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Demand
Terms to know:
The law of demand1
Demand function2
Demand schedule3
Diagramatical representation4
Elasticity of demand7
Changes in Demand 6
What is Demand?
Demand in economics means that willingness of a customers to purchase a commodity and as well as ability to purchase.
Demand=f(willingness, Money to pay)
Demand function
Demand function define as the relationship between Demand and price.
We can says that demand is the function of price.
Types of Demand
Price Demand
Price demand means that demand relation with price, demand increase or decrease when price increase or decrease.
E.g. demand for motor car will increase when its price reduce.
Income Demand
When customer demand is related to income of the customer, that sort of demand is called income demand.
E.g. when income increase we will buy more and more products, and if income reduce our demand will decrees.
Cross Demand
Cross demand means that price of one product will increase while demand of others product will increases.
E.g. when price of hp laptop increase than demand for Dell laptop will increase.
Market Demand vs. Individual Demand
Market demand refers to the sum of all individual demands for a particular good or service.
Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
Definition:
Law of demand states that, other things remaining the same, amount demanded increases with a fall in price and diminishes with rise in price.
Definition (continued)
Other things remaining the same
Weather conditionPrice of substitute goods
Taxes of the govt.
Taste, habits of the consumer
Income of the consumer
Political stability
Demand function:
Qd = f(P) Here,
Qd= Dependent variable
P= Independent variable
Demand has a negative relationship with price; i.e.
Demand schedule:
price Demand
1O0 100O
9O 1050
8O 1100
7O 115O
6O 120O
50 125O
price Demand
1O0 100O
110 950
120 900
130 850
140 800
150 750
Decrease in price increase in demand Increase in price decrease in demand
Diagrammatical representation:
PRICES
Quantity demandO 1000 1050 1100 1150
70
80
90
100Demand curve
D
D
Changes in demand:
Changes in the demand for a commodity can be shown through the demand curve in two ways:
Movements along the demand curve:
Shifts of the demand curve:
Changes in demand:
CHANGE IN DEMAND:
Change in demand
Movement along a demand
curve
Shift in the demand
curve
Extension in demand
Contraction in demand
Increase in demand
Decrease in demand
It is caused by change in the price
alone.
It is caused by changes in factors other than the price.
Changes in demand (cont’d):
Movements along the demand curve:if the change in demand is due to a rise or fall in the price of a commodity alone, it is known as contraction or extantion in demand.
Quantity
Price
2
4
6
8
100 200 300 400
a
b
Changes in demand (cont’d):
Shift in the Demand curve: If the changes in demand is due to factor other
than price, it is known as increase or decrease in demand.
In such case the demand curve shift to right or left from the original demand curve.
2
4
6
8
100 200 300 400
The demand curve shift to right due to change in other factors.
Other factors Affecting Demand law
We list some factors which may be expected to influence this consumer demand
The price of goods The prices of others goods which related to
that good The consumer income(y) The consumer taste(T) The consumer future expectations about
price(E) Populations Weather condition
Increase in income effect on Normal and inferior goods
Normal good: When an increase in income causes an increase in demand it is called as normal goods.
Example are car, cell phone.Inferior good: When an increase in
income causes a decrease in demand it is called as inferior goods. OR Demand remains the same.
Example are salt, soap etc.
Effect on demand by related goodssubstitutes and complementary
Substitutes: Two goods are substitutes if they satisfy the same need and an increase in the price of one of them causes an increase in the demand for the other.
Thus, an increase in the price of tea would increase the demand for coffee because both satisfy the same need.
Income
Demand for a commodity changes in income increase. Normally when income increase demand also increase. And when income decrease demand also decrease.
e.g your salary is 500 $ you are using one card per day. Now your income increase from 500$ to 1000$ than your demand also increase using 2 card per day.
Population
If population increase demand will increases because buyers increase consequently result will positive.
e.g. number of population in Afghanistan demand for car will also increase.
Consumer tastes
If people taste changes for a particular good than demand will also changes.
e.g. Normally people use Pepsi if taste changes now they using Sprite, than demand for Pepsi will decrease.
Price related Good
A decrease in the price substitute of a good will cause fall in its demand. For instance fish is substitute for meat. A decrease in the price of fish will cause fall in the demand for meat.
Terms to know:
statement
Degree/Cases of Ed
Schedule of Ed
Diagrammatical representation
Formula form for Ed
Elasticity Elasticity Of demandOf demandElasticity Elasticity
Of demandOf demand
Elasticity of demand:
Statement: To what extent or to what degree quantity demanded changes as a result of change in price is called elasticity of demand (Ed).
Elasticity and Demand
The law of demand tells us that there is an inverse relationship between price and quantity demanded.
But it does not tell us how responsive consumers are to price changes.
Elasticity
To find out exactly how responsive consumers are to a price change, we need the price elasticity of demand for that good or service.
Price elasticity of demand: A measure of how responsive people are to
price changes.
Cases/Degrees of elasticity of demand:
Elasticity of Elasticity of demanddemand
Less Less elasticelastic
Equal elasticEqual elastic
More elasticMore elastic
Cases of Ed (cont’d):
Equal elastic
More elastic
Less elastic
If there is a great change in price cause a less change in quantity demand, is called less elastic situation.
If there is an equal change in price cause an equal change in quantity demanded, is called equal elasticity of demand.
If there is a less change in price caused a great change in quantity demand, is called more elastic situation.
Schedule form of Ed:
50 2O
40 22
Less elastic
Price Demand
15 100
10 200
More elastic
Price Demand
12 60
10 70
Price Demand
Equal elastic
Diagrammatical representation of less elastic demand:
Less elastic curve
20 22
40
50
PRICE
QUANTITY DEMANDED
Diagrammatical illustration for equal elasticity:
Equal elastic curve
PRICE
QUANTITY DEMANDED
50 60
10
12
Diagrammatical illustration for more elasticity:
PRICE
QUANTITY DEMANDED
100 200
10
15 More elastic curve
Measurement of elasticity (Formula for Ed):
The formula form for elasticity of demand is; Elasticity of demand = change in quantity demanded ÷ change in price Quantity Price
Ed = ΔQd ÷ ΔP Q P Ed = ΔQd × P Q ΔP
Ed = ΔQd × P ΔP Q
Types of Elasticity of Demand:
There are many types of elasticity of demand: i.e.
Price elasticity of demand Income elasticity of demand and Cross elasticity of demand.
Income elasticity of demand: “Income elasticity of demand is the
responsiveness of demand to changes in the income of the consumer.”
Income elasticity is calculated by using the following formula:
Ey = % change in quantity / % change in income
Ey = ΔQ/Q ÷ ΔY/YEy = ΔQ/Q × Y/ΔY
Types of Elasticity of Demand (cont’d):
Types of Elasticity of Demand (cont’d):
Income elasticity of demand is:a) Equal to unity i.e. when the proportion of income
spent on goods remains the same even after increase in income.
Ey = 1
b) It is less than unity if the proportion decreases.Ey < 1
a) More than unity if the proportion increases.Ey > 1
Types of Elasticity of Demand (cont’d):
For example:
monthly income of the consumer (Afs)
Monthly demand for meat (Kg)
5000 40
8000 50
Ey = ΔQ/ΔY × Y/QEy = 10/3000 × 5000/40Ey = 0.14Ey = 0.14 < 1
Types of Elasticity of Demand (cont’d):
Cross elasticity of demand: “The rate of responsiveness of quantity demanded
of commodity A to changes in price of commodity B.” i.e.
EAB = % change in Qd of A ÷ % change in price of BEAB = ΔQA/QA ÷ ΔPB/PB
EAB = ΔQA/QA × PB/ΔPB
Types of Elasticity of Demand (cont’d):
For example:Price of wheat (PB)
Quantity demand for rice (QA)
200 1000
300 1200
EAB = ΔQA/ΔPB × PB/QA
EAB = 200/100 × 200/1000EAB =2/5 = 0.4<1
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