Demand

Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at alternative prices for a given period.

or

Demand = Power to purchase + will to purchase

Requisites: •Desire for specific commodity.

•Sufficient resources to purchase the desired commodity.

•Willingness to spend the resources.

•Availability of the commodity at (i) Certain price (ii) Certain place (iii) Certain time.

Determinants of DemandDeterminants of Demand

• What factors determine how much ice cream you will buy?

1. Product’s Own Price

2. Consumer Income

3. Prices of Related Goods

4. Tastes

5. Expectations

6. Number of Consumers

etc

Kinds of Demand

1. Individual demand2. Market demand

3. Income demand• Demand for normal goods (price –ve, income +ve)• Demand for inferior goods (eg., coarse grain)

4. Cross demand• Demand for substitutes or competitive goods (eg.,tea & coffee, bread and

rice)• Demand for complementary goods (eg., pen & ink)

5. Joint demand (same as complementary, eg., pen & ink)6. Direct demand (eg., ice-creams)7. Derived demand (eg., TV & TV mechanics)8. Competitive demand (eg., desi ghee and vegetable oils)9. Demand of unrelated goods

Factors Affecting Demand

1. Prices of Goods

2. Income of Consumer

3. Prices of Related Goods

4. Population

5. Tastes, Habit

6. Expectation about future prices

7. Climatic Factors

8. Demonstration Effect

9. Distribution of national income

Demand Schedule

Demand Schedule: a tabular presentation showing different quantities of a commodity that would be demanded at different prices.

Types of Demand Schedules

Individual Demand schedule Market Demand SchedulePrice A

1 50

2 40

3 30

4 20

Price A B C M.S

1 50 45 40 135

2 40 30 38 108

3 35 20 30 85

4 20 15 25 60

The Law of Demand

Prof. Samuelson: “Law of demand states that people will buy more at lower price and buy less at higher prices, others thing remaining the same.”

Ferguson: “According to the law of demand, the quantity demanded varies inversely with price”.

Chief Characteristics:

Inverse relationship.Price independent and demand dependent variable.

Assumptions:

No change in tastes and preference of the consumers.Consumer’s income must remain the same.The price of the related commodities should not change.The commodity should be a normal commodity

John's Demand Schedule

03.0022.5042.0061.5081.00

100.50120.00

Quantity of cones DemandedPrice of Ice-cream Cone ($)

John’s Demand Curve

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

2 4 6 8 10 120

$3.00

2.50

2.00

1.50

1.00

0.50

Exceptions and Importance of Law of Demand

Exceptions:Inferior goodsArticles of snob appeal. (exception: Veblen goods, eg., diamonds)Expectation regarding future prices (shares, industrial materials)EmergenciesQuality-price relationshipIgnoranceChange in fashion, habits, attitudes, etc..

Importance:Price determination.To Finance MinisterTo farmersIn the field of Planning.

Shift of Demand Vs Movement Along a Demand Curve

• A change in demand is not the same as a change in quantity demanded.

• In this example, a higher price causes lower quantity demanded.

• Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.

A Change in Demand Versus a Change in Quantity Demanded

• When demand shifts to the right, demand increases. This causes quantity demanded to be greater than it was prior to the shift, for each and every price level.

A Change in Demand Versus a Change in Quantity Demanded

To summarize:

Change in price of a good or service leads to

Change in quantity demanded(Movement along the curve).

Change in income, preferences, orprices of other goods or services

leads to

Change in demand(Shift of curve).

The Impact of a Change in Income

• Higher income decreases the

demand for an inferior good• Higher income increases the

demand for a normal good

The Impact of a Change in the Price of Related GoodsThe Impact of a Change in the Price of Related Goods

• Price of hamburger rises

• Demand for complement good (ketchup) shifts left

• Demand for substitute good (chicken) shifts right

• Quantity of hamburger demanded falls

From Household to Market Demand

Demand for a good or service can be defined for an individual household, or for a group of households that make up a market.

Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

From Household Demand to Market Demand

Assuming there are only two households in the market, market demand is derived as follows:

Reference: Principles of Economics, 6/e by Karl Cas, Ray Fair

Slides prepared by: Fernando Quijano and Yvonn Quijano