Demand

Reference: Koutsoyiannis, Ferguson & Gould

What is Demand?

Itis the relationship between

quantity demanded and
price
 Market Demand

 Market demand is the horizontal sum of

individual demands

 It is market demand that commands our

interest
Individual Demand Schedule
Demand Schedule - a table showing the relationship between
the price of a good and the quantity demanded per period
of time, ceteris paribus. Apple are measured in Rs..

Price of Apple (Rs.) Quantity Demanded

Your Demand Schedule

Price qd

Rs.2.00 5
Your Demand Schedule

Price qd

Rs.2.00 5

Rs.1.50 7
Your Demand Schedule

Price qd

Rs.2.00 5

Rs.1.50 7

Rs.1.00 15
10
 Law of Demand
The price (willingness to pay)
of a product, service, or
activity is inversely related to
the quantity demanded,
ceteris paribus.
D = f(Price) such that
f’(Price)<0
Demand Schedules and
Curves
 Demand Curve - a graph of the
demand schedule showing the
relationship between the price of
a good and the quantity
demanded per period of time,
ceteris paribus.
Individual Demand Curve

Price

Note: ALWAYS label your axes!

qd
Individual Demand Curve
Price

2.00

1.50

1.00

0.50

qd
0 5 10 15
Individual Demand Curve
Price
A
2.00

1.50

1.00

0.50

qd
0 5 10 15
Individual Demand Curve
Price
A
2.00

B
1.50

1.00

0.50

qd
0 5 10 15
7
 Individual Demand Curve
Price
A
2.00

B
1.50

C
1.00

0.50

qd
0 5 10 15
7
 Individual Demand Curve
Price
A
2.00

B
1.50

C
1.00
d

0.50

qd
0
5 7 10 15
Market Demand Curve
 Thedemand curve we just drew
was the Demand for APPLE by
one person.
 We want an aggregate
measure of the price, quantity
demanded relationship--a
market demand
 Market Demand Schedule

 A table showing the relationship between

the price of a good and the total quantity
demanded by all consumers in the market
per period of time, ceteris paribus.

 Market Demand is obtained by summing

horizontally the quantity demanded by
each person at each price
Market Demand Schedule

Price Ram’s
qd
5 3

10 2

15 1
Market Demand Schedule

Price Ram’s Shyam’s

qd qd
5 3 12

10 2 8

15 1 3
Market Demand Schedule

Price Ram’s Shyam’s Jatin’s

qd qd qd
5 3 12 7

10 2 8 5

15 1 3 4
Market Demand Schedule

Price Ram’s Shyam’s Jatin’s Market

qd qd qd Qd
5 3 12 7 22

10 2 8 5 15

15 1 3 4 8
Demand Curve

Note: the linear

demand is used for
15 convenience
10

D
Qd
8 15 22
Behind the Demand Curve
➢ A demand curve is drawn
under the assumption of
ceteris paribus - all other
important factors
remaining unchanged
➢ Factors to be considered
may be remembered by D
= D(APPLE)
Factors affecting market
demand,
 P = Prices
 I = income
 T = tastes or preferences
 E = expectations about future prices and market
conditions
 Price of Other Goods

The price of substitutes

The price of complements
 Price of Substitutes

What would happen to the

demand for Apples if the
price of Oranges fell?
 The demand for Apples would probably fall since people would
buy oranges instead.

There is a positive relationship

between the demand for a
good and the price of its
substitutes
Price of Substitutes
 Thus an increase in the price of a
substitute will increase the demand
for the good
 And a decrease in the price of a
substitute will decrease the demand
for the good
Price of Complements
 Complementary goods are goods
used together
 Suppose we are to buy car.
 Whatif the price of Petrol goes up?
What ought to happen to the
demand for car?
 Itought to go down, since people
requires petrol to run the car.
Price of Complements
 Thus an increase in the price of a complement will decrease
the demand for the good
 And a decrease in the price of a complement will increase
the demand for the good
Price of Other Goods -
Summary
 Thus, either of the following will increase Demand
• Price of a substitute good increases
• Price of a complement good decreases
 And either of the following will decrease Demand
• Price of a substitute good decreases
• Price of a complement good increases
 Income
 For most goods there is a
positive relationship between
income and demand. These
are defined as normal goods.
For inferior goods, there is an
inverse relationship between
income and demand.
Tastes and Preferences
 If we find out apple improves our
attractiveness to others, our
willingness to pay for Apples
would increase (an upward shift
of the demand curve)
 If we find out Apples are
unhealthy the demand for the
good decreases (a leftward shift
of the curve)
 Expectations
 If we were to hear a new story
about how Apple prices were going
to go up would you stock up?
 Ifyou expect your employer to
begin downsizing would you reduce
your demand for goods now?
 Change in Demand

 Increase in demand - demand

curve shifts to the right (or up -
an increase in WTP)
 Decrease in demand -
demand curve shifts to the left
(or down - a decrease in WTP)
 Increase in Demand

D’
D
Qd
Change in Demand vs. Change
in Quantity Demanded
 Change in Demand - a change in a
factor that effects demand other than the
price of the good, thus there is a change
in quantity demanded at EVERY price.
 Change in Quantity Demanded - a
movement along a given demand curve-
due only to a change in the price of the
good itself
Increase in Quantity Demanded
P

Qd