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LESSON 2: THEORY OF

WANTS
Demand and Consumer Behavior
Demand is the schedule of various quantities of
commodities which buyers are willing and able to
purchase at a given price, time and place.
It is determined by factors such as:
1. Income
2. Population
3. Taste and preferences
4. Price expectation
5. Prices of related goods
Table: Individuaal demand schedule showing the inverse
relationship between price and quantity.

Price Quantity
Demanded
1 5
2 4
3 3
4 2
5 1
Law of Demand states that consumers are most likely
to buy more goods and services as price decreases, and
buy less goods and services as price increases.
Validity of the Law of Demand
The law of demand states: as price increases, quantity
demanded decreases, and as price decreases, quantity
demanded increases. Such theory is only true if the assumption
of ceteris paribus is applied. It means “all other things equal or
constant.”
The law of demand is correct if the determinants of demand are
held constant. That is there is no change in income, taste or
population.
Elasticity of Demand

Demand elasticity
– refers to the reaction or response of the buyers to
changes in price of goods and services.
Types of Demand Elasticity
1. Elastic demand.
A change in price results to a greater change in
quantity demanded. For example, a 10% change in price
(increase or decrease) creates a 20% change in quantity
demanded (increase or decrease). This means that the
buyers are very sensitive to price.
2. Inelastic demand.
A change in price results to a lesser change in quantity
demanded. For example, a 20% change in price creates a
5% change in quantity demanded. This means that buyers
are not sensitive to price change.
3. Unitary demand.
A change in price results to an equal change in quantity
demanded. For example, a 10% change in price results to a
10% change in quantity demanded.
4. Perfectly elastic demand.
Without change in price, there is an infinite change in
quantity demanded. Such situation occurs in a purely
competitive market.
5. Perfectly inelastic demand.
A change in price creates no change in
quantity demanded.
Determinants of Demand Elasticity
1. Number of good substitutes.

Demand is elastic for a product with many substitutes.


An increase in the price of such product induces the buyers
to look for good substitutes.
2. Price increase in proportion to
income.

If the price increase has very little effect on the


income or budget of the buyers, demand is inelastic. But
if the price increase involves a substantial amount in
proportion to the income of consumers, demand is
elastic.
3. Importance of the product to the
consumers.
Luxury goods are not very important to majority of the
people. On the other hand, the essential goods are very
important to people. Rice is important to Filipinos, Electricity
is important to factory owners and gasoline is important to
transportation industry. All of these are inelastic.
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