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DEMAND
THEORY
(Week 1)
DPB 1023
MICRO
ECONOMICS
Objective 1
Define demand
Demand does not
necessarily mean a
consumer WILL buy, but
refers to a good or
service they WOULD LIKE
to buy
Introduction to Demand
The forces of supply and demand work together
to set prices.
Demand is the
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.
Copyright 2004 South-Western
Demand Schedule
(Demand for coffee monthly)
(1) (2) (3) (4)
Price Chriss Davids Total market
(cent per g) demand demand demand
(g) (g) (kgs: 000s)
A 20 28 16 700
B 40 15 11 500
C 60 5 9 350
D 80 1 7 200
E 100 0 6 100
Point Price per g Market Demand
Demand
A
P
Price
D1 D2
Q1 Q2
Quantity
A Decrease in Demand
P
Price
D2 D1
Q2 Q1
Quantity
Objective 5
Discuss factors
influencing demand
Factors affecting the demand
for a good
Dx = f ( Px, Pog, Y, T, E, G, U)
The Demand Function
Dx = f ( Px, Pog, Y, T, E, G, U)
P2
P1
Q2 Q1 Quantity Demanded
Demand for a good depends on the price
of other goods
Complimentary Goods
Goods which are used jointly. The use of one
involves the use of the other - E.g. bread and
butter, cars and petrol
Substitute Goods
Goods which satisfy the same needs and thus can
be considered as alternatives to each other E.g.
Coke and Pepsi or Tea and Coffee
Complimentary Goods
D1
D2
D2 D1
An increase in price of a An fall in price of a
complementary good causes the complementary good causes
demand for good X to fall the demand for good X to
rise
Substitute Goods
(The Substitute Effect)
D2
D1
D1 D2
An increase in price of a substitute An fall in price of a
good causes the demand for good X to substitute good causes the
rise demand for good X to fall
Demand for a good depends on level of
income (The Income Effect)
Normal Goods
P P
D2
D1
D1
Q D2 Q
A rise in income causes the demand for An fall in income causes the
a normal good to increase from D1 to demand for a normal good
D2 to fall from D1 to D2
Inferior Goods
P P
D1
D2
D2
Q D1 Q
An increase in income causes the A decrease in income causes
demand for an inferior good to fall the demand for an inferior
from D1 to D2 good to rise from D1 to D2
4. TASTE: Demand depends on
Consumer Tastes
D2
D1
D1
Q D2 Q
A movement in taste in favour of a A movement in taste against
good causes demand to increase a good causes demand to
fall
5. Demand for a good depends on the
expectations of consumers
D2
D1
D1 D2
Demand for Good X will rise if Demand for Good X will fall
consumers expect higher future prices, if consumers expect lower
scarcity or higher future incomes future prices, abundance or
lower future incomes
6. Demand for a good depends on
government regulations
Example:
The Smoking Ban
D1
D2
Example:
The Cycle to Work
Scheme
D2
D1
7. Demand for a good depends on
unplanned factors
If there is a sudden heat wave an
unplanned factor this may result in an
increase in demand for sunscreen and a
decrease in the demand of home heating
oil
Decrease in
Price
When price changes
- what happens?
The curve does not shift - there
is a change in the quantity
demanded.
When something
changes other than
price, what happens?
When other factors change while
the price remains the same,
there will be a change in
demand.
If McDonalds redesigns its
restaurants to appeal to more
people, they will have more
customers.
When something
changes other than
price, what happens?
The whole curve
shifts, there is a
change in demand.
Increase in
Quantity
Demanded
Decrease in
Price
When the ceteris paribus assumption
P
Rs20
is relaxed, the whole curve can shift
Rs15 A B
Rs10
D
Rs5
D12
Q
10 20 30 40 50
What does
ceteris
paribus mean?
All else remains the
same
Objective 6
Calculate demand
function
Demand function
A table, a graph, or an equation that
shows how quantity demanded is
related to product price, holding
constant the five other variables that
influences demand.
Linear demand function:
Base of
Sr.no difference Change in Quantity Demand Change in Demand
Changes in determinants of
demand, other than price, cause
a change in demand, or a shift
of the entire demand curve, from
DA to DB.
A Change in Demand Versus a Change in
Quantity Demanded
When demand shifts to the right,
demand increases. This causes
quantity demanded to be greater
than it was prior to the shift, for
each and every price level.
Variables That Influence Buyers
Decrease in
quantity
demanded
Upward
movement
along the
demand curve
Price
increases
Increase in
quantity
demanded
Downward
movement
along the
demand curve
Price
decreases
Decrease or
increase in
demand
Leftward or
rightward shift in
the demand curve
Nonprice
determinant
A Change in Demand Versus a Change in
Quantity Demanded
To summarize:
Change in demand
(Shift of curve).
Price rises when quantity supplied
is scarce and demand increases
Giffen Goods
Goods of ostentatious consumption
(snob goods)
Goods affected by consumers
expectations
Addictive Goods
Giffen Goods
Giffen goods are those which are consumed in greater
quantities when their price rises.
From time to time the poor may supplement their diet with
higher quality foods, and they may even consume the odd
luxury (E.g. Meat), although their income will be such that
they will not be able to save. A rise in the price of such a
staple food will not result in a typical substitution effect,
given there are no close substitutes.
Snob goods are a second possible exception to the general law of demand.
A rise in the price of high status luxury goods might lead members of this
leisure class to increase in their consumption, rather than reduce it. The
purchase of such higher priced goods would confer status(make these
people seem Cool/Wealthy/Rich) on the purchaser - a process which
calledconspicuous consumption.