Session 4

Objectives
To gain an understanding of
•Need, Want, Demand
•Demand Curve, Schedule, Function
•Determinants of Demand
•Change and Shift in Demand

January 3, 2021 Session 5 1

 Introduction
• Since we live in market economies and that is
where managers operate, it is essential to know
how markets work.
• How are prices determined?
• How much is bought and sold?
• How do the two sides (consumers & producers)
of the market behave?
For a market to operate, there need to be lots of
buyers and sellers

January 3, 2021 Session 5 2

 Need
Want
Demand

January 3, 2021 Session 5 3

• Needs – Basic human requirements
• Wants – Need satisfiers
• Demand – Want backed by purchasing power

January 3, 2021 Session 5 4

 Demand
Quantity of goods (or services) . . .
wanted by the consumer . . . within a
specified time . . . when expressed in the
market . . . and backed by purchasing
power.
Demand means the willingness and capacity to
pay.
•Prices are the tools by which the market
coordinates individual desires.
January 3, 2021 Session 5 5
 The Demand Schedule
• The demand table assumes all the following:
– As price rises, quantity demanded declines.
– Quantity demanded has a specific time dimension
to it.
– All the products involved are identical in shape,
size, quality, etc.

January 3, 2021 Session 5 6

 The Demand Schedule
• The demand table assumes all the following:
– The schedule assumes that everything else is held
constant.
• You plot each point in the demand table on a
graph and connect the points to derive the
demand curve.
• The demand curve graphically conveys the
same information that is on the demand table

January 3, 2021 Session 5 7

 From a Demand Table to a
Demand Curve
A Demand Table $6.00
A Demand Curve

Price per DVD rentals 5.00

Price per DVDs (in dollars)

cassette demanded per
week 4.00 E
A $0.50 9 3.50 G
3.00 D
B 1.00 8 Demand for
C
C 2.00 6 2.00 DVDs
D 3.00 4 1.00
F B
A
E 4.00 2 .50
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of DVDs demanded (per week)

January 3, 2021 Session 5 8

 Demand Schedule and
Demand Curve for DVDs

January 3, 2021 Session 5 9

 Other Things Constant
• Other things constant places a limitation on
the application of the law of demand.
– All other factors that affect quantity demanded
are assumed to remain constant, whether they
actually remain constant or not.

January 3, 2021 Session 5 10

 Individual and Market Demand
Curves
• A market demand curve is the horizontal sum
of all individual demand curves.
– This is determined by adding the individual
demand curves of all the demanders.
• Quantity demanded refers to the amount
people wish to purchase at a particular price.
• Demand refers to the whole curve, while
quantity demanded refers to a specific point
on the demand curve
January 3, 2021 Session 5 11
 Demand Curve
• Individuals choose a point on the demand
curve, which is the quantity that corresponds
to the price that the shopkeeper has posted.
• Demand curve is like a plan and we have may
such plans

January 3, 2021 Session 5 12

 Individual and Market Demand
Curves
• Sellers estimate total market demand for their
product which becomes smooth and
downward sloping curve.

January 3, 2021 Session 5 13

 Aggregation of Demand (I)

January 3, 2021 Session 5 14

 Aggregation of Demand (II)

January 3, 2021 Session 5 15

 Price of Other Goods
• When the price of a substitute good falls,
demand falls for the good whose price has not
changed.
• When the price of a complement good falls,
demand rises for the good whose price has
not changed.

January 3, 2021 Session 5 16

 Income
•An increase in income will increase demand for
normal goods.
•An increase in income will decrease demand for
inferior goods.

Tastes
•A change in taste will change demand with no
change in price.

January 3, 2021 Session 5 17

 Expectations
• If you expect your income to rise, you may
consume more now.
• If you expect prices to fall in the future, you
may put off purchases today.

January 3, 2021 Session 5 18

 Taxes and Subsidies
• Taxes levied on consumers increase the cost of
goods to consumers, thereby reducing
demand.
• Subsidies have an opposite effect.

January 3, 2021 Session 5 19

 Factors that Shift Demand

January 3, 2021 Session 5 20

 Other Factors
• Availability of credit
• Population and its composition
• Derived demand
• Seasonal effects

January 3, 2021 Session 5 21

 Note
• What is of interest is the relative prices and not
the absolute prices
• Prices of products may have increased absolutely,
but they may not have increased relatively or in
real terms with respect to their competitors.

January 3, 2021 Session 5 22

Shifts in Demand Versus Movements
Along a Demand Curve

A movement along a demand curve is the

graphical representation of the effect of a
change in price on the quantity demanded.

January 3, 2021 Session 5 23

 Change in Quantity Demanded

$2 B
Price (per unit)

Change in quantity demanded

(a movement along the curve)

A
$1

D1
0
100 200
Quantity demanded (per unit of time)
January 3, 2021 Session 5 24
 Shifts in Demand Versus
Movements Along a Demand Curve

• A shift in demand is the graphical

representation of the effect of anything other
than price on demand.

January 3, 2021 Session 5 25

 Shift in Demand

Change in demand
(a shift of the curve)
$2
Price (per unit)

B A
$1

D0

D1
100 200 250
Quantity demanded (per unit of time)
January 3, 2021 Session 5 26
 The Law of Demand
Consumers buy more of a good when its price is
lower and less when its price is higher (all other
things being constant)

•The demand curve is downward sloping for the

following reasons:
– At lower prices, existing demanders buy more.
– At lower prices, new demanders enter the market.

January 3, 2021 Session 5 27

 Exceptions to the Law of Demand
• Giffen goods
• Jensen, Robert T., and Nolan H. Miller. 2008. "Giffen
Behavior and Subsistence Consumption." American
Economic Review, 98(4): 1553–77.
• Veblen effect - conspicuous consumption
• Speculative products
• Life saving drugs or emergency products
• Bandwagon effect

January 3, 2021 Session 5 28

 Why Study Demand
– Decide the product to be produced
– Design of the product
– Decide on capacity of the plant
– Decide on production schedules
– Decide on marketing, distribution, advertising
strategy
– Know the profitability
– Predict possible changes in product characteristics
– Know the life-cycle of the business

January 3, 2021 Session 5 29

 Queries ?????

Session Assignment:
Identify the various factors that
would affect the demand of any one
product.
January 3, 2021 Session 5 30