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Demand

Learning Objectives

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What is demand Discuss the variables that influence demand. Variables that cause a change in demand. Nature of Demand

Demand
Demand implies

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Desire of consumer to buy a product Willingness to buy the product Sufficient purchasing power to buy the product

Types of Demand
Individual Market
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1. Individual demand 2. Market demand 3. Income demand 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. Composite demand (eg., coal & electricity) 7. Direct demand (eg., ice-creams)

8. Derived demand (eg., TV & TV mechanics)

9. Competitive demand (eg., desi ghee and vegetable oils) 10.Demand of unrelated goods

The Demand Side of the Market

Demand curve A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Demand schedule A table showing the relationship between the price of a product and the quantity of the product demanded.

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1 LEARNING OBJECTIVE

The Demand Side of the Market

The Demand of an Individual Buyer
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Plotting a Price-Quantity Combination on a Graph
At a price of $125 per printer, Kate, the purchasing manager for the Prudential Insurance Company, will be willing to buy 5 printers in the next month.

Quantity demanded The quantity of a good or service that a consumer is willing to purchase at a given price.

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Examples
Price 10 9 3 8 7 7 11 Q Dem 1
Price

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6 13

Quantity demanded of Oranges by consumers

Market demand

10 9 8 7 6

a 1 3 7 11 13

b 0 1 2 4 6

c 3 6 9 12 14

d 0 4 7 10 12

4 14 25 37 45

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Individual Demand and Market Demand

Market demand The demand for a product by all the consumers in a given geographical area.

Factors determining demand

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Explanatory and explained variable General Factors Additional factors related to luxury and durables Additional factors related to market demand

Demand Function
dX x y 1 n 1

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Q f ( P , Y , P , P ..........., P , T , A, E , E , u)
y p

Q f ( P , Y , P , P ..........., P , T , A, E , E , P , D, u)
dX x y 1 n 1 y p

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The Law of Demand

The Law of Demand Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increases, and when the price of a product rises, the quantity demanded of the product will decrease.

What Explains the Law of Demand?

Substitution effect The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. Income effect The change in the quantity demanded of a good that results from the effect of a change in the goods price on consumer purchasing power. Law of Diminishing marginal utility
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The Demand Side of the Market

Holding Everything Else Constant: The Ceteris Paribus Condition Ceteris paribus (all else equal) The requirement that when analyzing the relationship between two variablessuch as price and quantity demandedother variables must be held constant.
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Exceptions

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Giffen goods Commodities used as status symbol Expectations of change in the price of commodity

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Price of related goods Substitutes Goods and services that can be used for the same purpose. Complements Goods that are used together. Income Normal good A good for which the demand increases as income rises and decreases as income falls. Inferior good A good for which the demand increases as income falls, and decreases as income rises. Tastes Population and demographics Demographics The characteristics of a population with respect to age, race, and gender. Expected future prices

3-4
Shifting the Demand Curve

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Variables That Shift Market Demand

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Variables That Shift Market Demand

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A Change in Demand versus a Change in Quantity Demanded

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Revenue Concepts
Total Revenue Average Revenue Marginal Revenue

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Price 10 9 8 7 6 5 4

Qty Sold TR 10 20 30 40 50 60 70

AR

MR

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Draw the graph What does the graph imply Discuss?

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Nature of Demand

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Demand for indispensable objects is not affected by changes in market conditions. Demand for goods that have close substitutes have opposite case. Durable goods have different demand User characteristics also influences demand

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Derived Demand and Autonomous Demand Demand for Producer good and consumer good Demand for durable goods and non durable goods Industry demand and firm demand Short run and long run demand

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