ECO558

CH 3: DEMAND THEORY
SHAHARIAH ASMUNI
DEFS, FBM, UITM PUNCAK ALAM
APRIL 2023
 LESSON
CONTENTS:
3.0INTRODUCTION TO DEMAND 3.5ELASTICITY
THEORY 3.5.1 PRICE ELASTICITY OF
3.1DETERMINANTS OF DEMAND DEMAND
3.2DEMAND & DEMAND • ELASTICITY ALONG A DEMAND
CURVE
CURVE • IMPORTANCE OF PRICE ELASTICITY
3.3INDIVIDUAL & MARKET • DETERMINANTS OF PRICE
ELASTICITY
DEMAND
3.4TR, MR & AR
3.5.2 INCOME ELASTICITY
• IMPORTANCE
3.4.1 RELATIONSHIP
3.5.3 CROSS ELASTICITY
• IMPORTANCE
3.0 INTRODUCTION TO DEMAND
THEORY
• Demand – key to firm’s survival
• Effective demand – desire, willingness & ability to buy a product,
given price.

• How can the understanding of demand assist managers?

• Insight into consumer behavior (for effective management of resources and
supply of goods and services)
• Allows for forecasting of sales and revenue
3.1 DETERMINANTS OF DEMAND
3.2 DEMAND DEMAND
Q
FUNCTION
+ +

DIFFERENT
PERSPECTIVES OF
DEMAND DEMAND CURVE
FUNCTION 𝑄𝑥= 𝑓 ( 𝑃𝑥 ) 𝑐 . 𝑝 .
FUNCTION

CONVENTIONAL
DEMAND CURVE
P
FUNCTION
DEMAND
FUNCTION

DEMAND CURVE
FUNCTION

CONVENTIONAL
DEMAND CURVE
FUNCTION
3.3 INDIVIDUAL & MARKET DEMAND

MARKET
DEMAND
 Example:
3.4 REVENUE Given: P = 6.5 – 0.5Q

TOTAL
TR = P.Q TR = P.Q
REVENUE
= (6.5 – 0.5Q) Q
= 6.5Q –

REVENUE MARGINAL MR = MR =
CONCEPTS REVENUE = 6.5 - Q

AVERAGE AR = AR =.
REVENUE =
= 6.5 – 0.5Q
3.4.4
DEMAND, MR
AND TR
RELATIONSHIP
3.5.ELASTICITY
3.5.1 PRICE ELASTICITY OF DEMAND
PRICE ELASTICITY FORMULA
POINT ELASTICITY FORMULA
ELASTICITY ALONG A DEMAND
CURVE
DETERMINANTS OF PRICE ELASTICITY
OF DEMAND
ELASTICITY AND MR RELATIONSHIP
PRICE ELASTICITY OF DEMAND AND
MR RELATIONSHIP
INCOME ELASTICITY OF DEMAND
INCOME ELASTICITY OF DEMAND
CROSS ELASTICITY OF DEMAND