Economic Analysis

Demand Schedule and Law of Downward sloping demand

Assignment No. ………………………………. (2)

SUBMITTED TO:- …………………MR. KHALID MUNIR

SUBMITTED BY:- …………….MUHAMMAD IMRAN KHURSHID

REGISTRATION NUMBER:- ………….. AH 505028

ALLAMA IQBAL OPEN

UNIVERSITY ISLAMABAD
REGIONAL OFFICE LAHORE

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 DEDICATION

This report is dedicated to our beloved

parents, respected teacher of Economics &
Sincere friends.

Table of Contents
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Acknowledgement …………………………………………………….. 4
Abstract ………………………………………………………………… 5
Demand Schedule………….…………………………………………….. 6
An expansion of Demand…….…………………………………………. . 7
A contraction of Demand..……………………………………………….… 8
Law of downward sloping demand…………………..……………………11
Why does the demand curve slope downward?………………………….. 12
Case 1 growth of Personal computers…….…………………………….. 13
Case 2 wages and Worker Demand...………………………………….. 14

ACKNOWLEDGEMENTS

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We are grateful to Almighty Allah who has enabled me to complete
this report and then we would like to take this opportunity to thank
all those who helped and assisted us in completing this report. First
and foremost, we extend our deepest gratitude to Mr. Khalid Munir
our presentation advisor. His support, encouragement, and guidance
have been invaluable in the successful completion of this report.

Abstract:-

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These days, in every market and financial sector shortage of goods is a common problem
and getting severe day by day. Market capacity, its need and consumer requirement are
the major factors that must kept in mind for the improvement in supply. This relationship
along with the effects of price changes disturb the consumer a much. Understanding the
relationship of demand, demand schedule and Law of downward sloping demand is the
key role for every manager in this scenario. So my target in this assignment is to provide
the brief idea about the concepts of demand schedule, demand curve and the law of
downward sloping demand.

Define carefully what is meant by a demand schedule or curve. State the law of
downward sloping demand. Illustrate the law of downward sloping demand with
two cases from your own experience.

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Answer

Demand Schedule

A demand schedule is a list of the quantities of a good or service a consumer will buy at
each of a series of prices.

Each individual has their own demand schedule; a list of how many items they would buy
at different prices. We can also prepare a market demand schedule, summarizing all the
quantities that all consumers would be prepared to buy, at a variety of prices.

In economics, the demand curve is the graph depicting the relationship between the
price of a certain commodity, and the amount of it that consumers are willing and able to
purchase at that given price. It is a graphic representation of a demand schedule. The
demand curve for all consumers together follows from the demand curve of every
individual consumer: the individual demands at each price are added together. Despite its
name, it is not always shown as a curve, but sometimes as a straight line, depending on
the complexity of the scenario.

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Demand curves are used to estimate behaviors in competitive markets, and are often
combined with supply curves to estimate the equilibrium price (the price at which sellers
together are willing to sell the same amount as buyers together are willing to buy, also
known as market clearing price) and the equilibrium quantity (the amount of that good or
service that will be produced and bought without surplus/excess supply or
shortage/excess demand) of that market.

An ''Expansion'' of Demand
One reason consumers buy more of a commodity when its price is lower is because you
can increase your total utility or the amount of ''satisfaction'' you can gain from your
income.

If you have a fixed income and you like tomatoes, if the price of tomatoes falls, then you
can buy more of them.

This is called an income effect. Lower prices mean you have more purchasing power;
effectively, your real income has effectively risen, because your income can buy more
tomatoes.

When tomatoes are $5 per kilogram, the average household buys one kilogram per month
(see point E). When the price falls to $4 per kilogram, economists say there has been an
expansion of demand (from point E to point E1) and 2 kilograms are purchased per
month.

A further fall in price to $3 per kilogram sees a further ''expansion of demand'' to the
point from E1 to E2, at which point households consume three kilograms of tomatoes per
month.

Another reason consumers buy more of a commodity when its price is lower is because
the price of alternatives has become effectively more expensive. If the price of beef
falls, and the price of lamb does not, then lamb has become effectively dearer.
Consumers substitute beef for lamb for their Sunday dinner. This is called the
substitution effect.

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A ''Contraction'' of Demand
We can show the law of demand, when we look at a market in operation.

If movie tickets cost $10 each, the average person will go to the movies twelve times per
year. This is represented as the point E on the graph. The cinema owner will gain revenue
equal to the price of a cinema ticket, multiplied by the number of cinema tickets sold in a
specified period of time. At a price of $10 per ticket, the cinema owner will gain a
revenue of $10 x 12 = $120

If the price of movie tickets rises, to $12 each, the average person will go to the movies
less often; nine times per year. This is represented as the movement along the demand
curve from E to E1. At a price of $12 per cinema ticket, the cinema owner will gain
revenue of $108

If movie prices rise even further, to $14 per ticket, demand will contract even further to
six visits per year. This is represented as the movement along the demand curve from E1
to E2.

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The relationship between price and the amount of a product people want to buy is what
economists call the demand curve. This relationship is inverse or indirect because as
price gets higher, people want less of a particular product. This inverse relationship is
almost always found in studies of particular products, and its very widespread occurrence
has given it a special name: the law of demand. The word "law" in this case does not
refer to a bill that the government has passed but to an observed regularity.

There are various ways to express the relationship between price and the quantity that
people will buy. Mathematically, one can say that quantity demanded is a function of
price, with other factors held constant, or:

Qd = f(Price, other factors held constant)

A more elementary way to capture the relationship is in the form of a table. The numbers
in the table below are what one expects in a demand curve: as price goes up, the amount
people are willing to buy decreases. (A widget is an imaginary product that some
economist invented when he could not think of a real product to use in an example.)

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The same information can also be plotted on a graph, where it will look like the graph
below

If one of the factors being held constant becomes unstuck, changes, and then is held
constant again, the relationship between price and quantity will change. For example,
suppose the price of getwids, a substitute for widgets, falls. Then, people who previously
were buying widgets will reconsider their choices, and some may decide to switch to
getwids. This would be true at all possible prices for widgets. These changes in the way
people will behave at each price will change the demand curve to look like the table
below.

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These are the same changes shown in a graph.

A. The Law of downward sloping Demand

The law of demand states that, if all other factors remain equal, the higher the price of a
good, the less people will demand that good. In other words, the higher the price, the
lower the quantity demanded. The amount of a good that buyers purchase at a higher
price is less because as the price of a good goes up, so does the opportunity cost of
buying that good. As a result, people will naturally avoid buying a product that will force
them to forgo the consumption of something else they value more. The chart below
shows that the curve is a downward slope.

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A, B and C are points on the demand curve. Each point on the curve reflects a direct
correlation between quantity demanded (Q) and price (P). So, at point A, the quantity
demanded will be Q1 and the price will be P1, and so on. The demand relationship curve
illustrates the negative relationship between price and quantity demanded. The higher the
price of a good the lower the quantity demanded (A), and the lower the price, the
more the good will be in demand (C).

Why does the demand curve slope downward?

A demand curve shows the relationship between the price of something and the amount
people will buy. The higher the price goes, the less of it you're going to sell.The demand
curve slopes downwards due to the following reasons.
(1) Substitution effect: When the price of a commodity falls, it becomes relatively
cheaper than other substitute commodities. This induces the consumer to substitute the
commodity whose price has fallen for other commodities, which have now become
relatively expensive. As a result of this substitution effect, the quantity demanded of the
commodity, whose price has fallen, rises.
(2) Income effect: When the price of a commodity falls, the consumer can buy more
quantity of the commodity with his given income, as a result of a fall in the price of the
commodity, consumer’s real income or purchasing power increases. This increase
induces the consumer to buy more of that commodity. This is called income effect.

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(3) Number of consumers: When price of a commodity is relatively high, only few
consumers can afford to buy it, And when its price falls, more numbers of consumers
would start buying it because some of those who previously could not afford to buy may
now afford to buy it, Thus, when the price of a commodity falls, the number of its
consumers increases and this also tends to raise the market demand for the commodity
hence the downward sloping of the demand curve and other reasons such as diminishing
marginal utility and many others.
Case 1
The explosive growth in computor demand
We can state the law of downward sloping demand for the case of personal computors
(PCs). The price of the PCs were high and their computing power was relatively modest.
They were found in some business and even fewer homes. It is hard to believe that just
before 20 years ago students wrote their most of papers in long hand and did most of
calculations by hand or with simple calculators. But the prices of the computing power
fell sharply over the last 15 years. As the prices fell, new buyer were enticed to buy there
first computors. PCs came to be widely used for work, for schools and for fun. In the
early 2000s. as the value of computors increased with the development of internet, yet
more people jumped on to the computor bangwagon. World wide computor sales totaled
about 100 millios in 2002.
Figure below shows the price and the quantities of the computors and peripheral
equipment in the USA as calculated by the governament statisticians. The price reflect
the cost of purchasing computors with constant quality that ils, they into acount the rapid
quality change of the average computor purchased. You can see how falling price along
with improved softwere, increased the utility of the internet and e-mail, and othe factors
have led to an explosive growth in computors output.

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Case 2
 A less obvious aspect of the law but perhaps more important is the idea of cost. In
everyday language, a cost is measured in dollars and cents and is easily compared and
evaluated. Economists use the term total cost. The total cost of something is not only the
dollars and cents, but the next best thing you give up in order to consume that particular
good. This is what is known as an opportunity cost. For example, if a person has $500
dollars to spend they have to decide what to do with it. He might choose to buy a TV, or
he may buy a ticket to Loss Angels (LA) to visit some friends. If he decides to go to LA,
he gives up the option of the TV. In this example, the trip to LA cost him a TV. Money is
no longer the emphasis of cost; it only represents possibilities that one has to choose
from. This is important because you can then use the same structure to analyze non
monetary decisions. Good microeconomics goes way beyond dollars and cents.
 This should be fairly obvious when dealing with things like apples, cars, movie tickets
etc. It gets a little more interesting when you start thinking about things like justice, clean
air, and even life. Like so much of microeconomics, much of it looks obvious when you
think about it a little, but it’s surprising how quickly and easily people ignore this type of

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common sense. Most of microeconomics concerns itself with pointing out obvious
outcomes that are buried under obvious expectations. A prime example of this is the
minimum wage law. Minimum wage laws are brought about in order to help low income
workers. The results are the opposite, low income workers are hurt by minimum wage
laws. Why? You should know the answer by now, demand curves slope downwards.
Don’t see it? Imagine an employer's demand curve for labor.

At zero dollars per hour, he would employ anyone that would want to work for him up to
the point that everyone got in each others way and productivity actually went down, lets
say 190 people. At 42 dollars per hour, he would not hire anyone. Between these two
extremes there is a curve that describes his hiring of the same labor at different prices.
Since it is downwards sloping, any movement up the vertical axis (higher wages)
corresponds with a shift to the left on the horizontal axis, lowering the amount of labor he
hires. Any movement to the right (larger numbers of people employed) travels down the
vertical axis resulting in lower wages. We’re going to assume that the minimum wage

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law raises the salary of the workers (otherwise, why pass the law at all?). Now that the
same workers cost more, the employers will hire fewer employees. The result is more
unemployment among the people that the minimum wage law is supposed to help. It
can’t happen any other way, more unemployment will always be the result of minimum
wage laws because of finite budgets, in other words, demand curves slope downwards.
The same happens with mandatory union hiring. The Union demands a higher
compensation package than the workers would otherwise get. The result is that fewer
people are employed (albeit at higher wages usually) and more are unemployed.

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