Transcript Lec 2

Demand
Quantity Demanded refers to the amount (quantity) of a good that buyers are
willing to purchase at alternative prices for a given period.
or
Demand = Power to purchase + will to purchase
Requisites:
•Desire for specific commodity.
•Sufficient resources to purchase the desired commodity.
•Willingness to spend the resources.
•Availability of the commodity at
(i) Certain price (ii) Certain place (iii) Certain time.
Determinants of Demand
•
What factors determine how much ice cream you will buy?
1. Product’s Own Price
2. Consumer Income
3. Prices of Related Goods
4. Tastes
5. Expectations
6. Number of Consumers
etc
Kinds of Demand
1. Individual demand
2. Market demand
3. Income demand
•
Demand for normal goods (price –ve, income +ve)
•
Demand for inferior goods (eg., coarse grain)
4. Cross demand
•
Demand for substitutes or competitive goods (eg.,tea & coffee, bread and
rice)
•
Demand for complementary goods (eg., pen & ink)
5. Joint demand (same as complementary, eg., pen & ink)
6. Direct demand (eg., ice-creams)
7. Derived demand (eg., TV & TV mechanics)
8. Competitive demand (eg., desi ghee and vegetable oils)
9. Demand of unrelated goods
Factors Affecting Demand
1. Prices of Goods
2. Income of Consumer
3. Prices of Related Goods
4. Population
5. Tastes, Habit
6. Expectation about future prices
7. Climatic Factors
8. Demonstration Effect
9. Distribution of national income
Demand Schedule
Demand Schedule: a tabular presentation showing different quantities of a
commodity that would be demanded at different prices.
Types of Demand Schedules
Individual Demand schedule
Market Demand Schedule
Price
A
Price
A
B
C
M.S
1
50
1
50
45
40
135
2
40
2
40
30
38
108
3
30
3
35
20
30
85
4
20
4
20
15
25
60
The Law of Demand
Prof. Samuelson: “Law of demand states that people will buy more at lower price
and buy less at higher prices, others thing remaining the same.”
Ferguson: “According to the law of demand, the quantity demanded varies
inversely with price”.
Chief Characteristics:
Inverse relationship.
Price independent and demand dependent variable.
Assumptions:
No change in tastes and preference of the consumers.
Consumer’s income must remain the same.
The price of the related commodities should not change.
The commodity should be a normal commodity
John's Demand Schedule
Price of Ice-cream Cone ($)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity of cones
Demanded
12
10
8
6
4
2
0
John’s Demand Curve
Price of IceCream
Cone
$3.00
2.50
2.00
1.50
1.00
0.50
0
2
4
6
8
10
12
Quantity of
Ice-Cream
Cones
Exceptions and Importance of Law of Demand
Exceptions:
Inferior goods
Articles of snob appeal. (exception: Veblen goods, eg., diamonds)
Expectation regarding future prices (shares, industrial materials)
Emergencies
Quality-price relationship
Ignorance
Change in fashion, habits, attitudes, etc..
Importance:
Price determination.
To Finance Minister
To farmers
In the field of Planning.
Shift of Demand Vs Movement Along a Demand Curve
• A change in demand is not the
same as a change in quantity
demanded.
• In this example, a higher price
causes lower quantity demanded.
• Changes in determinants of
demand, other than price, cause a
change in demand, or a shift of the
entire demand curve, from DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded
• When demand shifts to the right,
demand increases. This causes
quantity demanded to be greater
than it was prior to the shift, for
each and every price level.
A Change in Demand Versus a Change in Quantity
Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded
(Movement along the curve).
Change in income, preferences, or
prices of other goods or services
leads to
Change in demand
(Shift of curve).
The Impact of a Change in Income
• Higher income decreases the
demand for an inferior good
• Higher income increases the
demand for a normal good
The Impact of a Change in the Price of Related Goods
• Demand for complement good (ketchup) shifts
left
• Demand for substitute good (chicken) shifts
right
• Price of hamburger rises
• Quantity of hamburger
demanded falls
From Household to Market Demand
Demand for a good or service can be defined for an individual household, or for a
group of households that make up a market.
Market demand is the sum of all the quantities of a good or service demanded per
period by all the households buying in the market for that good or service.
From Household Demand to Market Demand
Assuming there are only two households in the market, market demand is
derived as follows:
Reference: Principles of Economics, 6/e by Karl Cas, Ray Fair
Slides prepared by: Fernando Quijano and Yvonn Quijano