Demand

Definition of Demand

 Demand in economics is the consumer's desire and ability to purchase a

good or service. It's the underlying force that drives economic
growth and expansion. Without demand, no business would ever bother
producing anything.
 Demand can mean either market demand for a specific good or
aggregate demand for the total of all goods in an economy.
 Types of Demand
1. Price demand
2. Income demand
3. Cross demand
Law of demand

 The law of demand states that as price increases (decreases) consumers

will purchase less (more) of the specific commodity, ceteris paribus. In
other words, there is an inverse relationship between the quantity
demanded and the price of a particular commodity.
Limitations of demand law

Price of substitute and

complementary
commodity
Income

tastes or preferences

Expectations

Hobby

Natural calamities
Political disturbance or
war
 Price of X product Quantity of X product
10 60
Demand 15 50
Schedule 20 40
The demand schedule
(demand curve) reflects the law 25 30
of demand.
30 20
The demand schedule is a table 35 10
or formula that tells you how
many units of a good or
service will be demanded at the
various prices, ceteris paribus.
For example, the schedule is
based on a survey of college
students who indicated how
many cans of cola they would
buy in a week, at various prices.
Demand curve
In economics, a demand curve is
a graph depicting the relationship
between the price of a certain
commodity and the quantity of
that commodity that is demanded
at that price.
the demand function is Qd = 1600
– 20p. From this we can arrive at
the intersepts for the graph – in this
equation, p = 80 – i.e. {when Qd is
zero, p must be 80 to make bP
1600} and a = 1600, so the
intersepts are p=80 and Qd= 1600.
We can then solve for any points
along the curve. For example, if
we make p=40, then Qd = 1600 –
40×20, which is 1600 – 800, which is
800, and so on..
Why demand curve slopes
downward?

There are at least three accepted explanations of why demand curves slope
downwards:
1. The law of diminishing marginal utility: This law suggests that as more of a
product is consumed the marginal (additional) benefit to the consumer falls,
hence consumers are prepared to pay less.
2. The income effect: If we assume that money income is fixed, the income effect
suggests that, as the price of a good falls, real income – that is, what consumers
can buy with their money income – rises and consumers increase their demand.
3. substitution effect: as the price of one good falls, it becomes relatively less
expensive. Therefore, assuming other alternative products stay at the same price,
at lower prices the good appears cheaper, and consumers will switch from the
expensive alternative to the relatively cheaper one.
Extension & Contraction of demand

 Changes in the price of a commodity causes movements along the

demand curve; such movements are called changes in the quantity
demanded.
 If price decreases, then we move down and to the right along the
demand curve; this is an increase in the quantity demanded which is
known as extension of demand.
 If price increases, then we move upward and to left along the demand
curve, this is a decrease in the quantity demanded which is called
contraction of demand.
Extension &
Contraction of
demand
Assuming other things such as
income, tastes and fashion, prices
of related goods remaining
constant, a demand curve DD has
been drawn. It will be seen in this
figure that when the price of the
good is OP, then the quantity
demanded of the good is OM.
Now, if the price of the good falls
to OP’ the quantity demanded of
the good rises to ON. Thus, there is
extension in demand by the
amount MN. On the other hand, if
price of the good rises from OP to
OP” the quantity demanded of the
good falls to OL. Thus, there is
contraction in demand by ML.
Increase and Decrease of demand

 Increase and decrease in demand are referred to change in demand

due to changes in various other factors such as change in income,
distribution of income, change in consumer’s tastes and preferences,
change in the price of related goods, while Price factor is kept constant
Increase in demand refers to the rise in demand of a product at a given
price. On the other hand, decrease in demand refers to the fall in
demand of a product at a given price.
 In case of increase in demand, the demand curve shifts to right, while in
case of decrease in demand, it shifts to left of the original demand curve.
Increase & Decrease in Demand
Consumer surplus
Consumer surplus is a measure
of the welfare that people gain
from consuming goods and
services
Consumer surplus is defined as
the difference between the
total amount that consumers
are willing and able to pay for a
good or service (indicated by
the demand curve) and the
total amount that they actually
do pay (i.e. the market price).
Consumer surplus is shown by
the area under the demand
curve and above the price.
Elasticity of demand

 Elasticity is an economics concept that measures the responsiveness of

one variable to changes in another variable.
 The elasticity(Price) of demand is the percentage change in the
quantity demanded of a good or service divided by the percentage
change in the price. This shows the responsiveness of the quantity
demanded to a change in price.
 The formula of elasticity of demand:
Types of elasticity of demand

 There are 3 types of elasticity:

1. Price elasticity
2. Income elasticity
3. Cross elasticity
 On the basis of demand there are 2 types of elasticity
1. Elastic demand
2. Inelastic demand
Income elasticity

 Income Elasticity of Demand (YED) is defined as the responsiveness of demand when a

consumer’s income changes. It is defined as the ratio of the change in quantity
demanded over the change in income.
 YED is useful for governments and firms to help them decide what goods to produce and
how a change in overall income in the economy affects the demand for their products,
i.e., whether it’s inelastic or elastic. YED can be positive or negative. This depends on the
type of good. A normal good has a positive sign, while an inferior good has a negative
sign.
 An inferior good has an Income Elasticity of Demand < 0.
A normal good has an Income Elasticity of Demand > 0.
Luxury goods usually have Income Elasticity of Demand > 1
0 < Income Elasticity of Demand < 1 are goods that are relatively inelastic.
Income Elasticity of Demand = 0 means that the demand for the good isn’t affected by a
change in income.
Cross-Price Elasticity of Demand

 CPE is calculated as the percentage change in quantity demanded of good

1 divided by the percentage change in the price of good 2. That is,
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 1
 Cross-price elasticity of demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 2
.

 Whether the cross-price elasticity is a positive or negative number depends on

whether the two goods are substitutes or complements.
substitutes

 If CPE > o, then the two goods are substitutes. For example: Coke and Pepsi
 If CPE < o, then they are compliments. For example: Bread and Butter
 If CPE = 0, then they are unrelated. For example: Bread and soda.
Elastic & Inelastic demand

 The degree to which the quantity demanded of a commodity responds

to a change in its own price is known as ‘price elasticity of demand’.
 If a change in price leads to a relatively large change in quantity de-
manded, then demand for the commodity is said to be elastic. again, The
demand for a product is considered price elastic whenever the ratio of
percentage change of demand divided by the percentage change in
price is greater than one.
 If the change in quantity demanded is relatively small, demand is said to
be inelastic. The demand for a product is considered price elastic
whenever the ratio of percentage change of demand divided by
percentage change in price is less than one.
Distinguish between elastic & inelastic
demand

Elastic Demand Inelastic Demand

 Demand happens to be elastic for  Demand happens to be inelastic for
luxurious commodities necessary & semi necessary
commodities
 Elasticity is greater than 1
 Elasticity is less than 1
 Elastic demand curve is shallow
 Inelastic demand curve is steep
 Price and total revenue go on
opposite direction  Price and total revenue go on same
direction
 Substitute for the product is available
 Less or no Substitute for the product is
available
Consider the following numerical example:
Total Revenue Test

Total Quantity Price per unit Total Revenue Elasticity

1 7 7
2 6 12 }+5 Elastic

3 5 15 >+3 Elastic
>+1 Elastic
4 4 16
}-1 Inelastic
5 3 15
6 2 12 }-3 Inelastic
7 1 7 >-5 Inelastic
Supply

 Supply is the willingness and ability of producers to create goods and

services to take them to market.
 Supply is positively related to price given that at higher prices there is an
incentive to supply more as higher prices may generate increased
revenue and profits.
 Supply and stock are not the same thing. example of stock and supply will
be suppose a television manufacturer has 20000 television stock, out of
which the manufacturer supplies only 2000 television at prevailing market
price. Hence remaining 18000 units will be called stock and 2000 units will
be called as supply.
Differences

Supply Stock
 supply refers to the quantity which the  stock refers to total available quantity
seller is prepared to sell in the market with the seller at any given point of
at given price at any point of time. time.
 Supply can be increased and  stock at a particular point of time is
decreased depending on the price fixed and it cannot be increased or
prevailing in the market decreased,
 supply is dependent on the price  stock is not dependent on the price.
Law of supply

 The law of supply is  Qxs =Quantity supplied of

the microeconomic law that states commodity x by the producers.
that, all other factors being equal,
 Φ = Function of.
as the price of a good or service
increases, the quantity of goods or  Px = Price of commodity x.
services that suppliers offer will
increase, and vice versa.  Tech = Technology.

 The supply function can also be  S = Supplies of inputs.

expressed in symbols.  F = Features of nature.
 QxS = Φ (Px, Tech, Si, Fn, X,........)  X = Taxes/Subsidies
Here:
Supply Schedule & Supply curve

 Supply schedule shows a tabular representation of law of supply. It

presents the different quantities of a product that a seller is willing to sell at
different price levels of that product.
 The graphical representation of supply schedule is called supply curve. In
a graph, price of a product is represented on Y-axis and quantity supplied
is represented on X-axis.
S = f (P)
THANK YOU