UNIT 2 : Lecture : 3 and 4

Objectives
Market
Demand,
Law of demand,
Demand Curve
Why the demand curve is downward sloping ?
Factors Affecting Demand for Commodity
Movement and Shift on the Demand Curve
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 OBJECTIVES

At the end of this unit, you should be able to:

explain demand for a commodity in relation to changes

in price
 elucidate on factors that determines quantity
demanded
 explain the movement and shift on the demand curve

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 Market

A market is a place where buyers and sellers are engaged

in exchanging products at certain prices.
In a market, the two forces demand and supply play a
major role in influencing the decisions of consumers and
producers.

The behaviour of buyers is understood with the help of

the concept of demand. On the other hand, the behaviour
of sellers is analyzed using the concept of supply.

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 Demand

Demand : The term 'demand' is defined as the desire for

a commodity which is backed by willingness to buy and
ability to pay for it.

Quantity of a commodity purchased by an individual or

family or group of people at different prices at a given
time and place is known as the demand for such
commodity.

.
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 Demand
Individual demand :The quantity of a product
demanded by an individual purchaser at a given price is
known as individual demand.

Market demand : The total quantity demanded by all

the purchasers together is known as the market demand.

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 Law of 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. It can be inferred that price and quantities are inversely
related. According to Samuelson: "Law of demand states that
people will buy more at lower prices and buy less at higher prices,
(ceteris paribus) other things remaining constant."

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 Law of demand
Therefore some factors affecting demand for a
commodity which are considered constant are listed as
follows:
 households’ income

 households’ preference and taste

 prices of a related commodities

 number of consumers

 expectation of future price change

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 Demand function, Demand equation

DEMAND FUNCTION:

The demand function, describes the relationship

between the quantity demanded by customers and the
product price. It is usually an inverse relationship where
at higher (lower) prices, less (more) quantity is
consumed.

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 Demand function
Individual Demand function
Qdx = f(Px, Y, P1……Pn-1, T, A ,Ey, Ep, u)
Where
Qdx= qty demanded for the product X
Px = price of the product
Y = level of household income
P1….Pn-1 = price of all the other related products
T = tastes of the consumer
A = advertising
Ey = consumer‘s expected future income

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 Demand function
Ep= consumer‘s expected future price
U= all those determinants that are not covered in the list
determinants
Market Demand function
Qdx = f(Px, Y, P1……Pn-1, T, A ,Ey, Ep, P, D, u)
Qdx,Px,Y,P1…Pn-1,T,A, Ey,Ep,U are the same as the individual
demand function
P = population
D = distribution of consumers in various categories such as
income, age, sex etc.,

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In mathematical notation, the demand function is –
Qd= f(Px), other things are constant.

The demand equation is –

Qd = a – bP
Where,
Qd = Quantity demanded
a = Intercept
b = Slope
Px = Price
To draw a schedule we need a specific demand equation. The
equation is -
Qd = 15 – 2 Px

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 Demand Schedule
Demand Schedule:
According to Prof. Marshall, demand schedule is a list of prices
and quantities. It is a tabular statement of price-quantity
relationship between two variables. If we have the different
values of independent variables (price) in a equation then we get
the different values of dependent variables (quantities), which we

put a table this is called the Demand schedule.

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 Demand curve
Demand curve is a graphical representation of demand
schedule. A graphical representation showing the
relationship between price and quantity demanded of a
good at a particular point in time is called demand
curve. Joining together the points a, b, c, d, e, will
produce a downward sloping demand curve. The curve
is downward sloping because when the price is too high,
only few consumers that can afford it will buy.
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 The demand schedule is
Combinations Prices of Quantity
Oranges. ($. per demanded(in kg)
kg.)

a 5 5
b 4 7
c 3 9
d 2 11
e 1 13
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 Demand curve

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 SELF-ASSESSMENT EXERCISE

Differentiate between demand schedule and

demand curve.

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 Why the demand curve is downward sloping ?

There are some reasons, why the demand curve is downward

sloping, these are –
The Law of Diminishing Marginal Utility : For every additional
unit of consumption of a particular product, there is also an
additional satisfaction (marginal utility) that we receive/derive. But
this additional satisfaction becomes less and less as we consume
even more of the good. For example, when a person is very hungry
the first chapatti that he eats will give him the most satisfaction. As
he will consume more chapattis, his level of satisfaction will
diminish.

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Why the demand curve is downward sloping

When the quantity of goods is more, the marginal utility of the

commodity is less. Thus, the consumer is not willing to pay
more price for the commodity and its demand will decline.
Also, when the price of the commodity is low, its demand
increases.
Hence, the demand curve slopes downwards from left to right.

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 Why the demand curve is downward sloping

Substitution effect: When the price of a good rises, people

will substitutes other similar goods for it. For example, as the
price of beef rises, someone will eat more chicken.

Income effect: When a price of good goes up, people find

themselves poorer than they were before. For example, if
gasoline prices double, real income falls, so people will
naturally curb to cut their consumption of gasoline and other
goods.

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 Exceptions to law of demand
 Some goods which act as status symbol and have a
snob appeal fall under this category. Snob effect is
understood as the desire to possess a unique
commodity having a prestige value.

Here when the price of the product rises then the

appeal of the product also rises and thus the demand.
Some example are diamonds and antiques.

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 Exceptions to law of demand

 Ignorance on the part of the consumer may cause the

consumer to buy at a higher price, especially when
the rise in price is taken to mean an improvement in
quality and a reduction in price as deterioration in
quality.

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 Exceptions to law of demand
• Some people start money investment in share market
then many people start following the same without
thinking advantage and disadvantages. This is known
as the bandwagon effect.

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 Determinants of demand / Factors Affecting the
Demand Curve
It was mentioned earlier that the demand curve and
demand schedule are constructed based on assumption
of ceteris paribus i.e all things being equal. This implies
that other factors remain (constant) unchanged except
price. Unfortunately this assumption that other factors
remain constant is itself not constant. Note that price is
not the only determinant of quantity demanded.
Demand is also affected by many other factors earlier
mentioned. They shall be discussed under this section

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 Determinants of demand

 Income of the consumer

The consumer will buy more of a commodity when his

income increases and vice versa. Both demand and
income of the consumer move in the same direction . It
may be reverse for inferior goods here demand will
increase with decrease in the income and vice-versa.
 Price of the related goods

When a change in the price of one commodity influences

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 Determinants of demand

the demand of the other commodity and so the

commodities are interrelated. These related
commodities are of two types: substitutes and
complements.
When the price of one commodity and the quantity
demanded of other commodity are move in the same
direction, it is called as substitutes like:Tea and coffee

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 Determinants of demand

 When the price of one commodity and the quantity

demanded of other commodity are move in the
opposite direction, it is called as complementary ,
like: Tea and sugar.
 Taste and preferences

If the consumer taste and preferences are favor of a

commodity results in greater demand, and if it against
the commodity it results in smaller demand for the
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commodity.
 Determinants of demand

 Number of consumers Demand is determined by

how many people are buying a particular product.
Therefore, the more consumers available, the
greater the demand. In some cases, this number
increases because of population changes.

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 Determinants of demand

 The expected price of the commodity in the

future: If the customers expect any change in their
income or price change of a product, the demand
changes. Expectation of a rise in price of goods may
force people into what is called ‘panic buying’.
‘Panic buyers’ demands to buy more of the goods
before the prices goes up. This action increases the
demand for goods.
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 SELF-ASSESSMENT EXERCISE

 You have decided to buy a tooth-paste but need to make a

choice between Close-up whose price is slightly high and
Neem Herbal tooth- paste. You discovered that three third of
the customers that comes into the shop where you’re shopping
are visiting Neem Herbal tooth-paste’s shelf and you decided
to buy Neem Herbal.

Is Close-up and Neem Herbal substitute or complement?

How will this customers’ decision affect the demand curve?

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 Movement of the Demand Curve
When there is a change in the quantity demanded of a
particular commodity, because of a change in price,
with other factors remaining constant, there is a
movement of the quantity demanded along the same
curve. The important aspect to remember is that other
factors like the consumer’s income and tastes along
with the prices of other goods, etc. remain constant and
only the price of the commodity changes.
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 Movement of the demand curve
In such a scenario, the change in price affects the
quantity demanded but the demand follows the same
curve as before the price changes. This is Movement of
the Demand Curve. The movement can occur either in
an upward or downward direction along the demand
curve.

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 The shift of the Demand Curve

• When there is a change in the quantity demanded of a

particular commodity, at each possible price, due to a
change in one or more other factors, the demand
curve shifts. The important aspect to remember is that
other factors like the consumer’s income and tastes
along with the prices of other goods, etc., which were
expected to remain constant, changed.

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 The shift of the Demand Curve

The demand curve can shift either to the left or the

right, depending on the factors affecting it.

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 Effect of a change in consumer’s income on the quantity
demanded.

Price (TK) Quantity demanded Quantity demanded

when the average when the average
household income is household income is
TK. 4000 TK.5000

5 10 (A) 15 (A1)

4 15 (B) 20 (B1)

3 20 (C) 25 (C1)

2 35 (D) 40 (D1)

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 The demanded quantities are plotted as demand curves DD and
D’D’ as shown below:

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 SELF-ASSESSMENT EXERCISE
 Discuss other factors that can affect quantity
demanded aside price of a product and state simple
demand equation.

Thanks

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