ENGINEERING

ECONOMICS
Lecturer:
Engr. Afshan Naseem
Lecture 05
DEMAND
DEPARTMENT OF ENGINEERING MANAGEMENT
COLLEGE OF E&ME, NUST
DEMAND
Introduction to Demand
The forces of supply and demand work together to
set prices.
Demand is the desire, willingness, and ability to buy
a good or service.
Supply can refer to one individual consumer or to the
total demand of all consumers in the market (market
demand).
Based on that definition, which of the following do
you have a demand for?
Introduction to Demand
A demand schedule is a table that lists the
various quantities of a product or service
that someone is willing to buy over a
range of possible prices.
Price per Widget (Rs.) Quantity Demanded of
Widget per day
Rs.500 2
Rs.400 4
Rs.300 6
Rs.200 8
Rs.100 10
Introduction to Demand
A demand schedule can be shown
as points on a graph.

The graph lists prices on the vertical
axis and quantities demanded on
the horizontal axis.
Each point on the graph shows how
many units of the product or service
an individual will buy at a particular
price.
The demand curve is the line that
connects these points.

$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
P
r
i
c
e

p
e
r

W
i
d
g
e
t

Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
Introduction to Demand
The demand curve slopes downward.
This shows that people are normally willing to
buy less of a product at a high price and
more at a low price.
According to the law of demand, quantity
demanded and price move in opposite
directions.

$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
P
r
i
c
e

p
e
r

W
i
d
g
e
t

Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for
Widgets
Introduction to Demand
We buy products for their utility- the pleasure,
usefulness, or satisfaction they give us.
What is your utility for the following products?
(Measure your utility by the maximum amount you
would be willing to pay for this product)

Do we have the same utility for these goods?

Changes in Demand
Change in the quantity demanded due to a price
change occurs ALONG the demand curve

$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
P
r
i
c
e

p
e
r

W
i
d
g
e
t

Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
At Rs.300 per Widget, the
Quantity demanded of
widgets is 6.
An increase in the Price of
Widgets from Rs.300 to
Rs.400 will lead to a
decrease in the Quantity
Demanded of Widgets
from 6 to 4.
Changes in Demand
Demand Curves can also shift in response to the
following factors:
Buyers (# of): changes in the number of consumers
Income: changes in consumers income
Tastes: changes in preference or popularity of product/
service
Expectations: changes in what consumers expect to
happen in the future
Related goods: compliments and substitutes
BITER: factors that shift the demand curve





Changes in Demand
Prices of related goods affect on demand
Substitute goods a substitute is a product that can be
used in the place of another.
The price of the substitute good and demand for the
other good are directly related
For example, Coke Price Pepsi Demand
Complementary goods a compliment is a good that
goes well with another good.
When goods are complements, there is an inverse
relationship between the price of one and the demand
for the other
For example, Peanut Butter Jam Demand

Changes in Demand

$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
P
r
i
c
e

p
e
r

W
i
d
g
e
t

Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12 14
P
r
i
c
e

p
e
r

W
i
d
g
e
t

Quantity Demanded of Widets
Increase in Demand
Orginal Demand Curve
New Demand Curve
Several factors will
change the demand for
the good (shift the entire
demand curve)
As an example, suppose
consumer income
increases. The demand for
Widgets at all prices will
increase.
Changes in Demand

$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
P
r
i
c
e

p
e
r

W
i
d
g
e
t

Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
P
r
i
c
e

p
e
r

W
i
d
g
e
t

Quantity Demanded of Widgets
Decrease in Demand
Original Demand Curve
New Demand Curve
As an example, suppose
Widgets become less
popular to own.
Demand will also
decrease due to changes
in factors other than price.
Changes in Demand
Changes in any of the factors other than
price causes the demand curve to shift
either:

Decrease in Demand shifts to the Left
(Less demanded at each price)
OR
Increase in Demand shifts to the Right
(More demanded at each price)
The Demand Curve
Factors influencing demand
D = f (P
n,
P
n
P
n-1
, Y, T, P, A, E)
Where:
P
n
= Price
P
n
P
n-1
= Prices of other goods substitutes
and complements
Y = Incomes the level and distribution
of income
T = Tastes and fashions
P = The level and structure of the population
A = Advertising
E = Expectations of consumers

Demand in Output Markets
A demand schedule is
a table showing how
much of a given
product a household
would be willing to buy
at different prices.
Demand curves are
usually derived from
demand schedules.
PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
Rs. 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
AYESHA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
The Demand Curve
The demand curve is a
graph illustrating how
much of a given
product a household
would be willing to buy
at different prices.
PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
Rs. 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
AYESHA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
The Law of Demand
The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity
of a good demanded
and its price.
This means that
demand curves slope
downward.
Income and Wealth
Income is the sum of all households
wages, salaries, profits, interest payments,
rents, and other forms of earnings in a
given period of time. It is a flow measure.
Wealth, or net worth, is the total value of
what a household owns minus what it
owes. It is a stock measure.
Related Goods and Services
Normal Goods are goods for which
demand goes up when income is higher
and for which demand goes down when
income is lower.
Inferior Goods are goods for which
demand falls when income rises.
Shift of Demand Versus 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 D
A
to D
B
.
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
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 Law of Demand
Explanations
There are two ways to explain the Law of
Demand
Substitution effect
Income effect
24
Substitution Effect
When the price of a good decreases, consumers
substitute that good instead of other competing
(substitute) goods

Coke Books Movies Clothes
1. When the price of Coke
decreases
Pepsi
2. Consumption of
Pepsi decreases
3. Consumption of
Coke increases
Income Effect
Consumers respond to a decrease in the
price of a commodity as they would to an
increase in income
They increase their consumption of a wide
range of goods, including the good that
had a price decrease
Coke Books Movies Clothes
1. When the price of Coke
decreases
2. Consumers
feel richer
3. Consumption of Coke and
other goods increases
Pepsi
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
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:
DISCUSSION