CONSTANTINO, JOPET P.

BASIC MICROECONOMICS
BSBA HR 1D 01/27/2020

DEMAND FOR GOODS AND SERVICES

 Individuals buy goods and services to satisfy primarily their basic needs like food, clothing and shelter
 Individual demand for goods and services depends on the income of buyers and the prices of goods and
services.
 Lower Price = High purchasing power of goods and services.
 Higher Price = Lower Purchasing power of goods and services.
 Quantity demanded fluctuates in response to changes in the prices of goods and services.
o When Prices (P) increase, quantity demanded decreases. Conversely,

P = QD

o When Prices (P) decrease, quantity demanded increases. Nevertheless, such responses of buyers
to price changes differ depending on the importance of the goods and services and the presence
of substitutes.

P = QD

 Quantity 1 - White sugar P = QD

 Quantity 2 (Substitute) – Brown Sugar P = QD

DEMAND DEFINED

Demand is defined as the schedule of various quantities of commodities which buyers are uniting and
able to purchase at a given price, time and place.

QUANTITY DEMANDED

Quantity demanded refers to the amount of a particular product that households wish to buy in
some time period. When a person has the willingness and ability to buy the goods and services he needs,
he has an effective demand. This is the real meaning of demand in economics.

INDIVIDUAL DEMAND SCHEDULE

A table showing the quantity demand for a

product at various prices. It indicates the inverse
relationship between price and quantity demanded. That
is more units are bought at lower prices.
INDIVIDUAL DEMAND CURVE

A Graphical illustration of the inverse relationship

between price and quantity demanded.

DETERMINANTS OF DEMAND

Demand may be classified as individual demand and market demand.

They can increase or decrease demand for goods and services. Here are determinants of Demand:

INCOME - Individuals tend to purchase more goods and services when their incomes increase.

INCOME = PURCHASING POWER; leads to more demand.

On the other hand, if their incomes fall, their purchasing power also falls. That is they can buy less
number of goods and services. Obviously, individuals with more incomes consume more goods and
services than those with fewer incomes.

POPULATION - People consume goods and services. Clearly, more people means more demand for
goods and services.

POPULATION = DEMAND

TASTES AND PREFERENCES - When people prefer certain goods to other goods, demand for such
preferred goods rises. Such tastes or preferences are greatly influenced by fashions. Goods which are
out of fashion have very low demand — even if their prices have been lowered.

PRICE EXPECTATION - When people expect the prices of goods, particularly essential commodities, like
rice, cooking oil or sugar, to increase in a few days’ time, they buy more of these goods. On the other
hand, if they expect a fall in the prices of said products in a few days period, they reduce their purchases.

PRICES OF RELATED GOODS. These are close substitutes, like Pepsi cola, Coca cola and Pop cola. For
example, if the prices of Coca cola increases, people tend to buy a close substitute like Pepsi cola. Thus,
demand for coke falls while that of Pepsi rises. Complimentary goods, the price of one good and the
demand for the other good is directly opposite. That is, if the price of one good increases, the demand
for the other good decreases.

Complementary goods are those that go together like bow and arrow, or phonograph and records. But
for independent goods, the change in price of one has no effect on the demand for the other good.
LAW OF DEMAND
Individuals are most likely to buy more goods and services as prices decrease, and buy less goods and
services as prices increase. This is the law of demand. Such general tendencies of consumers may be
explained by two effects:

INCOME EFFECT. Even at a constant income, an individual has increased his purchasing power when
prices of goods and services fall. For the same amount of money, he can buy more goods and services at
lower prices than at higher prices.

SUBSTITUTION EFFECT. Consumers tend to buy goods and services with lower prices. Whenever the
price of the product they have been buying increases, they look for substitutes with lower prices.

INCOME / SUBSTITUTION EFFECT ON NORMAL AND INFERIOR GOODS

As Income (I) increases, with Price (P) being constant, the purchase of goods and services also increases.
In the same direct relationship, the consumption of goods and services falls as income declines. Such
consumer behavior applies to normal goods.

I = P = Purchasing Power

But in the case of 'inferior goods, the income effect is opposite that of normal goods. That is, as income
increases, the consumption of inferior goods decreases.

The relationship between money income (like monthly salary) and the consumption of goods and
services is illustrated by the Engel carve. The assumption is that prices remain constant with an increase
in income.

ENGEL CURVE –
Graphical illustration of the direct relationship
between money income and consumption of normal good.

Graphical illustration of the inverse relationship between money

income and the consumption of inferior goods.
VALIDITY OF THE LAW OF DEMAND

The law of demand states: as price increases, quantity demanded decreases, and as price decreases,
quantity demanded increases. Such theory is only true if the assumption of celeris paribus is applied. It
means "all other things equal or constant: The law of demand is correct if the determinants of demand
are held constant. That is there is no change in income, taste, or population.

ELASTICITY OF DEMAND
Demand elasticity refers to the reaction or response of the buyers to changes in price of goods
and services. As mentioned earlier, buyers tend to reduce their purchases as price increases, and tend to
increase their purchases whenever price falls. These are logical reactions to price changes.

There are five types of demand elasticity or types of reactions of buyers to price changes of goods and
services:

1. ELASTIC DEMAND - A change in price results to a greater change in quantity demanded.

2. INELASTIC DEMAND - A change to price results to a less change in quantity demanded.
3. UNITARY DEMAND - A change in price results to an equal change in quantity demanded.
4. PERFECTLY ELASTIC DEMAND - Without change in price, there is an infinite change in quantity
demanded.
5. PERFECTLY INELASTIC DEMAND. A change in price creates no change in quantity demanded.

Types of demand elasticity showing the various degrees of reactions of buyers brought about by price
change.
 DETERMINANTS OF DEMAND ELASTICITY
1. NUMBER OF GOOD SUBSTITUTES. Demand is elastic for a product with many good substitutes.
An increase in the price of such product induces buyers to look for good substitutes. On the
other hand, products without good substitutes have inelastic demand. Buyers have little or no
choice except to purchase them if they really need them. An example is electricity for a factory.

2. PRICE INCREASE IN PROPORTION TO INCOME. If the price increase has very little effect on the
income or budget of the buyers, demand is inelastic. For example, a 40 percent increase in the
price of a needle or candy means only a few centavos.

3. IMPORTANCE OF THE PRODUCT TO THE CONSUMERS. Luxury goods are not very important to
P
many Filipinos. Examples are diamond rings, sports cars, expensive wines, elegant clothing, etc.
So, these are elastic. On the other hand, essential goods are very important to people. Rice is
important to all consumers. Electricity is important to factory owners. Gasoline is important to
the transportation industry. All of these are inelastic.
 ECONOMIC SIGNIFICANCE OF DEMAND ELASTICITY
A good knowledge of demand elasticity helps the businessmen in planning their pricing
strategies. In the case of the government, it guides the economic managers in formulating appropriate
tax programs. Clearly, the market price of a product influences wages, rents, Interests, and profits. With
the right pricing strategy, businessmen may attain the following goals:

 Achieve target return on investment;

 Maintain or improve a share in the market;
 Meet or prevent competition.
 Maximize profits.

Here are some practical examples of economic significance of elasticity of demand:

1. WAGE DETERMINATION. If the product has elastic demand, a reduction in its price increases
quantity demanded. This means more sales and more profits. The company is in a position to
raise the wages of its workers. But if demand is inelastic, a reduction in its price has very little
effect on sales. Such price cut may even affect the viability of the company.
2. FARM PRODUCTION GUIDE. Most agricultural products like' rice, coconut and sugar are inelastic.
Quantity demanded does not change much even if there is a big decrease or increase in price.
Whenever there is an overproduction of farm crops due to good harvest, prices of said products
decrease. As a result, total revenue or income of the farmers also declines.
3. MAXIMIZE PROFITS. A reduction in price causes more quantity demanded. Businessmen can
estimate how far they can cut their prices to be able to generate their target sales. Evidently, a
substantial price reduction favors goods with highly elastic demand.
4. IMPOSITION OF SALES TAXES. Government planners should exercise prudence in taxing goods
and services. Otherwise, instead of getting more money from the people, they get less. It is not
advisable to increase taxes on goods with high elastic demand. A tax is an additional price.

SUMMARY
Individual demand depends on the incomes of buyers and the prices of goods and services. They
can buy more if they have higher incomes and/or if the prices of goods are lower.