MODULE 3: Demand Basics

Learning Outcomes:

At the end of the course, the student is able to:

describe the law of demand;
use the demand equation to determine market demand;
discuss how price and non-price factors can affect demand;

Teaching-Learning Activity:

In this module, you will get lectures on the definition of demand; determine the
factors of demand and law of demand. Compute for demand function and determine
the relationship of price and quantity demanded through problem sets and case
analysis.

The Concept of DEMAND

Demand refers to the various quantities of a good or service that consumers are willing
to purchase at alternative prices, ceteris paribus. Conveys both the elements of desire
for the commodity and capacity to pay (must be willing and able).
Emphasizes the relationship between quantity bought and its price, although there may
be other factors that determine how much a consumer wants to purchase.

The Law of Demand

Asserts that the quantity demanded of a good or service is negatively or inversely

related to its own price.

When the price increases, less of the good or service will be bought
When the price decreases, more of the commodity will be purchased.

3 Ways of presenting the demand relationship

The relationship between quantity demanded and prices may be presented in 3 ways:
Demand schedule –in tabular form.
Demand curve – in graphical form
Demand function – in equation form

Demand Schedule
A tabular presentation of the different prices and quantity demanded.
Price Quantity demanded
20 600
40 500
60 400
70 300
80 200
90 100
Demand Curve

PRICE

QUANTITY DEMANDED

The demand curve is a downward-sloping curve because of the inverse relationship of

price and quantity demanded. The slope of the line is negative.

Demand Function
Demand function is a functional relationship between price and quantity demanded.

Quantity demanded (Q) is expressed as a mathematical function of price (P). The

demand function may thus be written as:

Qd = a - bp
Where:
Qd = quantity demanded express in units
a= is the minimum quantity demanded when price= 0
-b= is the slope of the line
p= price

Example: Qd= 100-5p

Factors Affecting Demand

1. Prices of related commodities (substitutes and complements)

This factor makes the demand curve to shift either to the left or to the right or
downward or upward.
Substitute goods are goods that can replace the original good. Example bread
can be a substitute for rice; pork can be a substitute for chicken. A substitute good will
have a direct relationship with demand.
Complementary goods are goods that enhance the original good.These are
goods that are used together with another goods.Example creamer is a
complementary good for coffee; butter can be a complementary good for bread. A
complementary good will have an inverse relationship with demand.

2. Consumer incomes
Consumer income will make the demand curve shift to the right or left. When
income increases the demand for goods and services will also increase; however, when
income decreases the demand for goods and services will also decrease. Consumer
income will have a direct relationship with demand.
Products whose demand varies directly with income are called normal or
superior goods. On the other hand, there are products whose demand decline as
money incomes rise and are called inferior goods. Examples are dried fish, second -
hand clothes, and sardines.
3. Tastes and preferences
A favorable change in consumer tastes and preferences- a change that makes
the good or service more desirable would increase the demand. For example,
consumers prefer appliances that have higher electrical consumption efficiency, thus
increasing demand for these appliances. On the other hand, the fashion craze for the
color blue may soon pass, so the demand for blue clothes will decrease.

4. Number of consumers/buyers
An increase in the number of consumers/ buyers in a specific market results in
greater demand and vice versa. Concern for health because of the pandemic brought
about an increase in the demand for mask and face shield.

5. Price expectations
The expectations of consumers on future market situations such as future price or
future availability of a product, affect demand. If consumers expect that the price of
fruit cocktail will rise during the Christmas season, they will buy the good early, thus
increasing current demand.

Change in Quantity Demanded vs. Change in Demand

Change in quantity demanded – is a movement along the same demand curve, due
solely to a change in price, i.e., all other factors held constant. It is also known as a
movement along the curve.

Change in demand – is a shift in the entire demand curve (either to the left or to the
right) as a result of changes in other factors affecting demand.

Change in Quantity Demanded

PRICE

P1

P2

QUANTITY DEMANDED
Q1 Q Q2

The figure above shows the movement along the curve, when price P increases
to P1 , quantity demanded decreases from Q to Q1; on the other hand when price
decreases from P to P2, quantity demanded increases from Q to Q2.
Change in Demand

PRICE

QUANTITY DEMANDED

The figure above shows the shift in demand, the rightward shift or upward shift is
an increase in demand, and the leftward shift or downward shift is a decrease in
demand. The shift of the entire demand curve is not cause by the change in price but
rather other factors affecting demand such as prices of related goods, consumer
income, taste and preferences, number of consumers/buyers, and price expectations.

Demand Function Computation

Quantity demanded (Q) is expressed as a mathematical function of price (P). The

demand function may thus be written as:

Qd = a - bp
Where:
Qd = quantity demanded express in units
-b= is the slope of the line
p= price

Method to compute for Demand Function

Least Square Method

Na + ∑xb = ∑y
2
∑xa + ∑x b = ∑xy

Q(Na + ∑xb = ∑y)

Where:
N= total number of items
Q= ∑x ÷ N
1. Step 1: complete the variables needed in the 3 equations starting with representing
price= x and quantity demanded = y. Then formulate the table showing the needed
2
variables ∑x ;∑y ;∑ x ; ∑xy

Price(x) Quantity
x
2
xy
demanded (y)
20 500 400 10,000
40 400 1,600 16,000
60 300 3,600 18,000
80 200 6,400 16,000
100 100 10,000 10,000
∑x= 300 ∑y= 1,500 2 ∑xy = 70,000
∑ x =22,000

2. Step 2: formulate the 3 equations

Na + ∑xb = ∑y

5a + 300b =1,500 equation 1

2
∑xa + ∑x b = ∑xy

300a + 22,000b = 70,000 equation 2

Q(Na + ∑xb = ∑y)

60(5a + 300b =1,500)

300a + 18,000b= 90,000 equation 3

Where N= total pairs of price and quantity demanded

Q= 300 ÷ 5 = 60

3. Formulate the Demand Function by

solving for the value of b using equation 2 and equation 3

300a + 22,000b = 70,000

300a + 18,000b = 90,000
4,000b = -20,000
b = -5
solve for the value of a using equation 1

5a + 300b = 1,500
5a + 300 (-5) = 1,500
5a -1,500 = 1,500
5a= 1,500 + 1,500
5a= 3,000
5
a= 600

4. Substitute the value of a and b to the demand function

Therefore the demand function is

Qd = 600 - 5p
5. Interpretation
For every 5 units increase in quantity demanded there is a peso decrease in
price, for every 5 units decrease in quantity demanded there is a peso increase in price.

References:

Managerial Economics by Villegas

Introductory to Macroeconomics by Pagoso et al

Introductory to Microeconomics by Pagoso et al

Economics by Fajardo