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The Demand Theory
Price and Quantity Demanded
 Quantity
demanded:
The amount of a product that a household (a
consumer) would buy at the current market
price.
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The law of demand
•
There is a negative relationship between price
of any product and its quantity demanded,
other factors remaining constant.
↑ P → ↓ Qd
↓ P → ↑ Qd
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 This
negative relationship because of:
1.
The income effect .
2.
The substitution effect .
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➢
Demand Schedule:
A table showing how much of a given product a
household would be willing to buy at different
prices.
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 Demand
Curve :
A graph illustrating how much of a given
product a household would be willing to
buy at different prices.
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Price
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Q.D
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
Demand Curves Slope Downward :
•
The
relationship
between
price
(P)
and
quantity
demanded (Qd) presented graphically is called a demand
curve. Demand curve has a negative slope, indicating that
quantity demanded tends to fall when price rises, and
quantity demanded tends to rise when price falls.
Determinants of Demand

The price of the product is the main determinant of Quantity
demanded and it is represented by the law of demand.

Non-price determinants:
1- The income.
2- The prices of other products.
3- The tastes and preferences.
4- The expectations about future income and prices.
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1-
Income :
•
There is a positive relationship between household's
income and demand for normal goods.
•
Normal goods: movie tickets, restaurant meals, telephone calls.

↓ income → ↓ demand for normal goods

↑ income → ↑ demand for normal goods
•
There is a negative relationship between household's
income and demand for inferior goods.
•
Inferior goods: bad quality goods, such as beans, used clothes.

↓ income → ↑ demand for inferior goods

↑ income → ↓ demand for inferior goods
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2- Prices of other Goods and Services :
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A- Prices of Substitutes:
•
Substitutes are Goods that can serve as replacements for one
another- Such as (tea, coffee), (beef, poultry), (rice, pasta), (car,
train); when the price of one increases, demand for the other
increases,
other
factors
remaining
constant
(positive
relationship).

↑ P(substitute) → ↑ Dx

↓ P(substitute) → ↓ Dx
•
Example: An increase in the price of poultry, tends to decrease
the quantity of poultry demanded (law of demand) and therefore
increase the demand of its substitutes such as beef.
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B- Prices of Complements:

Complementary goods are Goods that are consumed or used
together-such as (CD, CD player), (tea, sugar), (car, gasoline); a
decrease in the price of one results in an increase in demand for
the
other,
other
factors
remaining
constant
(negative
relationship).

↑ P (complement) → ↓ Dx

↓ P(complement) → ↑ Dx
•
Example: An increase in the price of cars, tends to decrease
the quantity of cars demanded (law of demand) and therefore
decrease the demand for its complements such as gasoline,
since they are used or consumed together.
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3- Tastes and Preferences :
Tastes are volatile and personal, therefore, its effect on
demand curve location could be positive or negative.
•
If tastes change in favor of(X)
→ ↑
Dx
•
If tastes change in disfavor of (X) → ↓
Dx
➢
Adverts and medical reports can affect people's tastes and
preferences.
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4- Expectations about the future :
•
Expectation about prices and income:
If the prices of (x) is expected to increase or the consumer's
income is expected to increase, the current demand for x will
increase, ceteris paribus (positive relationship).

↑ Px (expected) → ↑ Dx

↓ Px (expected) → ↓ Dx

↑ income (expected) → ↑ Dx

↓ income (expected) → ↓ Dx
Changes in Quantity Demanded versus
Changes in Demand :

1- Changes in Quantity demanded:
•
Changes in the price of a product affect the quantity
demanded per period. It is represented graphically by a
movement along a demand curve.
•
Thus, we say that an increase in the price of Coca-Cola
is likely to cause a decrease in the quantity of CocaCola demanded (movement along a Coca-Cola demand
curve).
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Change in Quantity Demanded (Qd)
•
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When the price of a good changes, we move along the demand curve for
that good.

2- Changes in Demand:

Changes in any other factors, such as income or
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preferences, affect demand, it is represented graphically by
a shift of a demand curve.

Thus, we say that an increase in income is likely to cause an
increase in the demand for Coca-Cola (shift of a Coca-Cola
demand curve).
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
Change in Demand :

It is caused by a change in any other factors that influences
demand (income & Wealth, tastes, prices of other goods, and
the expectations about future), represented by a shift of the
demand curve.

1- Change in income:
↑ income →
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demand for curve normal goods shifts to the right from D0 to D1
consumers demand more at the same price .
↓ income →
demand for curve normal goods shifts to the left from D0 to D1
consumers demand less at the same price .

2- Change in Prices of Substitutes :
↓ Price of coffee → ↑ Qd of coffee → ↓ demand for tea at the same
price (because tea and coffee are Substitutes), and demand shifts
to the left.
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
3- Change in Prices of Complements :
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↓ Price car → ↑ Qd of cars → ↑ demand for gasoline because car and gasoline
are complements, and demand shifts to the right .

4- Change in Tastes and Preferences :
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5- Change in Expectations :
↑ Expected income or price → demand shifts to the right from D0 to D1
↓ Expected income or price → demand shifts to the left from D0 to D2
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The Market Demand Curve:

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Market demand:
The sum of all individual quantities of goods demanded at each price
(horizontal summation of demand curves of all consumers in the
market).
Thanks ,,,
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