Chapter 2

MICROECONOMICS

LESSON 2.1
The Concept of Demand and Demand Analysis

OBJECTIVES:
1. To define the concepts of demand, demand schedule, demand curve, and the law of
demand.
2. To identify the different factors affecting demand.
3. To analyze changes in the demand schedule and movements along the demand curve.

A. The Theory of Supply and Demand and The Market

 Theory of Supply and Demand – this theory shows how consumer preferences determine
consumer demand for goods and services and how business costs determine supply of the
product in the market. It is a basic and important tool in explaining changes in a
predominantly market economy like the Philippine economy.
 Generally, a market is defined as an institution or mechanism that brings together buyers
(demanders) and sellers (suppliers) of goods and services.

B. Demand
 The demand for a product (or simply, demand) is the amount of the good or services that
buyers in a specific market are willing and able to buy per unit of time, ceteris paribus or
“other things held constant”.
 Demand can be measured and presented as a demand schedule or a demand curve:
A. Demand Schedule – shows, in tabular form, the various quantities of the product
that will be bought at various prices at a specific time and place. Example:
Vigan City Market Demand Schedule for Mangoes per Week
Quantity Demanded (in
Price of Mangoes (per kilo)
kilo)
Php 45 100
Php 40 150
Php 35 200
Php 30 250
Php 25 300
Php 20 350
B. Demand Curve – it is a graphical representation of the demand schedule. Example:
 Vigan City Market Demand Curve for Mangoes per Week

 Law of Demand – When the price of a product is increased, and the “other things” are kept
constant, buyers tend to buy less of the product. On the other hand, when the price
decreases, buyers tend to buy more of the product.
 Hence, the law of demand explains the inverse relationship of price and quantity demanded,
quantity demanded goes down as price goes up, and vice versa.
 The two factors below explain why a consumer tends to buy more of a product or service if
its price falls.
1. Income Effect – as price falls, the purchasing power of the consumers is enhanced
because they can buy more of a product.
2. Substitution Effect – as price falls, the product becomes less expensive compared to
similar products so that the consumers tend to buy more of that product and less of
the similar product.

C. Non-Price Determinants of Demand

In the discussions above, price is assumed as the most important factor affecting demand.
Observations show however that there are other factors that can and do affect demand. The “other
factors” that influence demand, known as Non-Price Determinants of Demand, are as follows:
1. Tastes and Preferences.
 Explanation: A favorable change in consumer tastes and preferences – a change that
makes the good or service more desirable – would increase demand.
 Examples:
 Consumers prefer appliances that have higher electrical consumption
efficiency, thus, increasing demand for these appliances.
 Conversely, the fashion craze for the green color may soon pass, so the
demand for green clothes will decrease.
2. Number of Buyers.
 Explanation: An increase in the number of buyers in a specific market results in
greater demand, and vice versa.
 Examples:
 Concern for health has increased the number of consumers who prefer
organically grown fruits and vegetables and thus increased their demand.
 Conversely, education on the benefits of breastfeeding has decreased the
number of mothers buying infant milk formula for babies and thus
decreased the demand for the milk formula.
3. Income.
 Explanation: For most products, a rise in income causes increase in demand.
 Example:
 As consumers earn more, they tend to buy more beef, clothes, and
electronic equipment.
  Additional Discussion:
 Products whose demand varies directly with income are called normal or
superior goods.
 On the other hand, there are products whose demand decline as money
income rise and are called inferior goods.
 Example of inferior goods: dried fish and second-hand clothes.
4. Prices of Related Goods.
 Explanation: Changes in prices and availability of related goods may increase or
decrease the demand for a product or service depend on whether the good is a
substitute or a complement:
 Substitute Good – something that can be used in place of another good.
 Complementary Good – something which is used together with another
good.
 Example:
 Tea is a substitute for coffee while creamer is a complement of coffee.
 If the price of coffee rises, consumers will tend to buy less coffee,
and switch to buying tea which becomes relatively cheaper.
 On the other hand, if the price of the coffee rises, the demand for
coffee decreases as well as that of the creamer.
5. Expectations.
 Explanation: The expectations of consumers on future market situations, such as
future price or future availability of a product, affect demand.
 Example:
 If consumers expect that the price of fruit cocktail will rise during the
Christmas season, they will buy the product early, thus increasing current
demand for fruit cocktail.

D. Changes in the Demand Schedule and Movements Along the Demand Curve
 A change in one or more non-price determinants of demand changes the demand schedule
and therefore changes the location of the demand curve in the graph.
 An increase in demand will shift the demand curve from its original location to the right
while decrease in demand will shift the demand curve to the left.
 Thus, the non-price determinants of demand are sometimes called demand shifters.
 Examples:
Change in the Demand Schedule
(i.e. consumer’s income increased)

Legend: d1 = original demand | d2 = new demand after the increase in income

Movement Along the Demand Curve

(i.e. consumer’s income increased)
Legend: d1 = original demand | d2 = new demand after the increase in income