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Nawawi Jusoh] 1

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1.0 INTRODUCTION OF DEMAND THEORY

Demand refers to how much (quantity) of a product or service is desired by buyers. The
quantity demanded is the amount of a product people are willing to buy at a certain price; the
relationship between price and quantity demanded is known as the demand relationship.

A theory relating to the relationship between consumer demand for goods and services
and their prices. Demand theory forms the basis for the demand curve, which relates consumer
desire to the amount of goods available. As more of a good or service is available, demand drops
and therefore so does the equilibrium price.

2.0 LAW OF DEMAND

The law of demand states that, if all other factors remain equal, the higher the price of a
good, the less people will demand that good. In other words, the higher the price, the lower the
quantity demanded. The amount of a good that buyers purchase at a higher price is less because
as the price of a good goes up, so does the opportunity cost of buying that good. As a
result, people will naturally avoid buying a product that will force them to for go the
consumption of something else they value more. The chart below shows that the curve is a
downward slope. A, B and C are points on the demand curve. Each point on the curve reflects a
direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity
demanded will be Q1 and the price will be P1, and so on. The demand relationship curve
illustrates the negative relationship between price and quantity demanded The higher the price of
a good the lower the quantity demanded (A), and the lower the price, the more the good will be
in demand (C).
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3.0 GRAPHING DEMAND

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4.0 FACTOR TO DETERMINE TOTAL DEMAND

• Increase of income and wealth of customer

• Price of other products

• Taste and formality, fashion and weather

• Season

• Interest rate

• Price expectation and earnings

• Size and structure of population

• Advertisement

5.0 PRICE DEMAND FLEXIBILITY

Ep =

6.0 TYPE OF PRICE DEMAND FLEXIBILITY

• Flexible Demand (Ep >1)

• Non-flexible Demand (Ep >1)

• Single Flexible Demand (Ep = 1)

• Imperfect Flexible Demand (Ep = 0)

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• Perfect Flexible Demand (Ep = )

7.0 RELATIONSHIP BETWEEN PRICE CHANGE (P), TOTAL REVENUE

(TR) AND FLEXIBLE PRICE DEMAND (Ep)

TR = P x Q , TR : Total Revenue

P : Price of Product

Q : Quantity of Product

8.0 EXAMPLE FOR CALCULATION OF DEMAND THEORY

TYPE OF BRICK PRICE / UNIT QUANTITY

(RM) (PIECES)
Clay brick 0.38 100

Sand brick 0.23 200

POINT DEMAND FLEXIBLE

Ep =
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Ep, clay brick =

= 2.53 , Ep >1 (Flexible Demand)

Ep, sand brick =

= 0.77 , Ep <1 (Non-flexible Demand)

TOTAL REVENUE

TR, clay brick = RM 0.38 x 100

= RM 38.00

TR, sand brick = RM 0.23 x 200

= RM 46.00
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9.0 CONCLUSION

Demand theory is an economic theory which is part of economists' understanding of the supply
and demand curve. The supply and demand curve is often used as a fundamental argument
for capitalism. According to demand theory and the concept of supply and demand, society will
set the perfect price point for any item over time.

For every product that exists on earth, there is some level of demand. Demand simply refers to
the desire of a consumer to buy an item. The given demand is represented often in terms of
currency. For example, if an item costs a very low amount, many people may want the product,
even if they do not truly need it or have a use for it. On the other hand, if an item is extremely
expensive, then only those who truly want the item will be willing to pay for it.

As a result, the demand for a product is directly affected by how much it costs. There is an
optimum level of demand that should be reached, under demand theory. That level
of demand occurs when the price of a product is set so that only those who actually need the item
will buy it. This maximizes efficiency.

Supply can also affect demand. As such, demand theory is intertwined with supply theory. When
the supply becomes too high, it exceeds the demand for the item. As a result,
the manufacturers of that given product will need to lower the price of the item to increase
the demand. When the price is lowered, more people will want the item. Over time, eventually
the supply and demand curves will meet at the optimal point. Under demand theory, this means
that an industry will determine the exact price point at which charging too much would decrease
the demand and cost them money, while charging less would result in a loss of income, even
with the additional demand. This is fundamental to the idea of a capitalist society, which believes
that the market will set the appropriate price without intervention.
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10. REFERENCES

 http://www.investopedia.com/university/economics/economics3.asp-15
MARCH 2011

 http://en.wikipedia.org/wiki/supply_and_demand-15 MARCH 2011

 http://www.wisegeek.com/what-is-demand-theory.htm- 20 MARCH 2011

 Entrepreneurship notes, Prof Assoc Nawawi Jusoh, UTHM

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11. APPENDIX