Demand Theory
Chapter 3
Contents
• Definition, Representation and Meaning of
Demand
• Tables, graphs and equations
• Interpretation of equations (Section 3.2)
• Consumer Theory (Section 3.3)
• Factors determining demand
• Elasticity..
Definition
• Quantities that people are or would be
willing to buy
• at different prices during a given time period,
• assuming other factors affecting these remain
the same(ceteris paribus)..
• Demand denotes relationship between price
and quantity demanded(QD)..
Demand Schedule
Price of coke
30
40
50
60
70
Quantity sold
120
100
80
60
40
Demand Curve
80
70
P
R
I
C
E
60
50
40
30
20
10
0
0
20
40
Quantity demanded
60
80
100
120
140
Law of demand
• As price of a commodity increases the quantity
demand decreases and vice versa
• Exceptions:
– Giffins goods: related to income
– Luxury goods: related to conspiciuos consumption and
leisure etc..
– Speculation
– Calamity and contingencies
– Alcohol and drugs..
Demand Function
• Arithmetic depiction of relationship between two
or more variables
• QD=a-bP
– QD:quantity demanded
– a: maximum quantity bought at no price or zero price
– b: number of times QD decreases due to increase in
Price
– P: Price of commodity
Demand Equation
• Q= 180-2P
•
•
•
•
When Price is 30 what is the QD
Find the QD at price 10, 20
Maximum QD
Maximum possible price….
Factors affecting demand
• Controllable: marketing mix variables…
- Price, product(primary product), promotion,
place(distribution strategy)
• Uncontrollable: external or environmental
variables
- Income, tastes and preferences, competitive
factors, government policy, demographic factors,
seasonal factors, prices of substitutes and
complementary goods…
Impact of Change
• Change in Demand:
– due to change in factors other than price
– Impact: shift in demand curve
• Change in Quantity Demanded
– Due to change in price
– Impact: movement along demand curve
How much is the impact of change
• Introduction to the Elasticity…