Chapter two demand

Introduction to the theory of demand. Definition of Demand. The Law of Demand What is the factors which determines the quantity demanded Kinds of Demand. Factors affecting demand.
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Introduction to the theory of demand. Q. Explain the theory of demand? It considers how buyers and sellers behave and how they interact with one another. It shows how supply and demand determine prices in a market economy and how prices, in turn, allocate the economys scarce resources.
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Definition of Demand: Q. Define the demand? first definition of Demand we mean the various quantities of a given goods or service which consumers would buy in one market in a given period of time at various prices, or at various incomes, or at various prices of related goods.

Second definition : The demand for a good, at a given price, is the amount of this good, which will be bought per unit, at that price.
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The Law of Demand

Q- explain the low of demand? and draw figure? 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.
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The Law of Demand

P
P1 P2 Q1 Q1 Q2 P1 A P2

Q CHANGE IN PRICE= change in quantity demanded

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Q. What is The relationship between price and quantity demanded ? and Explain it? The demand schedule for an individual specifies the units of a good or service that the individual is willing and able to purchase at alternative prices during a given period of time. The relationship between price and quantity demanded is inverse : more the price is low more units are purchased at this lower prices because of a substitution effect and an income effect.
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 What is the factors which determines the quantity demanded ? 1. Price :If the price of a good rose to $20 per unit, you would buy less and You might buy a substituted goods instead. If the price of a good fell one would buy more. Because the quantity demanded falls as the price rises and rises as the price falls, we say that the quantity demanded is negatively related to the price. This relationship between price and quantity demanded is true for most goods in the economy and, in fact, is so pervasive that economists call it the law of demand: Other things equal, when the price of a good rises, the quantity demanded of the good falls.
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2. Income: What would happen to your demand if you lost your job? Most likely, demand will fall. A lower income means that you have less to spend in total, so you would have to spend less on some and probably most goods. If the demand for a good falls when income falls, the good is called a normal good. Not all the goods are normal goods. If the demand for a good rises when income falls, the good is called an inferior good. An example of an inferior good might be Flafl . As your income falls, you are less likely to buy a car , and more likely to ride the bus
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3. Prices of Related Goods Suppose that the price of a good falls: The law of demand says that you will buy more from the cheep alternative . At the same time, you will probably buy less from the original good you use to consume, and buy more from cheep alternative which satisfy similar desires. When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. Substitutes are often pairs of goods that are used in place of each other, such as hot dogs and hamburgers, sweaters and sweatshirts, and movie tickets and video rentals.
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4.

Expectations: Your expectations about the future may affect your demand for a good or service today. For example, if you expect to earn a higher income next month, you may be more willing to spend some of your current savings buying goods. As another example, if you expect the price of a good to fall tomorrow, you may be less willing to buy an ice-cream cone at todays price.

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Kinds of Demand
1.Individual demand 2.Market demand 3. Cross demand - Demand for substitutes or competitive goods (eg.,tea & coffee, bread and rice).

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4. Joint demand (complementary, eg., pen & ink). 5. Composite demand (eg., coal & electricity). 6. Derived demand (eg., TV & TV mechanics). 7. Competitive demand (eg., butter and vegetable oils).

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Factors leading Increase Demand

1. Prices of Goods 2.Income of Consumer 3.Prices of Related Goods 4.Population 5.Expectation about future prices

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6.Tastes,Habit 7.Climatic Factors 8.Demonstration Effect 9.Distribution of national income

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Demand Schedule
Demand Schedule: a tabular presentation showing different quantities of a goods that would be demanded at different prices.
Types of Demand Schedules

Market Demand Schedule

Price

Individual Demand schedule

A
50 40 35 20

B
45 30 20 15

C
40 38 30 25

M.S
135 108 85 60

Price 1 2 3 4

A 50 40 30 20

1 2 3 4
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Demand Curve
The Graphical Representation of Demand Schedule is called a Demand Curve. It is of two types:

Types of Demand Curve

Individual DC
Y Price Less Flatter Price

Market DC Y More Flatter

O
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Demand

Demand