THEORY OF DEMAND

• Free goods : Goods or services that do not have any

production cost at all (zero production cost).
Examples: air, rain water, etc.

• Public goods: Goods or services which benefit the

entire community, whether or not individuals desire
to purchase the public goods.
Examples: radio station, school, hospital, road, etc.

• Economic goods: Goods or services which the supply

is limited and require cost in obtaining them.
Examples: car, reference books, etc.
 Definition of Demand: The ability and willingness of
buyers to buy specific quantities of goods in a given
period of time at a particular price.

 Individual demand: The relationship between the

price of a good and the quantity demanded by a single
buyer.

 Market demand: The sum of all the quantities

demanded by all buyers in the market for a particular
good or service at a given price and period of time. .
 Demand Schedule Demand Curve
It is a table that shows the It is a graph of the relationship
quantity demanded for a good between the quantity
or service at each price level. demanded at each price.

Source: An Individual’s Demand Schedule of Good X (Normala Ismail, 2008,p.44) Source: The Downward Sloping Demand Curve Normala Ismail, 2008, p. 45)
 Market Demand Schedule Market Demand Curve

 A table showing the quantity  A market demand curve shows the price-
demanded for a good by all buyers in quantity relationship of good for all
the market. buyers.

 It is derived by adding the quantities  It is derived by adding up horizontally

demanded at each price. the individual demand curves.

Source: Deriving a Market Demand Schedule and a Market Demand Curve Source: Deriving a Market Demand Schedule and a Market Demand Curve (Roger
(Roger 2011, pg. 59) 2011, pg. 59)
The higher the price of a good, the lesser is the
quantity demanded, and the lower the price, the
more is the quantity demanded, ceteris paribus.

There is an inverse relationship the price of a

good and the quantity demanded.
Change in quantity demanded Changes in Demand

 Occurs only when the price  Due to a change in one or

of a good changes; other more of the determinants of
factors are constant. demand; price of a good
 Involves a movement remains constant.
between points on the same  The demand curve shifts so
demand curve, ceteris that different quantities
paribus. correspond to each of the
possible prices.
 Changes in quantity demanded Changes in Demand

Source: Amir b.Jusoh (2012) Source: Amir b. Jusoh (2012)

An upward movement (from point B to point A) An increase in demand is a rightward shift in

along the demand curve is due to a rise in price of the entire demand curve, from D0D0 to D1D1.
a good and quantity demanded decrease. It is
called contraction of demand.
A decrease in demand is a leftward shift in
A downward movement (from point B to point C) the entire demand curve, from D0D0 to D2D2.
along the demand curve is due to a fall in price of
a good and quantity demanded increase. It is
called expansion (extension) of demand.
1) Number of consumers
2) Consumer tastes
3) Consumer income
4) Consumer expectations
5) Prices of related goods
6) Gov’t policies
7) Seasonality
 Number of consumers
More consumers mean increased market demand
leading to a rightward shift demand curve, while
fewer consumers cause market demand to decrease
and shift the demand curve to the left.

 Consumer tastes
When taste (preference) change in favour of a good,
its demand increases ad shift the demand curve to the
right. When tastes for the good decline, demand
decreases causing the demand curve to shift to the left.
Consumer income
Higher consumer income increases demand for most
goods so the demand curve shift to the right. While
lower income decreases demand and shift the demand
curve leftward.

Consumer expectations
Expecting a higher future price or higher future income
increases demand now and so the demand curve for
the good shift rightward. But expecting a lower price or
lower future income decreases demand now and shift
the demand curve leftward.
 Prices of related goods
 Higher prices for substitutes increase demand for
the related good, and lower prices for substitutes
decrease demand. Demand for substitutes is
directly related with the other goods price.

 Higher complement prices lower demand for the

related good, and lower complement prices
increase demand. Demand for complements is
inversely related with the other goods price.
 Gov’t policies

 The imposition of higher tax on a good would

increase the price of the good. This would result in
the decrease in demand for a good, and vice versa.
 Seasonality
 Weather
 Rainy season there tend to have higher demand for umbrellas,
raincoats as compared to other times during the year.
 Demand for winter clothes will increase in winter, while the
demand for summer clothes will go down.

 Festival
 Different products will be demanded at different festive seasons.
 During Christmas the demand for Christmas tree and christmas
ornaments, etc. will be highly demanded. While during Hari Raya
Aidilfitri, traditional Malay cookies and cakes will be highly
demanded compared to other days. Similarly, the Chinese will
demand mandarin oranges, and other products to heighten the
Chinese New Year spirit.
 Exceptional (abnormal)
demand curve slopes upward
from left to right, showing a
positive (direct) relationship
between price and quantity
demanded.
Source: Ritika Muley (2016)

 The higher the price of a

good, the more is quantity When the price of the good rises
from OP1 to OP2, quantity
demanded, the lower the demanded increases from OX1 to
price, the lesser is quantity OX2.
demanded
Examples:

 Giffen (inferior) goods

 Ostentatious goods (goods with snob appeal / status symbol

goods).

 Speculation (expectations of future price increases).

 Emergencies (usually necessities in time of war and disaster).

 Highly priced goods (consumer’s perception of high priced goods

as superior and of high quality).
1. Hashim Ali (1998). Comprehensive Economics Guide. Singapore. Oxford University Press Pte. Ltd.

2. Irvin B. Tucker (2008). Economics for Today’s World (5th Ed.). International Student Edition.
Thomson South-Western.

3. Normala Ismail (2008). Micro Economics (ECO162). Institut Perkembangan Pendidikan,

Universiti Teknologi MARA, UiTM. Shah Alam

4. Rodney H. Mabry & Holley H. Ulbrich (1989). Introduction to Economic Principles. International
Edition. Singapore. McGraw-Hill.

5. Roger A. Arnold (2011). Principles of Economics, (10th Ed). South-Western . Cengage Learning
International Edition.

6. Amir bin Jusoh. (2012, January 7). Change in quantity demanded (movement) & change in demand (shift).
Retrieved from http://amir-economy.blogspot.my/2012/01/change-in-quantity-demanded-
movement.html

7. Ritika Muley (2016). 6 Main Exceptions to the Law of Demand (With Diagram).
Retrieved from http://www.economicsdiscussion.net/law-of-demand/exceptions/6-main-
exceptions-to-the-law-0f-demand-with-diagram/16675