The Law of Demand

Hussain A. Al Awami, B.Sc. Pharm., M.Sc., MBA

Basic definition

Inverse relationship between prices and quantity demanded

The demand curve

Price

Quantity demanded

Prices and quantities, example

Price
SR 3000 SR 2000 SR 1000

1M

2M

4M

Quantity demanded

Changes in demand and demand curve

Movement along

Movement (shift) of demand curve

Movement along demand curve

Price
SR 3 SR 2 SR 1

700

1000

1500

Quantity demanded

Movement (shift) of demand curve

Price

Outward Inward

Quantity demanded

Factors shifting the demand

Consumer income Prices of other goods
Consumer tastes and preferences

Expectation of price change Number of customers

Elasticity of demand
Response of change in quantity upon change in price

Price elasticity of demand

Elastic goods

% of change in quantity > % of change in the price

Elastic goods, graph

Price
P1 % P P2
Lower

Higher

% Q

Q1

Q2

Quantity demanded

Inelastic goods

% of change in quantity < % of change in the price

Inelastic goods, graph

Price
P1 % P P2
Higher

Lower

% Q

Q1

Q2

Quantity demanded

Calculation of elasticity of demand

Percentage method

Midpoint (or Arch) method

The percentage method

% Q ______ = % P

The midpoint (Arch) method

Q2 Q1 __________ Q2 + Q1 _______ 2 _____________

( (

) )

P2 P1 __________ P2 + P1 _______ 2

Elasticity of demand, example

Price What is the price elasticity?

SR 5 SR 3

3000

4000

Quantity demanded

Price

Calculation using percentage method

% Q ______ = % P
% P (4000-3000)/3000 ___________ = % Q (5-3)/5 0.33 ___ = 0.4

SR 5 SR 3

=
3000 4000

0.83

Quantity demanded

Price

Calculation using midpoint (Arch) method Q Q

SR 5 SR 3

2 1 __________ Q2 + Q1 _______ 2 _____________

( (

) )

P2 P1 __________ P2 + P1 _______ 2

3000

4000

Quantity demanded

Calculation using midpoint (Arch) method, continue

Price

(
=

SR 5 SR 3

4000 3000 __________ 4000 + 3000 __________ 2 _____________

35 __________ 5+3 _______ 2

3000

4000

Quantity demanded

Calculation using midpoint (Arch) method, continue

0.28 ___ = 0.5 SR 5 0.57 1000 ____ 3500 ________ 2 ___ 4 =
Price

1000 __________ 7000 __________ 2 _____________

SR 3

2 __________ 8 _______ 2

3000

4000

Quantity demanded

Classifications of levels of elasticity

Perfectly inelastic

Inelastic

Unitary elasticity

Elastic

Classifications of levels of elasticity

Perfectly inelastic

Inelastic

Unitary elasticity

Elastic

=0
Quantity Does NOT Affected By price

Classifications of levels of elasticity

Perfectly inelastic

Inelastic

Unitary elasticity

Elastic

<1
Quantity Changed by Lower % Than price

Classifications of levels of elasticity

Perfectly inelastic

Inelastic

Unitary elasticity

Elastic

=1
Quantity Changed by same % As the price

Classifications of levels of elasticity

Perfectly inelastic

Inelastic

Unitary elasticity

Elastic

>1
Quantity Changed by higher % Than price

Your presenter

Hussain A. Al Awami

alawami2001a@hotmail.com