DEMAND

DEFINITION OF DEMAND
Demand is the ability and willingness to buy specific quantities of a good at
alternative price in a given time period, ceteris peribus.

CLASSIFICATION OF GOOD AND SOLD CONVENTIONAL

PERSPECTIVE
Free Goods – Goods that do not have any production cost at all ( zero
production cost). Example: air and rain water.
Public Goods – goods which the benefits are in the indivisibly spread amount the
entire community whether or not individuals desire to purchase the public goods.
For example : stations, school, hospital and roads.
Economic Goods – Goods which supply is limited and require costs to purchase
them. Price involved in obtaining them.
Private Goods – You have to pay yourself and you can prevent others to use
your private goods.
ISLAMIC PERSPECTIVE
From Islamic economic, goods were classified according to its consumption
hierarchy. There are four classifications of good from Islamic perspective.
Dharuriyat (Essentials) – Goods that are classified as basic needs and necessary
for a living. For example food, clothing, houses, education, health service,
transportation and defense.
Hajiyat (Complementary) – Goods that will improve the quality of human life. For
example radio, TV, furniture and car.
Kamaliat (Perfection) – Goods that contribute towards the perfection of human
life. For example bungalow houses and luxury car.
Tarafiat (Extravagant) – Goods that are considered extravagant and wasteful.
For example golden bed and antique furniture.
LAW OF DEMAND
Economics might be referred to as “graphs and laughs” because economists are
so fond of using graphs to illustrate demand, supply and many other economic
concepts. Unfortunately, some students taking economics courses say they miss
the laughs. The law of demand state there is an inverse relationship between the
price of a good and the quantity buyers are willing to purchase in a defined time
period, ceteris paribus. The law of demand makes good sense. At a “sale”
consumer as buy more when the price of merchandise is cut.

PRICE (RM) PER QUANTITY DEMANDED

KG (KG)
1.4 8
1.2 13
1 20
0.8 30
0.6 50
0.4 90
0.2 100

PRICE OF MANGOES

QTY
OF MANGOES
MARKET DEMAND
To make the transition from an individual demand curve to a market demand
curve, we total, or sum, the individual demand schedules. Suppose the owner of
Rap City, a small chain of retail music stores serving a few states, tries to decide
what to charge for CD’s and hires a consumer buyers in Rap City market, and
they are sent a questionnaire that asks how many CD’s each would be willing to
purchase at several possible prices.

QUANTITY DEMANDED per YEAR

PRICE per CD FRED + MARY = TOTAL DEMAND
25 1 0 1
20 2 1 3
15 3 3 6
10 4 5 9
5 5 7 12
FRED’s DEMAND CURVE + MARY’s DEMAND CURVE
= MARKET DEMAND CURVE
CHANGE IN DEMAND
An increase or decrease in the quantity demanded at each possible price. An
increase in demand is a rightward shift in the entire demand curve. A decrease in
demand is a leftward shift in the entire demand curve.
P0

D2
D0

D1

Q1 Q0 Q2
CHANGES IN QUANTITY DEMANDED
A movement between points along a stationary demand curve, ceteris paribus.

DD

P2

P0 A

P1 C

Q2 Q0 Q1
DETERMINANTS OF DEMAND
 INCOMES
It is obvious that income will influence the amount of most goods and
service people will purchase at any given price. For most goods, the
quantity demanded at ant price will rise with income. Goods that have this
property are called normal goods. So – called inferior goods ( such as
ground beef with high fat content) are the exception to this general
pattern. For such goods, the quantity demanded at any price will fall with
income. The idea is that consumers abandon these goods in favor of
higher quality substitutes (such as leaner grades of meat in the ground
beef case) as soon as they can afford to.

 TASTES
Not all people share the same tastes. Nor do tastes always remain fixed
over time. In Western societies, culture instills a taste for sitting on padded
furniture, whereas in many Eastern societies, people are condition to favor
sitting cross-legged on the floor. The demand for armchairs thus tends to
be larger in the West than in the East. By the token, the demand for skirt
with hemlines above the knee tends to vary sharply from one decade to
another.

 PRICES OF SUBSTITUTES AND COMPLIMENTS

Bacon and eggs play a complementary role in the diets of some people.
For such people, a shop increase in the price of bacon would lead not only
to a reduction in the quantity of bacon demanded but also to a reduction in
the demand for eggs. Such goods are considered complements: an
increase in the price of one good decreases demand for the other good. In
the case of close substitutes, such as coffee and tea, an increase in the
price of one will tend to increase the demand for the other.
 EXPECTATIONS
People’s expectations about future income and price levels also affect
their current purchase decisions. For example, some one who expects
sharply higher income in the future is likely to spend more today than an
otherwise identical person who expects a much smaller income in the
future. (After all, with a higher expected income, the need to save for the
future diminishes.) Similarly, people will often accelerate their current
purchases of goods whose prices are expected to rise sharply in the
months to come.

 POPULATIONS
In general, the larger a market, the more a good or service at any given
rise will be purchase. Thus, in cities with growing populations, the demand
for housing increases from year to year, whereas it tends to fall in cities
with declining populations.
 EXCEPTIONAL DEMAND
Generally, the demand for goods and services follow the law of demand,
which say that when prices increase, the demand for goods and services
will increase, and when prices decrease, demand will increase. However,
in certain cases, the demand for certain goods does not follow the law of
demand. For example, it goes against the law of demand: when a price
goes up, demand will increase as illustrated in the diagram below:

PRICE

P1 DD

P0

QUANTITY
Q0 Q1
GIFFEN GOODS
Lower income group normally use this type of good. Examples are low
grade rice, salted fish etc. The demand curve for giffen goods is normally
upward slopping instead downward slopping. This means that the
consumption of giffen goods falls as income rises, ceteris paribus. While
better quality rice is more attractive to consumers compare to the low
grade rice, so the consumer can be made much poorer by an increase in
the price of low grade rice. In the diagram below, it show that, at low
prices (section A), people tend to substitute for better quality rice and thus
reduces the quantity demanded for this low grade rice. Why? We can see
that the lower the price, the less quantity of rice demanded. Thus, the
demand curve is regressive at lower price levels. The lower the price,
people will substitute this lower grade rice for a better grade of rice,
example from rice grade C to rice grade B. While at higher price ( section
B), the demand curve is normal, mean the lower the price, the higher the
demand for rice.
 ``

PRICE

P2

Pe

P1

P0

QUANTITY
Q0 Q1 Q2 Qe

LUXURIOUS GOODS
Luxurious goods are those products that have income elasticity demand greater
than one. Example of luxuries goods are jewelry, luxury-imported cars, antique
furniture and famous printing like Mona Lisa, etc. The more expensive the goods,
the greater will be the demand. In this case, the consumer tries to measure
quality by price, that is, the higher the price the better the quality of the good is,
and higher the demand will be. Some consumers try to be different from others to
show that they are better off because they can afford to buy more at a higher
price. The curve can be divided into two section, example section C and section
D. Section D is the normal demand curve because it has a negative slope as said
in the law of demand when the price is 0P1, the quantity demand is 0q1; and
when the price falls to 0P0, quantity demand will increase to 0q0. The law of
demand will operate until the price is 0Pe. Now look at section C. When the price
increase from 0Pe to 0P2, the quantity demanded increase as well from 0qe to
0q2. Higher the price are, the better the quality products. Regressive demand
curve at high prices.

PRICE

P2

Pe

P1

D
P0

QUANTITY

Qe Q1 Q2 Q0

INTER-RELATED DEMAND
Inter-related demand is where a demand for a particular good may effect the
demand of another good. There are 4 types of inter-related demand namely joint
demand, competitive demand, derived demand and composite demand.

 JOINT DEMAND
A demand for a particular good is likely to increase the demand for
another good. This type of demand is for complementary goods such as,
toothbrush and toothpaste, pen and ink, cars and petrol, etc. Thus, an
increase in the price of 1 good effectively decreases the demand of the
 Qother good. Example pen and ink. If the price of pen decreases, the
demand for ink will increase. This can be shown in the diagram below:

P P

D PEN D1 INK

D0
P0

Pe
P1

QTY QTY

Q0 Q1 Q0 Q1

PRICE of PEN

P0

P1
Dd

 COMPETITIVE DEMAND
QTY of INK
An increase in the demand
Q0 for 1Q1good will reduce the demand for another
good. This type of demand refers to demand for substitutes. Examples of
substitutes are butter and margarine, Pepsi cola and Coca-cola, Toyota
Car and Proton Wira. If the price of Toyota car increases, the quantity
demanded for Toyota will decrease but demand for Proton Wira will
increase. Consumers would prefer to buy local cars because is it relatively
cheaper than the price of Toyota. This can be shown in the diagram
below:
 PRICE
PRICE

D1

D
D0

P1 Pe

P0

QTY
QTY

Q1 Q2 Q0 Q1

TOYOTA PROTON

PRICE OF TOYOTA

P1

P0

QUANTITY OF PROTON
WIRA

Q0 Q1

 DERIVED DEMAND
The demand for a good increases, demand for the factor of production/
input produce the goods will also increase. Examples are houses and
bricks, cement, tiles or planks, if the demand for houses increase,
developers need more building materials to make houses, this will lead to
an increase in the demand for cement, bricks, plank and tiles.
 COMPOSITE DEMAND
This refers to multi-purpose products. Example: rubber can be used to
produce rubber shoes, tires, balls etc. If the demand for tires increase,
more rubber will be used to produce tires and there will be less rubber that
can be used to produce rubber shoes. The shortage of rubber to produce
rubber shoes will increase the price of rubber shoes.

ELASTICITY OF DEMAND
DEFINITION
The word elasticity has the same meaning as sensitivity, or
responsiveness. Therefore elasticity of demand means the
responsiveness of demand due to same changes to the factors which
influence demand. There are 3 types of elasticity of demand that are; price
 elasticity of demand, income elasticity of demand and cross elasticity of
demand.

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is the ratio of the percentage change in the
quantity demanded of a product to a percentage change in its price. The
elasticity formula is
Ed = percentage change in quantity demanded
Percentage change in price
=Q-Q
Q X 100%
P–P
P
Q =Initial quantity
Q =New quantity
P =Initial price
P =New price

DEGREES OF ELASTICITY
After we know the definition Price elasticity of demand, now we are going to look
at the 5 degrees of elasticity of demand.
1. Demand is elastic
2. Demand is elastic
3. Demand is unitary elastic
4. Demand is perfectly inelastic
 5. Demand is perfectly elastic.

DEMAND IS ELASTIC
Demand is elastic if given percentage changes in price results in a larger
percentage change in quantity demanded. Example, if a 2 percent decline in
price results in a 4 percent increase in quantity demanded, demand is elastic.
The coefficient of an elasticity is greater than 1. Goods, which have many
substitutes, have an elastic demand. This can be shown as below.

PRICE

P1

P0

QTY

Q0 Q1

DEMAND IS INELASTIC
Demand is inelastic when the percentage change in price is more than
the percentage change in quantity demanded. If a 3% increase in leads to
only - % decrease in the quantity demanded, so demand is inelastic.
Normally goods that have less substitutes such as rice has an inelastic
demand as below:
 PRICE

P1

P0

QTY

Q1 Q0

DEMAND IS UNITARY ELASTIC

A demand relationship in which the percentage changes in quantity is the same
as the percentage in price. The coefficient of a unitary elastic is always equals to
1. The demand curve is as illustrated below :
 P

QTY

DEMAND IS PERFECTLY INELASTIC

This is an in extreme situation where a price change result in no change to the
quantity demanded. It’s numerical value is 0. An example of perfectly inelastic
demand is demand insulin by a serious diabetic patient or addict’s demand for
heroine. The demand curve is parallel to the vertical axis such as in the diagram
below:

P
D

P1

P0

QTY

DEMAND IS PERFECTLY ELASTIC

A perfectly elastic demand curve is a horizontal straight – line such as below:
P

P D

QTY

Q0 Q1

DETERMINANTS OF PRICE ELASTICITY OF DEMAND

AVAILABILITY OF SUBSTITUTES
By far the most important influence on price elasticity of demand is the availability
of substitutes. Demand is more elastic for a good or service with cloth
substitutes. If the price of cars rise, consumer can switch to busses, trains,
bicycle, and walking. The more public transportation is available, the more
responsive quantity demanded is to a change in the price of cars. When
consumer have limited alternatives, the demand for a good or service is more
price inelastic.
Price elasticity also depends on the market used to measured demand.

SHARE OF BUDGET SPENT ON THE PRODUCT

When the price of salt changes, consumers pay little attention. Why should they
notice? The price of salt or matches can double, and this purchase will remain a
small percentage of a household’s budget. If, however, college tuition, the price
of dinners at restaurants, or housing prices double, people will look for
alternatives. These goods and services account for a large part of people’s
budgets.

TIME
Time affects the price elasticity of demand. Car owners can’t switch to electric
autos every time the price of gasoline goes up. In the short run, the elasticity of
demand for gasoline is quite low. With more time to adjust, however, consumers
can buy more fuel-efficient cars, relocate their homes or jobs, and even switch
fuels. As a consequence, the long-run price elasticity of demand is higher than
the short-run elasticity.

INCOME ELASTICITY OF DEMAND

To measure exactly how consumption responds to changes in income,
economists calculate the income elasticity of demand. Income elasticity of
demand is the ratio of percentage change in the quantity demanded of a good or
service to a given percentage change in income. We use a midpoints formula
similar to the one we used for calculating price elasticity of demand:
E i = Percentage change in quantity demanded
Percentage change in income
=Q–Q
Q X 100%
Y–Y
Y

Q = New quantity
Q = Original quantity
Y = New income
Y = original income

TYPES OF INCOME ELASTICITY

1. 0 < E <1 : normal goods, example: food, clothes, newspaper. Upward
sloping curve
2. Ey > 1 : luxury goods, example: antique furniture, luxury goods, jewellery
3. Ey < 1 : giffen goods or inferior goods, example: used car, salted fish
4. Ey = 1 : necessity good, example : rice, salt,

CROSS-ELASTICITY OF DEMAND
Cross-elasticity of demand is the ratio of the percentage change in the quantity
demanded of a good or service to a given percentage change in the price of
another good or service. Again, we use the midpoints formula as follows to
compute the cross-elasticity coefficient of demand:

Ec = percentage change in quantity demanded of one good

 percentage change in price of another good
= QX–QX
QX
PY–PY
PY
TYPE RESPONSES OF CROSS ELASTICITY
1. Positive cross elasticity
An increase in the price of 1 good will increase the opportunity of another
good and vice versa. Apply for substitutes goods. When price of chicken
increase, quantity demanded for beef will increase.
2. Negative cross elasticity
Increase in the price of 1 good will decrease the quantity demanded of
another good and vice versa. Apply for compliment good. When price of
increase quantity demanded for pen.
3. 0 cross elasticity
Increase in the price 1 good will not effect the demand of another good and
vice versa. The product has no relationship. Increase in price of oil has no
effect on demand for houses.
 THE END
4 TODAY
ONLY
3 MAC 2006