THEORY OF
“DEMAND”
INTRODUCTION
• How much to produce and what price
to charge?
• Factors determining demand for a
product.
• Explores the relationship between
price and demand for a product.
• Examines likely impact of the potential
factors that influence its demand.
WHAT IS DEMAND?
The quantity of a product consumers are willing and able to
buy at different prices in a specified time period.
Types of Demand
-Direct and derived demands
-Individual and market demand
-Recurring and replacement
-Complementary and competing
-New and replacement demands
DETERMINANTS OF DEMAND
•
•
•
•
•
•
•
•
•
Price of Product
Income of Consumer
Price of Related Good
Tastes and Preferences
Advertising
Consumer’s expectation of future Income and Price
Growth of Economy
Seasonal conditions
Population
DEMAND SCHEDULE
• It shows the price and output relationship.
• Tabular representation of price and demand.
DEMAND CURVE
• The geometrical representation of demand
schedule is called the demand curve.
LAW OF DEMAND
• As the price of a good rises, quantity demanded
of that good falls.
• As the price of a good falls, quantity demanded of
that good rises.
• Ceteris paribus.
DEMAND FUNCTION
• When we express the relationship between demand
and its determinant mathematically, the relationship
is known as demand function.
• The demand for product X can be written in
functional form as-
Dx= f (Px, Y, Po, T, A, Ef, N )
EXCEPTIONS TO THE LAW OF DEMAND
•
•
•
•
•
•
Inferior Goods
Snob Appeal
Demonstration Effect
Future Expectation of Prices
Insignificant proportion of income spent
Goods with no Substitutes
CHANGE IN DEMAND VS. CHANGE IN QUANTITY
DEMANDED
• A shift of the entire demand curve to a new position is
called change in demand.
• Changes in non-price determinants of demand.
QUANTITY DEMANDED
• Fluctuations in price, another determinant of demand,
cause movement along the demand curve.
Why the demand curve slope
downwards?
•
•
•
•
•
Law of diminishing marginal utility.
Income effect.
Substitution effect.
New consumers.
Multiple use of commodity.
ELASTICITY OF DEMAND
• Elasticity of demand is defined as the responsiveness of the
quantity of a good to changes in one of the variables on which
demand depends Price of the commodity
 Income of the Consumer
 Various other factor
DEFINATION-’’The elasticity of demand measures the response
of the demand for the commodity to change in price”.
PRICE ELASTICITY OF DEMAND
• The price elasticity of demand is the percentage change in
quantity demanded divided by the percentage change in price.
Percentage change in quantity demanded
Price elasticity of demand =
Percentage change in price
PRICE ELASTICITY OF DEMAND
Point Definition
Q / Q Q P
EP 


P / P P Q
Arc Definition
Q2  Q1 P2  P1
EP 

P2  P1 Q2  Q1
Perfectly Inelastic Demand: Elasticity Equals 0
city of Demand
Price
Demand
$5
4
1. An
increase
in price . . .
0
Quantity
100
2. . . . leaves the quantity demanded unchanged.
Copyright©2003 Southwestern/Thomson Learning
Inelastic Demand: Elasticity Is Less Than 1
Price
$5
4
1. A 22%
increase
in price . . .
Demand
0
90
100
Quantity
2. . . . leads to an 11% decrease in quantity demanded.
Unit Elastic Demand: Elasticity Equals 1
Price
$5
4
Demand
1. A 22%
increase
in price . . .
0
80
100
Quantity
2. . . . leads to a 22% decrease in quantity demanded.
Copyright©2003 Southwestern/Thomson Learning
Elastic Demand: Elasticity Is Greater Than 1
Price
$5
4
Demand
1. A 22%
increase
in price . . .
0
50
100
Quantity
2. . . . leads to a 67% decrease in quantity demanded.
Perfectly Elastic Demand: Elasticity Equals
Infinity
Price
1. At any price
above $4, quantity
demanded is zero.
$4
Demand
2. At exactly $4,
consumers will
buy any quantity.
0
3. At a price below $4,
quantity demanded is infinite.
Quantity