations

 Seasonal Variations

 Population
Determinants of demand
Change in Quantity Demanded
versus Change in Demand

Change in Quantity Demanded

 Movement along the demand curve.
 Caused by a change in the price of
the product.
 Changes in Quantity
Price of
Cigarettes
Demanded
per Pack
A tax that raises the
price of cigarettes
C results in a movement
$4.00
along the demand
curve.

2.00 A

D1
0 12 20 Number of Cigarettes
Smoked per Day
Change in Quantity Demanded
versus Change in Demand

Change in Demand
 A shift in the demand curve, either to
the left or right.
 Caused by a change in a
determinant other than the price.
 Consumer Income
Price of
Normal Good
Ice-Cream
Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand

1.50

1.00

0.50
D2
D1 Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Consumer Income
Price of
Inferior Good
Ice-Cream
Cone
$3.00

2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00

0.50

D2 D1 Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Change in Quantity Demanded
versus Change in Demand
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
Ford Motor Company announces that it will
offer $3,000 rebates on new Mustangs starting
next month. As a result of this information,
today’s demand curve for Mustangs

a.shifts to the right.

b. shifts to the left.
c. shifts either to the right or to the left, but
we cannot determine the direction of the shift
from the given information.
d. will not shift; rather, the demand curve for
Mustangs will shift to the right next month.
If a decrease in income increases the demand
for a good, then the good is

a.a substitute good.

b.a complement good.
c. a normal good.
d. an inferior good.
Which of the following events could shift the
demand curve for gasoline to the left?

a.Income of gasoline buyers rises, and gasoline is a

normal good.
b. Income of gasoline buyers falls, and gasoline is
an inferior good.
c. Public service announcements are run on
television, encouraging people to walk or ride
bicycles instead of driving cars.
d.The price of gasoline rises.
Law of Supply
 As a good’s price increases (decreases),
the quantity suppliers are willing and
able to supply increases (decreases)
 The quantity supplied is usually directly
related to its price
 P QS
Supply Schedule
 A Supply Schedule displays the quantity
of a product supplied at each price
Price Per Bottles Bottles
Bottle Supplied Supplied
Firm A Firm B
.74 200 100
.50 130 70
.36 75 50
.28 50 25
© Oxford University Press, 2016. All rights reserved.
Market Supply
 Market Supply Schedule: a table showing
the quantity supplied of a commodity at
each price for a given period of time.
 Market Supply Curve: A positively-sloped
curve showing the various price-quantity
combinations given by the market supply
schedule.

© Oxford University Press, 2016. All rights reserved.

Changes in Supply
Examples of things that could shift the supply
curve:
1)An improvement in technology,
2)A reduction in the price of resources used in
the production of the commodity,
3)For agricultural commodities, more favorable
weather conditions.

© Oxford University Press, 2016. All rights reserved.

© Oxford University Press, 2016. All rights reserved.
Market Equilibrium
Market Equilibrium
 Equilibrium Price of a Commodity: the price
at which the quantity demanded of the
commodity equals the quantity supplied and
the market clears.
 Surplus: occurs when the quantity supplied
exceeds the quantity demanded.
 Shortage: occurs when the quantity demanded
exceeds the quantity supplied.

© Oxford University Press, 2016. All rights reserved.

 The Market Mechanism
 Market Mechanism Summary
1) Supply and demand interact to
determine the equilibrium price.
2) When not in equilibrium, the market will adjust
to a shortage or surplus and return to the
equilibrium.
3) Markets must be competitive for the
mechanism to be efficient.

34
MARKET DEMAND & SUPPLY

Price Price
MARKET MARKET
P QD 200 DEMAND P QS 200 SUPPLY

Rs.5 10 B 2,000 Rs.5 60 S 12,000

4 20
3 35 x U 4,000
Y 7,000
4 50
3 35 x
E 10,000
L 7,000

2 55 E
11,000 2 20 L
4,000
R E
1 80 16,000 1 5 1,000
S R
S

EQUILIBRIUM 35
 MARKET DEMAND & SUPPLY
Price

Price Rs.5
Demand S Price Supply

P QD P Q
4
Rs.5 2,000 Market
Rs.5 12,000
S
Equilibrium
Rs.4 4,000Rs3 Rs.4 10,000
Rs.3 7,000 7,000
Rs.211,000 2 Rs.3 4,000
Rs.116,000 Rs.2 1,000
1
D Rs.1
o 2 4 6 78 10 12 14 16 Q
36
Quantity
 The Market Mechanism
Y
S
Price
(Rs. per unit)

P E

Quantity
O Q X 37
The Market Mechanism
Price
S
(Rs. per unit)
Surplus
P1
If price is above equilibrium
Point-Supply exceeds
Demand.
P

Q Quantity
38
 The Market Mechanism
Price
S
(Rs per unit)

Surplus
P1
Assume the price is P1 , then:
1) Quantity Supplied is >
Quantity Demanded
P2 2) Producers lower price.
3) Quantity supplied decreases
4) Equilibrium is restored

Q1 Q3 Q2 Quantity
39
 The Market Mechanism
Price
(Rs. per unit) S

E Assume the price is P2, then:

1) Quantity Demanded is greater
than quantity Supplied
P3 2) Producers raise price.
3) Quantity supplied increases
4) Equilibrium is restored

P2
Shortage
D

Q1 Q3 Q2 Quantity
40
 Change in Supply

P D1 S1
S2
Price

P2

P1

o Q2 Q 1 Q
Quantity
 Change in Demand

D2 S1
P D1

P2
Price

P1

o Q1 Q2 Q
 D P Q D P Q
D1 A D1
D1 S B S
P2
P1
D2
P1
P2

“Increase in Demand” Q1 Q2 Q2 Q1 “Decrease in Demand”

Four Possibilities
S P Q S P Q
D D D S2
C S1
S1 P2
P2 S1 P1
P1

“Increase in Supply” Q1 Q2 Q2 Q1 43
“Decrease in Suply”
Change in Supply = Change in Demand

D2 S3
D1
S1
D3 S2

Q
44
Effects of Government Intervention
Price Controls

 If the Government decides that the

equilibrium price is too high, they may
establish a maximum allowable ceiling
price.

45
 Price Ceilings
and Price Floors
 Price Ceiling
 is a legally established maximum price which
a seller can charge or a buyer must pay.

 Price Floor
 is a legally established minimum price which
a seller can charge or a buyer must pay.

46
 Price Ceilings
 When the Government imposes a price
ceiling (i.e., a legal maximum price at
which a good can be sold) two outcomes
are possible:
 The price ceiling is not binding.
 The price ceiling is a binding constraint on
the market, creating shortages.

47
A Binding Price Ceiling
Price
S

Price
PE Ceiling

PC
Shortage
D

QS QE QD Quantity/time
48
 Market Impacts
of a Price Ceiling
 A Binding Price Ceiling creates. . .
 Shortages (QD > QS)
 Shortages create :
• Queuing
• Discrimination criteria set by sellers
• Bundled pricing with other goods
• Bribery/corruption

49
 Price Floors

 When the Government imposes a price floor

(i.e., a legal minimum price at which a good
can be sold) two outcomes are possible:
 The price floor is not binding.
 The price floor is a binding constraint on the
market, creating surpluses.

50
 A Binding Price Floor
Price
Surplus S
PF

Price Floor
PE

D
QD QE QS Quantity/time
51
 Market Impacts
of a Price Floor

 A Binding Price Floor creates. . .

 Surpluses (QS > QD)
 Surpluses create :
• Discrimination criteria set by buyers
 Examples:
• Minimum wages act

52
Tutorial
Q1. The demand equation for a popular brand of fruit
drink is given by the equation
Qx = 10 – 5Px + 0.001I + 10Py
where Qx = monthly consumption per family in gallons
Px = price per gallon of the fruit drink = $2.00
I = median annual family income = $20,000
Py = price per gallon of a competing brand = $2.50
Interpretthe parameter estimates.
At the stated values of explanatory variables,
compute the monthly consumption (in gallons) of fruit
drink.
Suppose median annual family income increased to
$30,000. What will be answer to part (ii) now?
 Q2. Demand function for a variety of Bakeman
biscuits is:
Q = 2.02P + 0.03A - 0.04Ac + 0.06Pc + 0.001I
where Q and P are quantity and price of the Bakeman
biscuits respectively; A and Ac are company’s own
and competitor’s advertisement expenditures, Pc is
price of competitor’s and I is the average personal
disposable income. Given A = 50, Ac = 100, Pc = 5 and
I = 20,000

 Write down the demand & inverse demand equation.

 Draw the demand curve and find Q for P = 10.
MU, P
Consumer surplus

P1

MU

O Q1 Q
MU, P
Consumer surplus

P1

Total
consumer MU
expenditure

O Q1 Q
MU, P
Consumer surplus
Total
consumer
surplus
P1

Total
consumer MU
expenditure

O Q1 Q
Consumer Surplus

Consumer surplus is defined as the difference

between the total amount that consumers are
willing and able to pay for a good or service
(indicated by the demand curve) and the total
amount that they actually do pay (i.e. the
market price).