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Tanu Kathuria 1
Theory of Demand
Meaning of demandDemand may be defined as the
amount of a commoditypurchased by a person at agiven point of time and at agiven price.
It includes:
1. A desire to get a commodity
2. A means to buy it.
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Tanu Kathuria 2
Meaning of demand
Cont.
3. The willingness to use thosemeans.
Again it must consist,
it is always at a point of time.
It is always at a price.
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Tanu Kathuria 3
Features of Demand1.Difference between desire and
demand:
(consumer has the willingness andability to buy)
2.Relationship between demand and
price
(It is always at a price per unit oftime)
3.Demand at a point of time It is
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Tanu Kathuria 4
Definition
According to Hansen" By demand,we mean the quantity of acommodity that will be purchasedat a particular price and not
merely the desire of a thing.
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Tanu Kathuria 5
Demand & Demand Curve
The term demand refers to the entire
relationship between the price of thegood and quantity demanded of thegood.
A demand curve shows the
relationship between the quantitydemanded of a good and its pricewhen all other influences onconsumers planned purchases
remain the same.
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Tanu Kathuria 6
Demand ScheduleThe Mathematical representation ofthe Demand curve is known as
demand schedule.
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Tanu Kathuria 7
Demand Curve
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Tanu Kathuria 8
Types of demand
1. Price Demand: It refers to the
various quantities of thecommodity which the consumerwill buy per unit of time and atcertain price.
DA=f(PA)
Where DA =demand of
commodity A
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Tanu Kathuria 9
Types of demand Cont2. Income Demand: It shows how
much quantity a consumer will buy
at different levels of income.DA=f(YA)
Where DA =demand of
commodity AF =function
YA =income of the
consumer A
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Tanu Kathuria 10
Types of demand Cont3. Interconnected Demand
A. Substitute and Complementary
demand: It refers to therelationship between quantitydemanded of good A and price ofrelated good B.
B. Composite Demand: When a thingis demanded for two or many otherreasons.
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Tanu Kathuria 11
Interconnected Demand
cont..C. Direct and Indirect Demand:
Direct demand: which satisfieshuman wants directly.
Indirect Demand :which satisfieshuman wants indirectly.
D. Alternative Demand: when it issatisfied by alternative ways.
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Tanu Kathuria 12
Law of Demand Holding all other things constant
(ceteris paribus), there is an
inverse relationship between theprice of a good and the quantity ofthe good demanded per timeperiod.
The Law of Demand results from a substitution effect an income effect
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Tanu Kathuria 13
Explanation of the Law Substitution effect when the relative
price (opportunity cost) of a good or servicerises, people seek substitutes for it, so thequantity demanded decreases.
Income effect when the price of a good orservice rises relative to income, people cannot
afford all the things they previously bought, sothe quantity demanded decreases.
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Tanu Kathuria 14
Individual Demand Curve
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Tanu Kathuria 15
Market Demand Curve
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Tanu Kathuria 16
From Individual to Market
Demand Curve
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Tanu Kathuria 17
Demand function
DX=f(PX,P,Y,T,E etc.)
here DX=demand forcommodity X
F=functional relationshipPX=price of the commodity X
P= price of the relatedcommodity
Y=income of the consumerT = taste
E= expectations.
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Tanu Kathuria 18
Changes in Demand
When any factor that influences buying plansother than the price of the good changes,there is a change in demand for that good.
The quantity of the good that people plan tobuy changes at each and every price, so thereis a new demand curve.
When demand increases, the quantity thatpeople plan to buy increases at each andevery price so the demand curve shiftsrightward.
When demand decreases, the quantity that
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Tanu Kathuria 19
Shifts in the DemandCurve
Income
Price of substitutes
Price of complements
Population, tastes, weather
Expected future prices Quality of the product
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Tanu Kathuria 20
demanded Vs. Change inDemand
A Change in theQuantity
Demanded Versusa Change inDemand This figure
illustrates thedistinctionbetween a changein demand and a
change in theuantit
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Tanu Kathuria 21
Movements along theDemand Curve
When the price ofthe good changes
and everythingelse remains thesame, there is achange in the
quantitydemanded and amovement alongthe demand
curve.
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Tanu Kathuria 22
Shifts in the DemandCurve
When one of theother factors that
influence buyingplans changes,there is a changein demand and a
shift of thedemand curve.
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Tanu Kathuria 23
Common Confusions
2. Individual vs. Market Demand
4. Movements along vs. Shifts inDemand curve
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Tanu Kathuria 24
Quantity Supplied
Definition:
QS
= the amount of good or servicethat suppliers will be will be willingand able to sell during a particulartime at a particular price, ceteris
paribus Resources and technologydetermine what it is
possible to produce. Supply reflects a decision aboutwhich technologically feasible items to produce.
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Tanu Kathuria 25
Supply
Supply Curve and Supply ScheduleThe term supply refers to the entire
relationship between the quantitysupplied and the price of a good.
The supply curve shows the
relationship between the quantitysupplied of a good and its price whenall other influences on producersplanned sales remain the same.
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Tanu Kathuria 26
Supply Curve of CD-Rs
A rise in the price,other things
remaining thesame, brings anincrease in thequantity supplied
and a movementalong the supplycurve
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Tanu Kathuria 27
Example: Supply of CD-Rs
Price(P) Quantity(QS)
$ 0.50 0
1.00 31.50 4
2.00 5
2.50 6
Supply Schedule
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Tanu Kathuria 28
The Law of Supply
The higher theprice of the
good, the moreproducers willbe willing to
supply (QS
),ceteris paribus
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Tanu Kathuria 29
A Change in Supply
When any factor that influences selling plans other thanthe price of the good changes, there is a change insupply of that good. The quantity of the good thatproducers plan to sell changes at each and every price,
so there is a new supply curve.
When supply increases, the quantity that producers planto sell increases at each and every price so the supplycurve shifts rightward.
When supply decreases, the quantity that producersplan to sell decreases at each and every price so thesupply curve shifts leftward.
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Tanu Kathuria 30
Shifts in the Supply Curve
Price of inputs
Price of other goods produced
Expected future prices
# Suppliers
Technology
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Quantity Supplied Vs.Change in Supply
A Change in theQuantity Supplied
Versus a Changein Supply
Figure illustratesthe distinction
between a changein supply and achange in the
quantity supplied.
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Tanu Kathuria 32
Movement along theSupply Curve
When the price ofthe good changesand otherinfluences onselling plansremain the same,there is a change
in the quantitysupplied and amovement alongthe supply curve.
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Tanu Kathuria 33
Shift in Supply Curve
When one of theother factors that
influence sellingplans changes,there is a changein supplyand a
shift of the supplycurve.
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Tanu Kathuria 34
Market Equilibrium
Equilibrium is a situation in which opposingforces balance each other. Equilibrium in amarket occurs when the price balances theplans of buyers and sellers.
The equilibrium price is the price at whichthe quantity demanded equals the quantitysupplied.
The equilibrium quantity is the quantitybought and sold at the equilibrium price.
Price adjusts when plans dont match.
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Tanu Kathuria 35
Market Equilibrium
Figure illustrates theequilibrium price andequilibrium quantity
in the market for CD-Rs.
If the price of a discis $2, the quantitysupplied exceeds thequantity demandedand there is asurplus of discs.
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Tanu Kathuria 36
Market Equilibrium
Definition:
A Price-Quantity Combination atwhich
there is no shortage or surplus
S=D
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