CHAPTER 2

Theory of Demand

Prepared by:
Dr. Siti Badariah Saiful Nathan
 Learning outcome

After reading the whole chapter, the student should be able to:
 Explain the meaning of demand, law of demand & market
demand
 Construct a demand schedule & demand curve
 Distinguish between a change in quantity demanded &
change in demand
 Explain the factors that shift market demand
 Explain inter-related demand

2
CHAPTER 2
 Definition of Demand

 The willingness & ability of buyers to purchase

different quantities of a good at different prices
during a specific time period.
 Total of goods and services that buyers are
willing and able to purchase at different prices
in specific time period, ceteris paribus.

CHAPTER 2 3
 The Law of Demand

Law of Demand (P , Qd or P , Qd )

 When the price of a good increases, ceteris paribus,

the quantity of the good demanded decreases.
 There is an inverse (negative) relationship between
price & quantity demanded of a good.
 This results in a negatively sloped demand curve.

CHAPTER 2 4
 Demand Schedule Demand Curve
Shows the relationship
A table that shows the
between the price of a good
relationship between price
& the quantity demanded.
& quantity demanded by a
consumer, cet. par.
When price ↑,
Price (RM) quantity demanded
Price Qty Demanded ↓ causing the
(RM) (unit) demand curve to be
5 downward-sloping.
5 2
4
4 4
3
3 6
2
2 8 1
DD
1 10 0
2 4 6 8 10 Qty DD

CHAPTER 2 5
The Individual Demand Curve

Shows the relationship

between the price of a good &
the quantity that a single
consumer is willing to buy
(quantity demanded).

CHAPTER 2 6
 Market Demand

 The sum of all quantities of a good or service

demanded per period by all the households buying in
the market for that good or service.

 Market demand curve - shows the relationship

between price & quantity demanded by all consumers,
cet. par.

CHAPTER 2 7
 From individual DD to Market DD
Quantity of Pizza Demanded
Price (RM) Ali Abu Ahmad Market Demand
8 4 2 1 7
6 7 4 2 13
2 10 6 3 19
4 13 8 4 25

Ali’s D + Abu’s D + Ahmad’s D = Market D

P P P P

6 6 6 6

D D D
7 Qty 4 Qty 2 Qty 13 Qty
CHAPTER 2 8
 Change in Qd vs Change in Demand

Change in quantity demanded Change in demand

 Refers to a movement along  Refer to a shift of the
a demand curve demand curve (left/right)

 Due to the change in the  Due to the change in other

price of the good itself factors affecting demand,
holding other factors holding the price of the good
affecting demand constant. constant.

CHAPTER 2 9
 Changes in Quantity Demanded

Price of Ice-  Movement along the demand

Cream curve.
 Caused by a change in the
price of the product.
B
RM2.00  Upward – ↓ in qty demanded
(contraction of D)
 Downward – ↑ in qty
demanded (expansion of D)

1.00 A

D
0
4 8 Quantity of Ice-Cream 10
CHAPTER 2
Changes in demand: Increase in Demand

 The demand for a good ↑ if

people are willing & able
to buy more of the good at
all prices.
 Demand curve shifts right
from D1 to D2.

CHAPTER 2 11
Changes in demand: Decrease in Demand

 The demand for a good ↓ if

people are willing & able
to buy less of the good at
all prices.
 Demand curve shifts left
from D1 to D2.

CHAPTER 2 12
CHAPTER 2 13
 Consumers’ income

 When income ↑, a person will buy more of any

particular good at a given price.

 ↑ in income will ↑ demand for normal goods.

 Examples: furniture & cars
 ↓ in income will ↑ demand for inferior goods.
 Examples: used cars & salted fish

CHAPTER 2 14
 Normal Goods
Price (RM)

An ↑ in income will ↑ the

3.00
demand for normal goods
2.50
Increase
2.00 in demand

1.50

1.00

0.50 D2
D1
Quantity
0 2 4 6 8 10 12
CHAPTER 2 15
 Inferior Goods
Price (RM)

3.00
An ↑ in income will ↓ the
2.50 demand for inferior goods

2.00
Decrease
1.50 in demand
1.00

0.50
D2 D1
Quantity
0 2 4 6 8 10 12
CHAPTER 2 16
 Prices of Related Goods : Substitutes

 Two goods are substitutes if they satisfy similar needs or

desire (Coca-Cola & Pepsi).
 An ↑ in the price of Coca-Cola, ↑ the demand for Pepsi.

CHAPTER 2 17
 Prices of Related Goods : Complements

 Two goods are complements if they are consumed jointly

(bread & butter).
 An ↑ in the price of bread, ↓ the demand for butter.

CHAPTER 2 18
 Consumers’ Tastes & Preferences

 When a product becomes less preferable to consumers,

the demand curve will shift to the left.

 When a product becomes more preferable to consumers,

the demand curve will shift to the right.

DRAW A DIAGRAM TO EXPLAIN THE EFFECTS

ON THE SHIFT OF THE DEMAND CURVE AND
THE CHANGE IN QUANTITY.

CHAPTER 2 19
 Number of Buyers and Population Size
 The larger the number of
buyers, the higher the Price (RM)
demand.
 The number of buyers can
be affected by the size of
Increase
population:
in demand
 higher birth rate & ↑
immigration will ↑ the
number of buyers, so P
demand ↑ (D0  D2)
 higher death rate, war &
migration from one Decrease
region to another will ↓ in demand D2
D0
the number of buyers so D1
demand ↓ (D0  D1)
Quantity

CHAPTER 2 20
 Expectations of Buyers

 When buyers expect a change in future income, future prices,

product availability, etc., they act to change current demand.
 If consumers expect their income to ↑, they may consume
more in the future. Current demand will ↓.
 If prices are expected to ↓ in the future, consumers may put
off purchases today. Current demand will ↓.
 If buyers expect a good to be less available in the future, they
may want to build their stock now, so current demand will ↑.

CHAPTER 2 21
 Seasonal Factors (weather & festive seasons)

 A prolonged rainy Price (RM)

season will ↑ the
demand for
umbrellas rain coats. Increase
in demand
 Demand for food &
furniture will ↑
during festive P
seasons or
celebrations, such as
Hari Raya & D0
D2
Chinese New Year.
Quantity

CHAPTER 2 22
 INTERRELATED DEMAND
CROSS DEMAND
The demand for a good is
also affected by the price of
its substitute or
complementary goods.
Cross demand can be
divided into: joint demand
(complementary goods) and
competitive demand
(substitute goods).
CHAPTER 2
DERIVED DEMAND
 The demand for a good
which is derived from other
goods.
 Eg: Demand for tyres is
derived from the demand
for vehicles; demand for
construction labors is
derived from the demand
for houses.
23
CHAPTER 2 24
CHAPTER 2 25
 In-class assignment

Define the law of demand. Using

appropriate diagrams, explain the effect of
a change in the price of a complement.
(10 marks)

CHAPTER 2 26
 In-class assignment

Define the law of demand. Using

appropriate diagrams, explain the effect of
a change in the price of a substitute.
(10 marks)

CHAPTER 2 27
CHAPTER 2 28