Demand
Demand
Meaning of Demand
Demand in economics means a desire to possess a
good supported by willingness and ability to pay
for it.
 If you have a desire to buy a certain commodity,
say, a tractor, but do not have the adequate means
to pay for it, it will simply be a wish, a desire or a
want and not demand.

Demand, cont.
Meaning of Demand

In the other words, "Demand means the various
quantities of a good that would be purchased per
unit of time at different prices in a given market.”
Demand, cont.
There are three main characteristics of
demand in economics.
i. Willingness and ability to pay.
 Demand is the amount of a commodity for which
a consumer has the willingness and also the ability
to buy.
Demand, cont.
ii. Demand is always at a price.
 If we talk of demand without reference to price, it
will be meaningless. The consumer must know
both the price and the commodity. He will then be
able to tell the quantity demanded by him.
iii. Demand is always per unit of time.
 The time may be a day, a week, a month, or a
year.
Demand, cont.
Individual's Demand for a commodity:
 The individual’s demand for a commodity is the
amount of a commodity which the consumer is
willing to purchase at any given price over a
specified period of time.
 The individual's demand for a commodity varies
inversely with price ceteris paribus. As the price
of a good rises, other things remaining the same,
the quantity demanded decreases and as the price
falls, the quantity demanded increases.
Demand, cont.
The Market Demand for a Commodity:
 The market demand for a commodity is obtained
by adding up the total quantity demanded at
various prices by all the individuals over a
specified period of time in the market.
Price
The Demand Curve
Demand Curve
Quantity demanded per unit of time
Demand, cont.
 Two
types of demand:
1) Derived demand.
Derived demand refers to demand for goods
which are needed for further production. It is
the demand for producer’s goods like
industrial raw material, machine tools and
equipment.
Demand, cont.
2) Autonomous demand
 Autonomous demand is independent of the
other product or main product. It is not
linked or tie-up with the other goods or
commodity.
 eg: food articles, clothes.
Demand, cont.
 Price
Demand : It refers to various
quantities of a good or service that a
consumer would be willing to purchase at
all possible prices in a given market at a
given point in time, ceteris paribus.
Demand, cont.
 Income
Demand : It refers to various
quantities of a good or service that a
consumer would be willing to purchase at
different levels of income, ceteris paribus.
Demand, cont.
 Cross
Demand : It refers to various
quantities of a good or service that a
consumer would be willing to purchase due
to changes in the price of related
commodity. For example: Demand for pork
is more not because price of pork has fallen
but because price of beaf has risen. Thus
demand for substitutes take the form of
cross demand.
Surplus and Shortage
 We
could have a surplus and still have a
scarce commodity, RIGHT?
Surplus
A SURPLUS
 Pe
and Qe represent the market clearing
price and quantity.
 Assume the government sets a price at P1:
1. There is a surplus of goods.
2. Price must fall for the market to
clear.
Shortage
A SHORTAGE
 Assume
the government sets a price at P2:
1. There is a shortage of goods.
2. Price must rise for the market to
clear.
Law of Demand
Principle stating that as the price of a
commodity increases, the less consumers
will purchase per unit of time, ceteris
paribus.
As price decreases, the quantity demanded
increases per unit of time, ceteris paribus.
Law of Demand
 P  Qd
 P  Qd
Law of Demand
 As
price falls from P1 to P2 the quantity
demanded increases from Q1 to Q2. This is
a negative relation between price and
quantity, hence the negative slope of the
demand schedule; as predicted by the law of
demand.
Change in Demand
 Changes
in demand for a commodity can be
shown through the demand curve in two
ways:
(1) Movement along the demand curve
(Extension and contraction)
(2) Shifts of the demand curve (Increase and
decrease).
Change in Demand, cont.
Movement along the demand curve:
 A movement along a demand curve is
defined as a change in the quantity
demanded due to changes in the price of a
good will result in a movement along the
demand curve.
(1)
Law of Demand
Change in Demand, cont.
Shifts in the demand curve:
 A shift of the demand curve is referred to as
a change in demand due any factor other
than price.
2)
Change in Demand, cont.
A
demand curve will shift if any of these
occurs:
1. Change in the price of other goods
(complements and substitutes)
2. Change in the income level
3. Change in consumers’ tastes and
preferences…
Determinants of demand
 Movements
along a demand curve is the
result of increase or decrease of the price of
the good, while the demand curve shifts
when any demand determinant other than
price changes.
Determinants of demand
 These
other determinants, in addition to the
commodity's own price are:
a. Consumer disposable income.
b. Price of substitutes.
c. Price of complements.
d. Consumer preferences.
e. Expectations about the future.
Determinants of demand
f. Changes in the population.
g. Length of adjustment period.
h. Availability of substitutes.
i. The proportion of the consumers
budget a good or service represent
A. Consumer’s Disposable
Income
1. If we increase consumer's disposable
income, ceteris paribus, what happens?
• He/she is able to purchase more at all price
levels.
2. The demand curve shifts to the right.
Price
D1
D0
Quantity
3. If we decrease the consumer's disposable
income ceteris paribus, what happens ?
· The consumer cannot purchase the same
amount of the commodity as before, over
the entire range of prices.
4. The demand curve is said to shift to the left.
Price
D0
D1
Quantity
5. Associated with this income effect, we can
create another sub-classification for
commodities:
Normal Goods or Services
An Increase in disposable income, shifts
Demand curve right.
 Id Demand
Price
D1
D0
Quantity
Normal Goods or Services
A Decrease in disposable income shifts
Demand curve left
 Id Demand
Price
D0
D1
Quantity
Inferior Good or Service
An Increase in disposable income shifts
curve left.
 Id Demand
Price
D0
D1
Quantity
Inferior Good or Service
A Decrease in disposable income shifts
curve right.
 Id Demand
Price
D1
D0
Quantity
Inferior Good or Service
Examples:


potatoes,
and rice
B. Change in the price of
substitutes, ceteris paribus:
An increase in the price of a substitute will
result in an increase in the demand of the
commodity of interest (COI)
(demand shifts right).
For example, lets look at beef while
considering pork as a substitute:
Let the quantity of pork available become
restricted. What happens?
· There is an increase in the price of pork.
Increase in price of pork due to a
decrease in Supply of pork:
Price
S1
S0
Pork Market
P1
P0
D
Q1
Q0
Qd of pork
There is an increase in the demand for beef (COI)
because of the increase in the price of pork
(SUBSTITUTE).
Price
S0
Beef Market
P1
P0
D1
D0
Q0
Qd of beef
Substitutes:
Therefore, an increase in the price of a
substitute will shift the entire demand curve
of the commodity of interest to the right.
Substitutes:
A decrease in the price of a substitute will
shift the entire demand curve of the
commodity of interest to the left.
Substitutes
 Psub DCOI
AND
 Psub DCOI
C. Change in the price of a
complement, ceteris paribus:
Complements are goods that go together, such
as:
 left and right shoes,
 gas and cars,
 milk and cereal,
 Gasoline and bio-gas
 etc.
Compliments:
If the price of a complement increases, then
the demand for the COI decreases.
 Pcomp  DCOI
Compliments:
Price
Let the price of gasoline increase.
Since bio-gas is a complement of
gasoline, its demand will decrease.
D0
D1
Qd
Compliments:
If the price of a complement decreases, the
demand for the COI increases.
Pcomp DCOI
Compliments:
Price
Let the price of gasoline decrease.
Since bio-gas is a complement of gasoline,
its demand will increase.
D1
D0
Qd
D. Consumer preferences and
taste
As preferences change the demand curve will
also change.
For example: What would be the result of the
following statements, if true, on the demand
curve for each commodity ?
Animal fat leads to a higher risk of heart attacks.
Price
Result:  Demand for red meat
D0
D1
Qd
Increasing fiber in the diet reduces the chance of
getting colon cancer.
Price
Result: Demand for high fiber
cereals and popcorn.
D1
D0
Quantity / unit of time
E. Expectations about the future
The peanut butter scare:
a news release said that the peanut crop would
be short that year and peanut butter prices
were expected to double.
Expectations about the future
Result:
People bought 3 kg. of peanut butter that
month instead of 1 kg.
 Demand for peanut butter.
Due to Expectations of higher Price.
Since consumers expect prices to increase,
they all run out to buy NOW.
This causes demand to increase, and prices
are pushed up very quickly!
Graphically Speaking:
Price
$2.00
D1
D0
1
3
kg. per month
F. Changes in the population of
consumers
Price
Increase in population will result in
increase in Demand for G&S.
D1
D0
Quantitiy/unit time
Changes in the population of
consumers
Price
Decrease in population will result
in decrease in Demand for G&S.
D0
D1
Quantitiy/unit time
G. Length of the Adjustment
Period
This is tied to, or related to the availability of substitutes.
Price
Short Run: Consumers have little time
to find suitable substitutes.
Demand is not very sensitive
to price changes, c.p.
We say demand is relatively
inelastic
D
Quantity per Unit of Time
Length of the Adjustment Period
Price
Long Run: Consumers have time
to find suitable substitutes.
Demand becomes more
sensitive to prices changes
as time progresses, c.p.
We say demand
is relatively
D elastic.
Quantity Demanded per Unit of Time
An Example: Demand for Gasoline
If the price of gas increases from $1.20 per
gallon to $2.20 per gallon, how will
consumers respond?
First:
Are we asking how consumers will respond
over the next day, week, month, year, etc.
It makes a difference!
Demand for gas will be different for different
time periods
The longer the time period considered, the
flatter the demand curve becomes; or the
more elastic it becomes.
What occurred in the 1970’s?
What was a simplified sequence of events that
occurred when gas prices at the pump
increased so dramatically in the
1970's?
The Sequence of Events:
(1) People griped.
(2) Car pools formed, and bus usage
increased.
(3) Big cars were replaced with small
ones.
(4) Some people moved closer to work.
(5) New technology that decreased fuel
consumption was developed.
What was the result of this sequence of events
on Demand?
Price
In Short Run, the very large increase
in gas price resulted in a very small
decrease in consumption of gasoline.
$2.20
Consumption of gas will not be very
responsive to the increase in price.
$1.20
We say demand is relatively inelastic
D
Q1 Q0
Quantity demanded
As time progressed:
Long Run, consumers have time to
As timeInprogressed:
find substitutes, and the very large
increase in gas price will eventually
result in a significant decrease in
consumption of gasoline.
Price
$2.20
This of course assumes that
consumers perceive the increased
price of gas to be persistent, not
just a temporary price increase.
$1.20
D
Q1
Q0
Quantity demanded
H. The Availability of Substitutes
Price
If a commodity has FEW substitutes,
demand for the commodity will tend
to be more inelastic or less responsive
to price changes.
P1
Demand curve will tend to have a
very steep slope.
P0
D
Q1
Q0
Quantity/unit time
The Availability of Substitutes
Price
If a commodity has MANY substitutes,
demand for the commodity will tend
to be more elastic or more responsive
to price changes.
Demand will tend to have
a very flat slope.
P1
P0
D
Q1
Q0
Qd/unit time
I. Proportion of the Consumers Budget a
Good or Service Represents
Salt
Price
If the price of SALT doubles, how much
will this price increase affect the consumption
of salt?
$1.00
Why?
$.50
D
Q1 Q0
Qd/u.t.
Proportion of the Consumers Budget a
Good or Service Represents
The less of a consumers budget a commodity
represents, the more inelastic the demand
curve will tend to be.
The price of salt is such a small percentage of
our budgets, that consumption of salt will
not be affected very much by a price
increase.
Proportion of the Consumers Budget a
Good or Service Represents
Automobile
Price
If the average price of an AUTO doubles,
how much will this price increase affect the
consumption of Automobiles?
$40,000
Why?
$20,000
D
Q1
Q0
Qd/u.t.
Proportion of the Consumers Budget a
Good or Service Represents
The more of a consumers budget a commodity
represents, the more elastic the demand
curve will tend to be.
The price of an automobile is such a large
percentage of our budgets, that consumption
of automobiles will be affected very much
by a price increase.
Exceptions to the law of demand

1.
2.
3.
Few exceptions of the law of demand are as follows:
These are those inferior goods whose quantity demanded
decreases with decrease in price of the good.
Commodities which are regarded as status symbols:
Expensive commodities like jewelry, AC cars, etc., are
used to define status and to display one’s wealth.
Expectation of change in the price of the goods in future:
if a consumer expects the price of a good to increase in
future, it may start accumulating greater amount of the
goods for future consumption even at the presently
increased price.