UNIVERSITY OF EDUCATION, WINNEBA

SCHOOL OF BUSINESS

DEPARTMENT OF APPLIED FINANCE AND POLICY MANAGEMENT

FIRST SEMESTER 2022/2023 ACADEMIC YEAR

BBA 111 PRINCIPLES OF MICROECONOMICS

DEMAND

HAJIA RAMATU USSIF (Ph.D)

 PRESENTATION OUTLINE
 Basic Concepts
 Ways of Value in Exchange
 Functions of Price
 The concept of Demand
 The Law of Demand
 The Substitution Effect
 The Income Effect
 Demand Schedule Demand Curve
 Individual Demand and Market Demand
 Determinants of Demand
 Change in Demand and Change in Quantity Demanded
BBA 111 Lecture Three
 DEMAND

BBA 111 Lecture Three

 Basic Concepts

 Demand together with supply constitutes the forces that make transactions in the
market possible
 A market: is an institution or place where buyers and sellers exchange goods and
services.
 A competitive market: is one in which there are many buyers and many sellers
where an individual seller has negligible influence on the market price.
 In a perfectly competitive market, there are homogeneous goods.
BBA 111 Lecture Three
 Basic Concepts

 A seller has little motivation to charge a price lower than the market price.

 Buyers will simple also move elsewhere when the supplier charges higher than
the market price.
 The following are examples of market types: Goods and services market, Factor
market, Foreign Exchange market, Money market, Capital Market, etc.

BBA 111 Lecture Three

 Basic Concepts

 The concept of VALUE refers to the worth of an item to a holder, consumer or

owner. Value may be used in a dual sense. Value in Use and Value in Exchange.
 Value in use describes the satisfaction or pleasure that the holder, consumer or
owner derives from consuming, holding or owning the item.
 Value in exchange defines the opportunity cost of obtaining or acquiring an item.

 Generally, any item that has value in exchange has value in use but not everything
that has value in use has value in exchange.
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 Ways of determining Value in Exchange

 Four main ways of determining value in exchange are; by market forces,

auctioning, tender and haggling
 Market Forces – price is fixed or arrived at through the interplay between demand
and supply
 Under Auctioning – prices are determined normally through public and open
bidding by interested parties or buyers with usually one seller, selling a limited
quantity of item

BBA 111 Lecture Three

 Ways of determining Value in Exchange

 Tender – many prospective buyers against a single supplier or a number of

prospective sellers against a single buyer. Highest bidder buys and lowest
bid is given the nod to sell.
 Haggling – involves bargaining between the buyer and seller to arrive at an
agreed price.

BBA 111 Lecture Three

 Functions of Price

In a typical market economy, prices perform three functions which are signaling,
incentive creating and rationing.
1.Signalling – Prices convey information to the market so suppliers can respond to
which goods and services are high in demand. Consumers also decide on which goods
and services will provide the maximum satisfaction at the lowest price. Prices may send
wrong signals sometimes.
2.Incentives – Prices provide incentives to economic agents to behave and make
decisions in a manner that is consistent with what they consider to be their desires.
3.Rationing – Price can serve as a rationing tool by enabling the economic agents to
respond to incentives being offered by so doing enabling the market to operate in the
most efficient manner.

BBA 111 Lecture Three

 The Concept of Demand

 Demand: is the various amounts of a product that consumers are willing and able to
purchase at each of a series of possible prices during a specific period of time (all
other things being equal
 The Demand schedule: A table that shows the relationship between the price of a
product and the quantity of the product demanded.
 What is the demand for mobile phones?

BBA 111 Lecture Three

 The Concept of Demand

 Quantity demanded: is slightly different from demand. Classically, we define

quantity demanded as the specific amount of a good or service that a consumer or
consumers are willing and able to buy at a given price within a period of time.

 What is the quantity demanded for Samsung mobile phones when the price is
Ghc1,000?

BBA 111 Lecture Three

 The Law of Demand

 We have observed the inverse relationship between price and quantity

demanded. This helps formulate the law of demand:
 The law of demand states that;

 The quantity demanded of a good falls when the price of the good rises, and
vice versa, provided all other factors that affect buyers’ decisions are
unchanged

BBA 111 Lecture Three

 The Law of Demand

 There are two ways to explain the Law of Demand

• Substitution effect

• Income effect

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 Substitution Effect

When the price of a good decreases, consumers substitute that good instead of other
competing (substitute) goods

Example:

Coke and Pepsi

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 Income Effect

 A decrease in the price of a commodity is essentially equivalent to an

increase in consumers’ income

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Lower Prices = Higher Income

Situation A
If income rises, Situation A
Price of an Apple $1.00 becomes Situation B.
Price of an Orange $2.00
Situation B
Income $10.00
Price of an Apple $1.00
If prices fall, Situation A Price of an Orange $2.00
becomes Situation C.
Income $20.00

Situation C
Price of an Apple $0.50 Q: Which change is better?
Price of an Orange $1.00
A: They are both equally
Income $10.00 desirable. A fall in prices is
equivalent to an increase in
income.
SUPPLY AND DEMAND 16
 The Individual Demand Curve
• An Individual demand curve is typically a downward sloping curve. It may
sometimes be also represented hypothetically as a downward sloping straight
line.
6
6

5
5

4 4

3 3

2 2

1 D 1 D

0 10 20 30 40 50 60 70 80
0 10 20 30 40 50 60 70 80
Quantity Demanded (tin of milk per week)
Quantity Demanded (tin of milk per week)
 The Demand Schedule

Demand schedule: A table that shows the relationship between the price of a
product and the quantity of the product demanded.

BBA 111 Lecture Three

 Demand Curve
Price of
Ice-Cream Cone
$3.00

2.50

1. A decrease
2.00
in price ...

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
 Market Demand

 The market demand is an aggregate (a sum) of all the quantities demanded

by all consumers at the possible prices of a good.
 Market Demand is obtained by summing horizontally the quantity
demanded by each person at each price

BBA 111 Lecture Three

 Market Demand Schedule
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
Price of bread (GH Individual Demand Market
¢) Demand
Buyer A Buyer B Buyer C

5 10 12 8 30
4 20 23 17 60
3 35 39 26 100
2 55 60 39 154
1 80 87 54 221
 The Market Demand Curve

It shows the price-quantity combination of a particular good for all buyers. The market
demand curve DD is derived by adding horizontally the individual demand curves
(D1D1+D2D2+D3D3) of all the buyers in the market
P 𝐃𝟏 𝐃𝟐 𝐃𝟑 D

GH¢3.00

𝐃𝟏 𝐃𝟐 𝐃𝟑 D

0 35 𝑸𝒅 0 39 𝑸𝒅 0 26 𝑸𝒅 0 100 𝑸𝒅

(𝟑𝟓 + 𝟑𝟗 + 𝟐𝟔 = 𝟏𝟎𝟎)

BBA 111 Lecture Three

 Determinants of Demand

The demand of a good can be affected by the following factors:

The price of the good
Prices of Related Products
Income of Consumers
Consumers’ tastes (Preferences)
Number of Buyers
Consumer expectations about future prices and income
Population
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 Determinants of Demand Cont’d

1) Price of the good:

Price has an inverse relationship with demand. The lower the price, the higher quantity
demanded.
2)Price of related goods:
The price of substitutes (goods that can be used in place of another good) or complements
(goods can are used together) can affect the demand of a good.
a)Price of Substitute Goods: There is a positive relationship between the demand for a
good and the price of its substitutes. An increase in the price of Coca Cola will lead to
an increase in the demand of Pepsi and vice – versa.
b)Price of Complements Goods: There is a negative or inverse relationship between the
demand for a good and the price of its complements. An increase in the price of Tennis
balls may
BBAlead
111 to a decrease
Lecture Three in the demand for tennis rackets.
 Determinants of Demand Cont’d

3) Income of Consumers:
•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.
Cheaper food products are examples of inferior goods
4) Consumers Taste and Preferences:
•Tastes (preferences) influence the demand for a product. When preferences
change in favour of a commodity, the demand for that particular commodity
increases while the demand for another commodity decreases

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 Determinants of Demand Cont’d

5) Number of Buyers:

An increase in the number of buyers in a market increases demand while a decrease

in the number of buyers in a market decreases demand. For instance, if the number
of buyers increases due to, say, a high birth rate, increased immigration, etc.,
demand will increase

BBA 111 Lecture Three

 Determinants of Demand Cont’d

6) Expectation about Future Price & Income:

Changes in consumer expectations may cause a change in the demand of the good.
A newly formed expectation of higher future prices (or decreasing income) may
cause consumers to buy more now in order to escape the anticipated price
increases (or the fall in income). The convex is also true.

BBA 111 Lecture Three

 Determinants of Demand Cont’d

7) Population:

If there is an increase in population accompanied with the means to purchase

goods, demand for all goods and services by the new people will increase.

BBA 111 Lecture Three

 Change in Quantity Demanded Vs Change in Demand

Economists often talk about change in quantity demanded and

change in demand.

Change in quantity demanded and change in demand are two

different concepts.

BBA 111 Lecture Three

 Change in Quantity Demanded

 Change in quantity demanded occurs when the price of the product in question changes
but the other factors that affect demand remain constant.
 Price changes may be an increase or a decrease leading to a movement along the
demand curve from one price-quantity combination to another.
Price
(GH¢) D

GH¢5.00

GH¢4.00

GH¢3.00
D

0 6 10 16 Quantity Demanded
(Tins of Milk)

BBA 111 Lecture Three

 Change in Demand

• A change in demand occurs when one or more of the other factors that affect
demand, other than the price of the product in question, change leading to
consumer(s) demanding more or less of the product at their various prices
• It often leads to a right-ward (increase) or a left-ward (decrease) shift in the
demand curve Price
𝐃𝟎
𝐃𝟐

𝐃𝟏

𝐃𝟐
𝐃𝟎
𝐃𝟏

0 Quantity Demanded

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 Factors that Cause an Increase in Demand

The decision by consumers to buy larger quantities of a commodity at each

possible price may be caused by the following:
A favourable change in consumer tastes and preferences.

An increase in the number of buyers.

Rising incomes if the product is a normal good and falling income if it is

inferior.

BBA 111 Lecture Three

 Factors that Cause an Increase in Demand

An increase in the price of a substitute good.

A decrease in the price of a complementary good.

A new consumer expectation that prices and income will be

higher in the future.

BBA 111 Lecture Three

 Abnormal Demand

Demand that deviates from the law of demand is referred to as abnormal demand.
There are a number of situations which give rise to abnormal demand.

For instance, if we have a good such that:

1) when price increases, quantity demanded also increases

2) when price increases, quantity demanded remains unchanged

3) the same price induces infinite demand for goods; and among other price-quantity
demanded relations of a good which deviates from the law of demand.
BBA 111 Lecture Three
 Abnormal Demand

Abnormal demand would occur under these specific instances.

i) Demand for Giffen goods

ii) Demand for articles /goods of ostentation

iii) Goods which have large number of buyers

iv) Demand for necessities

BBA 111 Lecture Three

 Abnormal Demand Cont’d
Giffen good Veblen (ostentatious) good
P P

𝐏𝟑
𝐏𝟎
𝐏𝟐
𝐏𝟏
𝐏𝟏
𝐏𝟐
𝐏𝟎
𝐏𝟑

D D

0 𝐐𝟐 𝐐𝟎 𝐐𝟏 𝐐𝐝 0 𝐐𝟏 𝐐𝟎 𝐐𝟐 𝐐𝐝

Here, when price decreases from P1 Here, when price increases from P1
through P3 , quantity demanded also through P3 , quantity demanded also
decreased from Q1 through to Q 2 . increased from Q1 through to Q 2 .
 Abnormal Demand Cont’d
P P D
Demand for goods with
large unlimited market
𝐏𝟑
Demand for
𝐏𝟏 D Necessity Goods
𝐏𝟐

𝐏𝟏

0 𝐐𝟏 𝐐𝟐 𝐐𝟑 𝐐𝐝 0 𝐐𝟏 𝐐𝐝
Here, quantity demanded increases Here, the same quantity is demanded
infinitely even when price remains with infinite increase in price.
constant.
 REFERENCES
 Anaman E.A., (2019). Introduction to Microeconomics. Abundant Grace Printing and Stationery.
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 Chacoliades, M(1986) .Microeconomics.4th ed, Macmillan Publishing Hill Co. New York.
 Frank,H and Bernanke.(2004):Principles of Microeconomics;2nd Edition ,New York: McGraw-Hill.
 Lipsey, R and Crystal, A.(2007).Economics.11th Ed, Oxford University Press, Oxford.
 McConnell and Brue,S (2002).Economics: Principles, Problems and Policies. McGraw-Hill Higher Education, New York.
 Mankiw, Gregory (2005). Principles of Microeconomics. 9th Ed. Norton and Co. Inc., New York.3rd Ed. Prentice-Hall International
Inc., New Jersey.
 Ofori-Atta, Jones (1998) Introduction to Microeconomics. Woeli Publishers, Accra
 Pindyck, R.S. and Rubinfield, D.L.(1995).Microeconomics. 3rded. Prentice-Hall International Inc., New Jersey.
 Pomeyie, Paragon (2001).Microeconomics: An Introductory textbook. Wade Laurel Press, Accra.
 Essentials ofBBA
Economics, by P. Krugman,
111 Lecture Three R. Wells and K. Graddy, Worth Publishers, Second Edition.
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BBA 111 Lecture Three