Theory of

Demand

Prepared by: Divina Monterola

- Is a desire and want backed by money.

1. Want it
2. Can afford it
3. Plan to buy it

• Wants – are the unlimited desires or wishes that people

have for goods and services.
How many times have you thought that you would like to
something “if only you could afford it” or if it
weren’t expensive”?

• Quantity Demanded of a good or service is the amount

that consumers plan to buy during the given time period
at a particular price.

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Price of Potato Quantity Demanded
Per kilo In kilos
₱ 45 100

40 150

35 200

30 250

25 300

20 350

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The Law of
Demand
The law of demand states:
ceteris paribus, the higher the price
of a good, the smaller the quantity
demanded; and the lower the price of a
good, the greater the quantity demanded.

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Why does a higher price reduce
the quantity demanded?
1. Substitution Effect
When the price of a good rises, other things
remaining the same, it’s relative price – its
opportunity cost – rises.
2. Income Effect
When price rises and all other influence on buying
plans remains unchanged, the price rises relative to
people’s income.

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Demand Curve
- shows the relationship
between the quantity demanded
of a good and it’s price when
all other influences on
consumer’s planned purchases
remain the same.

Demand Schedule
- lists the quantities
demanded at each price when all
other influences on consumers’
planned purchases remain the
same.

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• Willingness and Ability to Pay

- it is a measure of marginal benefit.

- If a small quantity is available, the highest the price that some one is
willing and able to pay for one more unit is high. But as the quantity available
increases , the marginal benefit of each additional unit falls and the highest price
that someone is willing and able to pay also falls along the demand curve.

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Determinants of Demand
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A Change in Demand
- When demand increases, the
demand curve shifts right ward abd the
quantity demanded at each price is
greater.

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1. The Prices of related goods.

Substitute – is a good that can be used in a

place of another good.

Complement - is a good that is used in

Gray
conjunction with another good.

2. Expected Future Prices

If a price of a good is expected to rise in
White and if good
the future Black can be stored, the
opportunity cost of obtaining the good for
future use is lower today than it will be when
the price has increased.

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3. Income
- Consumer’s income influences demand.
- When income increases, consumer’s buy more of most goods;
and when income decreases, consumers buy less of most goods.

Normal good – is one of which demand increases as income

decreases.
Inferior good – is one for which demand decreases as
income increases.

4. Expected Future Income

- When income is expected to increase in the future,
demand might increase now.

5. Population
- Demand also depends on the size and the age structure of
the population.
- The larger the population, the greater the demand for
all goods and services.

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6. Preference
- determines the value of that people place on each good and
service.
- depend on such things as the weather, information and fashion.

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A Change in the Quantity Demanded Versus a
Change in Demand
The distinction between a change in quantity demanded
and change in demand is the same as that between a
movement along the demand curve and shift of the demand
curve.

1. Movement Along the Demand Curve

If the price of a good changes but everything else
remains the same, there is movement along the demand
curve.
2. A Shift of the Demand Curve
If the price of good remain constant but some
other influence on buyer’s plans changes, there is a
change in demand for that good.
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Demand
Function
Demand Function
The quantity demanded for a product depends on various
factors which make demand function.
It can express as follows:

1. One Point Method or Slope Method

2. Two Point Method
3. Least Square Method

D= a-bp

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Quantity Price
Demanded (x) (y)
2 ₱ 90
4 80

6 70

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One Point
Method

a. Δy b. y-y1= b(x-x1)
Δx y-70=-5(x-6)
80-90 y= 70-5x+30
4-2 y= 100-5x
-10
2
= -5
Quantity Demanded = 100-5p

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Two Point Method

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Least Square Method

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Thanks!
Reference
Economics
Michael Parkin

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