BHHT1123

HOSPITALITY ECONOMICS

LECTURE 3

Demand
Learning Objectives

On completion of the chapter, the student

will be able to:

1. Define demand, law of demand and

market demand.
2. Distinguish between a change in quantity
demanded and a change in demand.
3. Explain the concept of elasticities.
Market
❑ Exists whenever there are buyers & sellers
of a particular good
❑ Buyers demand goods from the market &
sellers supply goods on to the market
DEFINITION OF DEMAND

Demand is defined as the ability and willingness

to buy specific quantities of goods

in a given period of time

at a particular price, ceteris paribus.

 Ceteris Paribus

Assumption
❑ From the Latin, ceteris paribus means “all
other things held constant.”
❑ The Law of Demand states ONLY the price
of the good changes, other factors that
affect demand remained unchanged.
❑ E.g. income remained unchanged
Four Ways to Represent
The Law Of Demand

❑ In Words: “As price rises, quantity

demanded falls”
❑ In Symbols: P↑ Qd↓
❑ In a Demand Schedule
❑ In a Demand Curve
CLASSIFICATION OF GOODS AND SERVICES

❑ Free goods are goods that have no production cost.

(gifts of nature: sunlight, river water & air)
❑ Public goods are goods that are for common use
and will benefit everyone. (public clinics, schools)
❑ Economic goods are goods that involve a cost of
production.
❖ Economic goods are also things of value that can
be seen and touched. (books, clothes, houses).
❖ Economic services are intangible things (with
value) that cannot been seen or touched. (legal
services, medical care)
 LAW OF DEMAND

Law of demand states that the________________

of a good, the_____________________________
for that good and the lower the price, the higher
is the quantity demanded, ceteris paribus.

P  Qdd 

NEGATIVE RELATIONSHIP
INDIVIDUAL AND MARKET DEMAND

INDIVIDUAL DEMAND
The relationship between the quantity
of a good demanded by a single individual
and its price.

MARKET DEMAND
The relationship between the total quantity
of a good demanded by adding all the quantities demanded
by all consumers in the market and its price.
DEMAND SCHEDULE & DEMAND
CURVE
Deriving a Market Demand Schedule and a
Market Demand Curve

PRINCIPLES Individual
OF ECONOMICS DDThird
curve
Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 2–curve
Market DD 11
Change in Quantity Demanded versus a
Change in Demand

❑ Change in Quantity Demanded: a movement

from one point to another point on the same
demand curve caused by a change in the
price of the good (own price).

❑ Change in Demand: a shift in the demand

curve
– Increase in demand: a shift to the right
– Decrease in demand: as shift to the
left
Shifts in the Demand Curve
CHANGES IN QUANTITY DEMANDED
VS. CHANGES IN DEMAND
CHANGES IN QUANTITY DEMANDED CHANGES IN DEMAND
Price Price

DD
Quantity
❖ Movement along DD curve
❖ Price changes and other factors are
constant
❖ Upward movement  Decrease in
quantity demanded (Contraction)
❖ Downward movement  Increase in
quantity demanded (Expansion)
D1
D0
Quantity
❖ Shift in the demand curve
❖ Occurs when there are changes in
other factors but price remains
constant
❖ Increase in Demand (D0 → D1)
❖ Decrease in Demand (D1 → D0)
DETERMINANTS
OF DEMAND
 Causes of Change in the Demand Curve
Income
❑ A person’s income change, demand for a
particular good may increase, decrease or
remain constant.
❑ The demand for a good increases if people are
willing and able to buy more of the good at all
prices.
❑ A normal good is a good that as income rises
(falls), the demand for a good will rise (falls).
❑ An inferior good is a good that as income rises
(falls), the demand for a good falls (rises).
❑ A neutral good is a good that as income rises
or falls, the demand for which does not change.
Causes of Change in the Demand Curve

Preferences
❑ Preferences affect the amount of a good they are
willing to buy at a particular price (Ex: favorite food,
favorite author).
❑ A change in preferences in favour of a goods will
shifts the demand curve to rightward.
❑ A change in preferences away from the goods will
shifts the demand curve to leftward.
Causes of Change in the Demand Curve
Prices of Related Goods.
There are 2 types of related goods: Substitutes &
Complements

a) Substitutes goods
- two goods that satisfy similar needs / desires.
- E.g. Coke & Pepsi
If price of Coke increases → Demand for Pepsi
increases
If Px increases → DDy increases (shift to right)
If Px decreases → DDy decreases (shift to left)
So, x and y are substitute goods.
Causes of Change in the Demand Curve
Prices of Related Goods.

b) Complements goods
- two goods that are consumed jointly.
❑ - E.g. Ketchup and Burger Buns
❑ If price of Burger Buns rises → DD for Ketchup falls
(left)
❑ If price of Burger Buns falls → DD for Ketchup rises
(right)
Substitutes and Complements
Causes of Change in the Demand Curve
Number of Buyers
❑ More Buyers, More Demand (shift to right).
❑ Fewer Buyers, Less Demand (shift to left).

Expectations of Future Price

❑ Buyers who expect a price to be higher next
month will buy the good this month, increasing
demand.
❑ Buyers who expect a price to be lower next
month will wait to buy the good next month,
reducing the current demand.
❑ E.g. if the house prices are expected to fall in a
few months, a potential house buyer may hold off
her purchase of a house for a few months.
PRICE ELASTICITY OF DEMAND

DEFINITION:

Measures the sensitivity/responsiveness

of the quantity demanded
due to a change in its price.
PRICE ELASTICITY OF DEMAND (cont.)

FORMULA:

d = %  Quantity Demanded
%  Price
DEGREE OF Perfectly Inelastic Demand
A condition in which the quantity demanded does
ELASTICITY not change as the price changes.

Inelastic Demand d < 1

A large percentage of change in the price of a good
Price (RM) will only affect a small percentage of change in the
d =0 quantity demanded.
d < 1
Elastic Demand d > 1
A small percentage of change in the
price of a good will lead to larger
percentage of change in quantity
d =  demanded.

Unitary Elastic
Demand
A condition in which
Perfectly Elastic percentage changes in price
d = 1 equals to percentage
Demand d > 1 changes in quantity
A condition in which a small demanded.  =1
d
percentage of change in Quantity Demanded
price leads to an infinite
percentage of change in the
quantity demanded.
 Proportionofofthe
Proportion the
expenditureon
expenditure onaa Nature of
Existenceofof
Existence product
product goods
substitutes
substitutes

Frequently DETERMINANTS Income level

purchased OF PRICE ELASTICITY
products OF DEMAND

Time
Complementary dimension
goods Habits