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Lecture 3 Demand

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Lecture 3 Demand

Uploaded by

Md. Didarul Alam
Copyright
© © All Rights Reserved
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Download as PPT, PDF, TXT or read online on Scribd
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GE04: Fundamental of Business Economics

Lecture 2: Demand

Presented by
Dr. M. Anwar Ullah, FCMA

The Institute of Cost and Management Accountants of Bangladesh


ICMA Bhaban, Nilkhet, Dhaka – 1205
Email: [email protected]
Demand
Demand is defined as the quantity of a good or service that consumers are
willing and able to buy at a given price in a given time period.
Market demand
Market demand is the sum of the individual demand for a product from each
consumer in the market.

Effective demand
Consumers'
desire to buy
Ability to pay
Purchasing power
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Demand Schedule and Demand Curve

Price (Tk.) Quantity


Demanded
5 10

4 20

3 30

2 40

1 50

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The Demand Curve
A demand curve shows the relationship between the price of an item and the quantity
demanded over a period of time.

Latent Demand
The potential demand for a product. willingness to buy but lack the purchasing power
The concept of derived demand
The demand for a product X might be strongly linked to the demand for a related
product Y – giving rise to the idea of a derived demand. For example, the demand for
steel is strongly linked to the demand for new vehicles/ building construction and
other manufactured products.
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The Law of Demand
Other factors remaining constant (ceteris paribus) there is an inverse
relationship between the price of a good and demand. As prices fall, we see
an expansion of demand on the other hand If price rises, there will be a
contraction of demand.
ASSUMPTIONS:
CHANGE IN INCOME : no change in income
CHANGES IN FASHION
CHANGE IN TASTE : coffee and tea
CHANGE IN WEATHER
CHANGE IN POPULATION :-
PRECIOUS AND CHEAP GOODS : salt and diamond demand
INVENTION OF SUBSTITUTES
CHANGE IN THE DISTRIBUTION OF WEALTH : demand for
expensive goods will fall and demand for basic necessities will increase.
CHANGES IN THE STATE OF TRADE
FUTURE EXPECTATIONS
DEVALUATION EXPECTATION: currency will be devalued in the near
future

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The law of demand yields an inverse relationship. We distinguish
between changes in quantity demanded, movements along a single
demand curve caused by price changes, and shifts in the entire curve
caused by a change in a factor other than price.

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Changing prices of a substitute good
Substitutes are goods in competitive demand and act as replacements for
another product.

Changing price of a complement


Two complements are said to be in joint demand. Examples include: fish and
chips, DVD players and DVDs, iron ore and steel.

Change in the income of consumers


Most of the things we buy are normal goods. When an individual’s income
goes up, their ability to purchase goods and services increases, and this
causes an outward shift in the demand curve. When incomes fall there will be
a decrease in the demand for most goods.

Change in tastes and preferences


Changing tastes and preferences can have a huge effect on demand.
Persuasive advertising is designed to cause a change in tastes and
preferences and thereby create an outward shift in demand. A good example
of this is the recent surge in sales of smoothies and other fruit juice drinks.

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Exceptions to the law of demand
Does the demand for a product always vary inversely with the price? There are two
possible reasons why more might be demanded even when the price of a good or
service is increasing. We consider these briefly – ostentatious consumption and the
effects of speculative demand.
Ostentatious consumption
Luxurious items
Speculative Demand
Perception of potential rise in market price

The conditions of demand/ Demand Function


The conditions of demand for a product in a market can be summarized as follows:

D = f (Pn, Pn…Pn-1, Y, T, P, E)
Where,
Pn = Price of the good itself
Pn…Pn-1 = Prices of other goods – e.g. prices of Substitutes and Complements
Y = Consumer incomes – including both the level and distribution of income
T = Tastes and preferences of consumers
P = The level and age-structure of the population
E = Price expectations of consumers for future time periods

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Market Demand Function/Calculation of Demand Function
The demand curve is often graphed as a straight line of the form Q = a – bP, where a
and b are parameters.
The standard form of the demand equation can be converted to the inverse equation
by solving for P or P = a/b - 1/bQ
The equation P = a - bQ, "a" is the intercept where quantity demanded is zero (where
the demand curve intercepts the Y axis), "b" is the slope of the demand curve, "Q" is
quantity and "P" is price.

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Revenue Implications for Demand Shift

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