DEMAND AND SUPPLY

The Concept of Demand

THE CONCEPT OF DEMAND

 The fundamental building block in any

economic analysis is the concept of
demand.
 It is one of the elements that make market
economies work
 In economics demand refers to the quantity
of a good or service that consumers or the
buying public are willing and able to
purchase, during a specified period of time,
all other things remaining the same.
THE CONCEPT OF DEMAND
 The law of demand
 It states that holding other things constant, the
quantity demanded for a commodity or service is
negatively or inversely related to its own price. It
is shown by the demand curve below
Series 1
30
25
20
15 Series 1
10
5
0
0 11 2 3
3 4 5
5 6
THE CONCEPT OF DEMAND
 Reasons for the downward slope of the demand
curve
 Opportunity cost
 The higher the price of the commodity the higher is its
opportunity cost
 Purchasing power/ budget of the consumer
 When the price of the commodity increases, the higher price
translates into a reduction in income
 Successive consumption of good yields less satisfaction at
any specific time period

Another way to depict demand-price relationship aside from

the graph presented is through a demand schedule.
A demand schedule is a numerical tabulation of the
quantity demanded of a good or service at selected prices,
holding other things constant.
THE CONCEPT OF DEMAND

Below is an example of a demand schedule

Price per Unit Quantity Demanded per

Week
25 0
20 1
15 2
10 3
5 4
0 5

Another way of showing the relationship between price

and demand is through a demand function/ equation
THE CONCEPT OF DEMAND
 The
  function may be written as:
Qd=a-bP
Where:
Qd= Quantity demanded
a= the horizontal intercept of the demand curve or
the
quantity demanded when the price is zero
b= slope of the demand curve
P= price of the commodity

 Given the demand curve and the demand

schedule from that we could formulate the
demand function which is:
THE CONCEPT OF DEMAND
 Change in Quantity Demanded
 Allother things held constant, it is important to
remember that when price changes, the
movement is along the demand curve.
 The change in price results in changes in
quantity demanded.
P

a
P2

b
P1

D
Q2 Q1
Q
THE CONCEPT OF DEMAND
 Market Demand
 Also called total demand for a good or service is
the sum of the demand of all individual buyers.
 It is simply the horizontal summation of the
individual demands at the stated price

Example:
The retail price of a notebook is 15 pesos a piece.If
Mariah demands 5 notebooks and Ela demands 7
notebooks. The total demand/ market demand is
12 notebooks. If there are many buyers you would
just simply add all their demands.
THE CONCEPT OF DEMAND
 The graph below illustrates how market
demand works.

15 15 15

5 7 12

Mariah’s Demand Ela’s Demand Market

Demand
THE CONCEPT OF DEMAND
 Shifts in the demand curve
 Although the price of the good is probably the
most important factor affecting quantity
demanded, it is not the sole factor that affects
demand because when we defined the demand-
price relationship, other factors were held
constant.
 These factors are the following:
 Income and income distribution,
 Prices of related goods in consumption,

 Consumer tastes and preferences,

 Consumer expectations,

 Unexpected events, and

 Number of buyers
INCOME AND INCOME DISTRIBUTION
 A higher income generally translates into
greater ability to buy, and hence, raises the
demand for goods and services. This is
shown by the figure below. Comparing the quantity
demanded at the same
price (P) given the two
demand curve, we see
that the demand for
the good has increased
P from Q to Q1. Similarly,
a fall in income reduces
demand and causes
D1
the demand curve to
D shift to the left from D
D2 to D2. We could see
Q2 Q Q1 that demand for the
good has fallen
INCOME AND INCOME DISTRIBUTION
 There are two classifications of goods when it
comes to the effect of an increase/decrease
in income on the quantity demanded for the
good these are:
 Normal goods
 Are products whose demand increases as income
increases or whose demand decreases as income
decreases.
e.g. cellphone, shoes, clothes etc.
 Inferior goods
 Are products whose demand decreases as income
increases or whose demand increases as income
decreases.
e.g. ukay ukay clothes, tuyo, corn etc.
PRICES OF RELATED GOODS IN
CONSUMPTION
 Prices of related goods in consumption affect
our demand for commodities. A change in
the price of related good may either increase
or decrease the demand for another
commodity, depending whether the related
good is a substitute or a complementary.
 Substitute good
 A good that can be used in place of another good
e.g. glue and paste, rice and corn, meat and tuyo etc.
 Complementary good
 A good that is consumed along with another good
e.g. coffee and sugar, shampoo and conditioner etc.
CONSUMER TASTES AND
PREFERENCES
 When consumer tastes and preferences shift
towards a certain good, greater amounts of it
are demanded

 It is influenced by their customs, tradition,

and history
CONSUMER EXPECTATIONS
 The demand for specific commodities would
be also affected by expectations about the
future
i.e
 Future product availability
 Future prices
 Future income
UNEXPECTED EVENTS AND NUMBER
OF BUYERS
 Unexpected events
 Acts of nature and other unexpected events alter
the demand for a good or service.
 Number of buyers
 An increase in the number of consumers affects
the market demand for a good and shifts the
market demand curve to the right.