DEMAND

Demand - Total quantity customers are willing and able to purchase.

A demand function is a behavior function for consumers.
A supply function is a behavior function for producers.
Two functions
Direct Demand-for consumption goods Goods and services that satisfy consumer desires.
Derived Demand-These are sometimes called intermediate goods. For example, demand for steel (an
intermediate good) is derived from the demand for final goods (e.g., automobiles).

Quantity Demanded – amount of a good that the consumer is willing to buy and able to buy at a given price
over a period of time.
Law of Demand :All other things remaining unchanged, the quantity demanded of a good increases when its
price decreases and vice versa.
Demand Schedule shows the different quantities of goods that a consumer is willing to buy at various prices.
Prices and quantities normally move in opposite directions
Demand Curve : A curve showing the relationship between the price of a good and the quantity demanded.
Demand Function:
A demand function is a causal relationship between a dependent variable (i.e., quantity demanded) and
various independent variables (i.e., factors which are believed to influence quantity demanded)
Q = f(P) Where Q= quantity and P = price of a good. Example Q = 2 – 4P

Determinants of Demand
Own Price
Income of the consumers
Price of other goods- 1. complements 2. substitutes
Tastes and preferences
Expectations of future prices
Advertising
Distribution of income

Types of goods
Complementary goods are a pair of goods consumed together. As the price of one goes up the demand for
the other falls. Example- car and petrol
Substitute goods are alternatives to each other. As the price of one goes up the demand for the other also
goes up. Example – pepsi and coke
Normal goods are those goods whose demand goes up when the consumer’s income increases.
Inferior goods are those goods whose demand falls when the consumer’s income increases. Example :
autotravel, kerosene Giffen goods are those goods whose demand moves in same direction as price
Snob or Veblen goods are those goods whose demand falls when price falls

Shift in Demand and Movement along Demand Curve

A shift in demand means at the same price, consumers wish to buy more. A movement along the
demand curve occurs following a change in price.
Movement along the demand curve
A change in price causes a movement along the demand curve.
 An increase in price from 12 to16 causes a movement along the demand curve, and Quantity
Demand falls from 80 to 60.
A change in price doesn’t shift the demand curve – we merely move from one point of the
demand curve to another.
Shift in the Demand Curve

A shift in the demand curve occurs when the whole demand curve moves to the right or left. For
example, an increase in income would mean people can afford to buy more widgets even at the
same price.
The demand curve could shift to the right for the following reasons:

 The good became more popular (e.g. fashion changes or successful advertising campaign)
 The price of a substitute good increased.
 The price of a complement good decreased.
 A rise in incomes
 Seasonal factors
SUBSTITUTION AND INCOME EFFECT

Substitution effect – describes the decision of a consumer to substitute an expensive good with cheaper
goods when there is a price change

Income effect – refers to the modification of the consumption of a commodity due to the change in the
purchasing power of the consumer resulting from the price change. An increase in the purchasing power
will enable the consumer to buy more of the good while reduction in purchasing power will reduce its
capacity to purchase.

PRINCIPLE OF DIMINISHING MARGINAL UTILITY

- As a buyer continues to consume a good, his total satisfaction or utility increases; however, the
additional marginal satisfaction decreases as a buyer consumes an additional unit of good

SUPPLY
Supply
The quantity supplied is the number of units that sellers want to sell over a specified period of time at a
particular price.
Law of Supply states that all other factors remaining unchanged, the supply of a good increases as its price
increases. This can be shown by a supply schedule, a supply curve or a supply function.
Supply schedule
There exists a positive relation between quantity and price
Supply Curve – a schedule showing the direct or positive relationship between the price of the commodity
and level of output that the seller is willing to supply at a given point in time other things held constant.

Supply function shows the relation between quantity and price. It is a positive relation. Example : q= 4+3p
Determinants Of Supply
Price
Price of production inputs
-intermediate inputs/raw materials – materials including raw materials that are still going to be
processed or transformed into higher level of outputs.
-factor inputs - are labor, capital, land, and entrepeneurship
Technological progress
Expectation
Government policy/taxes