Lectur-04

Demand Analysis

Nazrul Islam
Lecturer in Economics
Dept. of Humanities,RUET

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 Demand Analysis

 Is there any difference between Demand & Wants?

 Wants: Wants are the unlimited desires or wishes that people have for goods &
services.
 Demand: If you demand something then you have to fulfill the following
conditions-
1. Want it
2. Can afford it
3. Plan to buy it.
 What are the determinants of demand?
 Income(Y), price of the good(P), taste(T), expectation(Exp), number of buyers(nb),
price of substitute(ps) and complementary good(pc), weather(w) etc.

 Functionally we can express as, QD=f(Y,P,T,Exp,nb ,pc ,ps ,w)

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Demand and Quantity Demanded

No. In economics, demand is the quantities of

a commodity or a service that people are willing and able
to buy at various prices, over a given period of time. The
entire relationship indicated by a demand curve is known
as demand.

The quantity demanded of a good or service is the

amount that consumers plan to buy during a given time
period at a particular price. A specific point on the demand
curve indicates a particular amount of quantity demanded
at a certain time period. The quantity demanded is
measured as an amount per unit of time. For example,
suppose that you buy one cup of coffee a day. The quantity
of coffee that you demand can be expressed as 1 cup per
day, 7 cups per week, or 365 cups per year.

So, he term demand refers to the entire relationship

between the price of a good and the quantity demanded of
that good. Demand is illustrated by the demand curve and
the demand schedule. The term quantity demanded refers
to a point on a demand curve—the quantity demanded at a
particular price.

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Demand Schedule and Demand Curve

The graph uses the numbers from the table to illustrate

the law of demand. By convention, the price of ice
cream is on the vertical axis, and the quantity of ice
cream demanded is on the horizontal axis. The
downward-sloping line relating price and quantity
demanded is called the demand curve.

Here, when price is 0, quantity demanded is 12 cones

and when price is 0.50, quantity demanded is 10
cones. Again when price is 3.00, quantity demanded is
0. Here we observe that as price increases quantity
demanded decreases and when price decreases
quantity demanded increases. We get an inverse
relationship between price and quantity demanded.
We get a downward sloping demand curve.

H.W-Suppose you are given the demand equation

Qd=100-5P. Make a demand schedule and draw the
curve.

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Market Demand Vs Individual Demand

To analyze how markets work, we need to

determine the market demand, the sum of
all the individual demands for a particular
good or service.

The table shows the demand schedules for

ice cream of the two individuals in this
market—Catherine and Nicholas. At any
price, Catherine’s demand schedule tells us
how much ice cream she buys, and
Nicholas’s demand schedule tells us how
much ice cream he buys. The market
demand at each price is the sum of the two
individual demands. The graph shows the
demand curves that correspond to these
demand schedules.

The quantity demanded in a market is the

sum of the quantities demanded by all the
buyers at each price. Thus, the market
demand curve is found by adding
horizontally
the individual demand curves. At a price of
$2.00, Catherine demands 4 ice-cream
cones, and Nicholas demands 3 ice-cream
cones. The quantity demanded in the
market at this price is 7 cones.

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 Downward sloping demand curve

 H.W- Suppose you are given the demand equations; for person 1 Qd1=100-20P and for
person 2 Qd2=100-10P. We get the market demand function Qm=200-30P by summing
the both equations. Make separate demand schedule for each equation and draw
respective curves.

 Why the demand curve slopes downward?

 We know , as price increases, quantity demanded decreases and as price decreases,
quantity demanded increases. But why? There are several reasons. Let’s discuss.

1. Income effect: Others things remaining constant, suppose price increases but real
income remains unchanged. Real income=Nominal income/price . So, price increases
relative to income. He /she has to buy less product now. Purchasing power of the
consumer decreases.

let’s consider the following exam-

 Initially you have Tk. 10 and price of pen is Tk. 1. Quantity of pen bought is 10. Now,
suppose you have amount of money of Tk. 10 but price of pen has increased to Tk. 2.
So, now quantity of pen bought is 5. Loss in purchasing power or in real income is the
lost 5 pens.

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 Downward sloping demand curve (Contd.)/ Change in demand

2. Substitution effect: When price increases, it becomes expensive. People try to move
to cheaper goods.
3. Law of diminishing marginal utility: As people consume more of one commodities
continuously, utility from additional consumption decreases. So, the person decreases
consumption of the product.

4. change in usage of product: If price increases , people do not use for the less important
need.
-Electricity and cooking
-Plastic (due to low price of plastic, it is used now for different purpose. Amount of
plastic demanded has increased. )

 Change in demand versus quantity demanded.

 Because the market demand curve holds other things constant, it need not be stable
over time. If something happens to alter the quantity demanded at any given price, the
demand curve shifts. For example, suppose the American Medical Association
discovered that people who regularly eat ice cream live longer, healthier lives. The
discovery would raise the demand for ice cream. At any given price, buyers would now
want to purchase a larger quantity of ice cream, and the demand curve for ice cream
would shift.

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 Change in demand and quantity demanded.

Change in Demand Change in quantity demanded

 Any change that increases the quantity demanded

at every price, such as our imaginary discovery by  point on the demand curve shows
the American Medical Association, shifts the the quantity demanded at a given
demand curve to the right and is called an increase
in demand. Change in demand occurs when any price, so a movement along the
determinant of demand except price of the good
changes. demand curve shows a change in the
quantity demanded. Change in
 Any change that raises the quantity that buyers
wish to purchase at any given price shifts the quantity demanded occurs when
demand curve to the right. Any change that lowers only price e of the good changes.
the quantity that buyers wish to purchase at any
given price shifts the demand curve to the left.

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Change in demand and
quantity demanded. (contd.)

Six main factors bring changes in demand.

They are changes in
■ The prices of related goods
■ Expected future prices
■ Income
■ Expected future income and credit
■ Population/No of buyers
■ Preferences/Tastes

1. The prices of related goods: two

goods for which an increase in the price of
one leads to an increase in the demand for
the other is called substitute goods. For
example, Tea and Coffee. If the price of a
cup of tea rises, people take/buy fewer
cups of tea and more cups of coffee. The
demand for coffee increases. The demand
curve for coffee shifts to right.

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 Reasons for Change in demand. (contd.)

Two goods for which an increase in the price of one leads to a decrease in the demand
for the other is called complementary goods. For example-Bike and petrol.
Complements are often pairs of goods that are used together, such as gasoline and
automobiles, computers and software, and peanut butter and jelly. Suppose price of
petrol increases, demand for bike decreases. So the demand curve for bike shifts to the
left.
 2. Expected future prices: Your expectations about the future may affect your demand
for a good or service today. For example, if you expect to earn a higher income next
month, you may choose to save less now and spend more of your current income
buying ice cream. As another example, if you expect the price of ice cream to fall
tomorrow, you may be less willing to buy an ice-cream cone at today’s price.

 3. Income: Consumers’ income influences demand. When income increases,

consumers buy more of most goods; and when income decreases, consumers buy less
of most goods. Although an increase in income leads to an increase in the demand for
most goods, it does not lead to an increase in the demand for all goods. A normal good
is one for which demand increases as income increases. An inferior good is one for
which demand decreases as income increases. As incomes increase, the demand for air
travel (a normal good) increases and the demand for long-distance bus trips (an inferior
good) decreases.

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 Reasons for Change in demand. (contd.)

 4. Expected Future Income and Credit: When expected future income increases
or credit becomes easier to get, demand for a good might increase now. For
example, a salesperson gets the news that she will receive a big bonus at the end
of the year, so she goes into debt and buys a new car right now, rather than
waiting until she receives the bonus.
 5. Population : Demand also depends on the size and the age structure of the
population. The larger the population, the greater is the demand for all goods and
services; the smaller the population, the smaller is the demand for all goods and
services. For example, the demand for parking spaces or movies or just about
anything that you can imagine is much greater in Dhaka City than it is in Rajshahi.

 6. Preferences/Tastes: Demand depends on preferences. Preferences determine

the value that people place on each good and service. Preferences depend on such
things as the weather, information, and fashion. For example, greater health and
fitness awareness has shifted preferences in favor of energy bars, so the demand
for energy bars has increased.

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 Exceptions to the law of demand

 Exceptions to law of demand:

The law of demand does not apply in every case and situation. The circumstances when the law of
demand becomes ineffective are known as exceptions of the law. Some of these important
exceptions are as under.

 1. Giffen goods: Cheaper varieties of this category like bajra, cheaper vegetable like potato come
under this category. Sir Robert Giffen or Ireland first observed that people used to spend more their
income on inferior goods like potato and less of their income on meat. But potatoes constitute their
staple food. When the price of potato increased, after purchasing potato they did not have so many
surpluses to buy meat. So the rise in price of potato compelled people to buy more potato and thus
raised the demand for potato. This is against the law of demand. This is also known as Giffen
paradox.

 2. Conspicuous Consumption: This exception to the law of demand is associated with the doctrine
propounded by Thorsten Veblen. A few goods like diamonds etc are purchased by the rich and
wealthy sections of the society. The prices of these goods are so high that they are beyond the
reach of the common man. The higher the price of the diamond the higher the prestige value of it.
So when price of these goods falls, the consumers think that the prestige value of these goods
comes down. So quantity demanded of these goods falls with fall in their price. So the law of
demand does not hold good here.
 3. Conspicuous necessities: Certain things become the necessities of modern life. So we have to purchase
them despite their high price. The demand for T.V. sets, automobiles and refrigerators etc. has not gone
down in spite of the increase in their price. These things have become the symbol of status. So they are
purchased despite their rising price. These can be termed as “U” sector goods.

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 Exceptions to the law of demand

 4. Ignorance: A consumer’s ignorance is another factor that at times induces him

to purchase more of the commodity at a higher price. This is especially so when
the consumer is haunted by the phobia that a high-priced commodity is better in
quality than a low-priced one.
 5. Emergencies: Emergencies like war, famine etc. negate the operation of the law
of demand. At such times, households behave in an abnormal way. Households
accentuate scarcities and induce further price rises by making increased purchases
even at higher prices during such periods. During depression, on the other hand,
no fall in price is a sufficient inducement for consumers to demand more.
 6. Future changes in prices: Households also act speculators. When the prices are
rising households tend to purchase large quantities of the commodity out of the
apprehension that prices may still go up. When prices are expected to fall further,
they wait to buy goods in future at still lower prices. So quantity demanded falls
when prices are falling.
 7. Change in fashion: A change in fashion and tastes affects the market for a
commodity. When a broad toe shoe replaces a narrow toe, no amount of
reduction in the price of the latter is sufficient to clear the stocks. Broad toe on the
other hand, will have more customers even though its price may be going up. The
law of demand becomes ineffective.

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 References

 References
 Principles of microeconomics by Mankiw.
 Microeconomics by parkin.
 Internet.

Thank You!

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