THEORY OF DEMAND

In order to satisfy their needs and wants individuals consume both goods and services, by extension
the same very similar process producers (also known as firms) demand the factors of production
(F.O.P’S) from the owners of the F.O.P’S(the consumers themselves), in order to produce the goods
and services the consumers want or need(see the circular flow of income theory, diagram.)

Therefore Demand can be defined as the total quantity of a good or service purchased at a specific
price over a period of time. It follows the 1st Law Of Demand, which states:

1st Law of Demand: this law states that for Normal Goods, more of the product is demanded at a
lower price than at a higher one, therfore this assumes that an inverse relationship between the
price and the quantity demanded for the same good exists

DEMAND CURVE FOR ANY NORMAL GOOD (DIAGRAM 1)

ISIS , the following must be noted as a general rule and principle for all diagrams and graphs in
Economics:

(1) Note that the diagram has a title above it

(2) All the axes on the graph must show and indicate the directional arrows at the end of each
axis, both vertical and horizontal
(3) The point at which both axes meet otherwise known as the Origin must be indicated by
either the number 0 or the common case letter o.
(4) Both axes must be named, (hint): if you ever forget what goes where, remember your
alphabet and the 2 important variables that deals with demand (price and quantity) so
therefore p and q are the 2 letters we abbreviate these 2 variables by. In terms of the
alphabet p comes before q so therefore it makes sense that the 1 st axis you see or the
vertical axis is always p, the 2nd axis is therefore the 2nd letter q or quantity
*** an important point to note the only factor that can cause A MOVEMENT ALONG THE
DEMAND CURVE IS BROUGHT ABOUT BY A CHANGE IN THE PRICE OF THE GOOD OR SERVICE
UNDER CONSIDERATION, AND NOTHING ELSE, CETERIS PARIBUS

DIAGRAM 2- MOVEMENTS ALONG THE DEMAND CURVE FOR CHARLES CHOCOLATE BARS:

** NOTE THAT CETERIS PARIBUS IS LATIN AND MEANS ALL OTHER THINGS OR FACTORS
REMAINING CONSTANT OR BEING HELD CONSTANT.

So as we can see via the graph above, let us assume that the original price of the said Charles
chocolates bar is at price P1, this will correspond to point A, at which the quantity of the
bars taken would be at Q1. If however we assume 2 things-
(a) These chocolate bars are normal goods
(b) The producer Charles chocolates decides to increase the price of the bar in question:

Then ceteris paribus, as the chocolate bar in question is assumed to be a normal good, this
will cause a movement along the demand curve DD from the point A to the point B, this is
indicated by the arrow along the curve, note that this increase in price will be from P1 TO P2,
therefore causing a movement along the demand curve of Charles chocolate bars from point
A to B,

** also note the increase in price is seen along the price axis from P1 to P2, and along the
Quantity axis from Q1 to Q2. ** THIS IS TERMED A CONTRACTION OF DEMAND

THE REVERSE WILL HAPPEN IF THE PRODUCER DECIDES TO DROP ITS PRICE, THE ARROWS
WILL THERFORE BE THE OPPOSITE AS THEY ARE INDICATED IN THE DIAGRAM. So what we
will have is a price decrease from P2 TO P1, therefore a movement along the demand curve
from point B to point A where quantity demanded will increase from Q2 to Q1, THIS IS
TERMED AN EXTENSION OF DEMAND.

As we noted earlier a change in price causes movements along the demand curve ONLY, thus
it is therefore logical to assume that any other changes in the conditions of demand causes
an entire shift in the demand curve, meaning an entirely new demand curve is drawn:

THE CONDITIONS OF DEMAND(NOTE THAT PRICE IS NOT INCLUDED HERE AS IT IS THE

ONLY CONDITION THAT CAUSES A MOVEMENT ALONG THE DEMAND CURVE)

(1) PRICES OF OTHER GOODS: these other goods are namely

 COMPLEMENTARY GOODS- these are goods that are consumed together, e.g. cars
and gasoline, if the price of gasoline falls dramatically lower, the demand for cars
will increase, and vice versa
 SUBSTITUTE GOODS- these are goods which can be used in place of each other e.g.
butter and margarine, if the price of butter goes up, the demand for butter will fall
and the demand for margarine will increase as such
(2) CHANGES IN INCOME OF THE INDIVIDUAL-changes in consumer’s income affects
demand based upon the type of good in question: these are:
 NORMAL GOODS-these have a positive relationship between income and quantity
consumed, if a person’s income rises more of these types of goods will be
demanded
 INFERIOR GOODS- these have an inverse relationship between a person’s income
and quantity of the good consumed, therefore if a person’s income rises, it is
assumed that less of what is considered to be inferior goods will be consumed.
(3) ADVERTISING-these are any attempts by producers to influence consumers purchasing
habits mainly by changing the opinion or view the consumers may have on their
product.
(4) POPULATION ASPECTS/SEGMENTS OF A COUNTRY- population size, characteristics like
age, gender etc. can determine the demand for goods and services across the many
varying sub-sections of the country’s population.
(5) FASHION AND TASTE- individuals sense of fashion and personal tastes can directly alter
their views or choices in the demand of certain products namely clothing
(6) GOVERNMENT INFLUENCES- legislation can be imposed which can directly skew or alter
the demand for certain products such as alcohol in the U.S.A which was totally banned
during The Prohibition period in the USA during the 1930’s

Any further questions please see the following YOUTUBE VIDEO

Movement Vs Shift in Demand Curve: Difference between them with examples &
comparison chart - YouTube

DIAGRAM 3: - SHIFTS IN THE DEMAND CURVE: