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Supply and Demand: Theory Demand

1. Demand refers to the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. 2. The law of demand states that, other things remaining the same, the higher the price of a good the lower the quantity demanded. The demand curve graphically shows the inverse relationship between price and quantity demanded. 3. A change in demand results from a shift of the entire demand curve, caused by changes in factors like income, prices of related goods, or the number of buyers. This is different from a change in quantity demanded which is a movement along the existing demand curve due to a change in price.

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Himesh Reshamia
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86 views5 pages

Supply and Demand: Theory Demand

1. Demand refers to the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. 2. The law of demand states that, other things remaining the same, the higher the price of a good the lower the quantity demanded. The demand curve graphically shows the inverse relationship between price and quantity demanded. 3. A change in demand results from a shift of the entire demand curve, caused by changes in factors like income, prices of related goods, or the number of buyers. This is different from a change in quantity demanded which is a movement along the existing demand curve due to a change in price.

Uploaded by

Himesh Reshamia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Supply and Demand: Theory

DEMAND
What is demand?
Demand refers to:
1. The willingness and ability of buyers to purchase different quantities of a good
2. At different prices
3. During a specific time period (per day, week, etc.)
Example: John is willing and able to buy 5 Play station CDs a month at 2000 taka per CD and is
willing and able to buy 4 Play Station CDs a month at BDT 2500 taka.

The Law of Demand


• Price of a good ………………………………………, the quantity demanded of the good falls
• Price of a good falls, the quantity demanded of the good ……………………………………..
• Ceteris paribus
• The law of demand: The price of a good and the quantity demanded of the good are
………………………………………………… related.
If P= price, Qd= quantity demanded, then:
P↑ Qd
P Qd↑
Four ways to represent the law of demand
1. In words: if the price of good quantity demanded falls, and if the price of a good decreases ( very
rare) quantity demanded increases, other things remain same.
2. In symbols:
If P= price, Qd= quantity demanded, then:

P↑ Qd↓

P↓ Qd↑

3. Demand schedule: numerical representation of the law of demand


Generally represented by a table
4. Demand curve: graphical representation of the inverse relationship between price and quantity
demanded
Table 1 Demand Schedule for Good X
5

Price (dollars)
4 D
Price ($) Qd Point in the Graph C
3
1 40 A
2 B
2 30 B
1 A
3 20 C
0
4 10 D 0 20 40 60
Quantity Demanded of Good X

Why does quantity demanded go down as price goes up?


There are mainly two reasons:

1. People substitute lower priced goods for higher priced goods (if price of beef goes up many
people substitute beef by mutton)
2. If price of a good increases (decreases), relative income falls and people tend to consume less.

Individual Demand curve and market demand curve


Individual demand curve: presents the price-quantity demand combination of a particular good for a
single buyer

Market demand curve: add individual demand curves

Market demand schedule: derived by adding the quantities demanded at each price. For example in
the following table at price 11 market demand is …………………………………………….

From market demand schedule we can draw marker demand curve. Market demand curve is
downward sloping like the individual demand curve, but………………………………….

Table 2 Market Demand Schedule for Good X

Price ($) Jones Smith Market= Jones + Smith


15 1 2 3
13 3 4 7
11 5 6 11
10 6 7 13

A change in quantity demanded versus a change in demand


Quantity demanded = The number of units of a good that individuals are willing and able to buy at a
particular price
Change in quantity demand= A movement from one point to another point on the same demand
curve caused by a change in the price of the good

Change in demand = shift of the demand

Demand curve can change in two ways: Demand (not quantity demand) can increase or demand can
decrease for a given price

Demand schedule A Demand schedule B Demand Schedule C

Increase in demand Decrease in demand

20 500 600 400

15 600 700 500

10 700 800 600

5 800 900 700


What factors cause the demand curve to shift?
Factors Change in the Change in Change in demand
factors Demand curve

Income Normal good Income rises Demand increases Shifts right

Example: CDs Income falls Demand falls Shifts left

Inferior good Income rises Demand falls Shifts left


(example: baked
beans) Income falls Demand increases Shifts right

Neutral good Income rises Demand remains Does not shift


(example: same
toothpaste)
Income falls Demand remains Does not shift
same

Prices of Substitutes (Coca- Price of Pepsi- Demand for Coca- Demand curve for
related Cola and Pepsi-Cola Cola rises Cola increases Coca-Cola shifts right
goods
Price of Pepsi- Demand for Coca- Demand curve for
Cola falls Cola decreases Coca-Cola shifts left

Complements (tennis Price of tennis Demand for tennis Demand curve for
rackets and tennis rackets rises balls decreases tennis balls shifts left
balls)
Price of tennis Demand for tennis Demand curve for
rackets falls balls increases tennis balls shifts
right

Number of buyers Increases Demand increases Shifts right

Decreases Demand decreases Shifts left

Expected future price increase Current demand Shifts right


increase

Decrease Current demand Shifts left


decrease

Price Increase Decrease in quantity Movement along the


demand curve

Decrease Increase in quantity Movement along the


demand curve
Normal goods: A good the demand for which rises (falls) as income rises (falls). Example: DVD

Inferior good: A good demand for which falls (rises) as income rises (falls). Example: coarse rice

Neutral good: A good demand for which does not change as income rises or falls. Example: tooth
paste

Substitutes: Two goods that satisfy similar needs or desire. If two goods are substitutes, the demand
for one rises as the price of the other rises. Example : Pepsi-Cola and Coca-Cola

Complements: Two goods that are used jointly in consumption. If two goods are complements, the
demand for one rises as the price of the other falls. Example: tennis rackets and tennis balls

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