Lecture # 4

Law of Demand
 Demand

 Demand - Total quantity customers are willing and able to

purchase

 A demand function is a behavior function for consumers.

 A supply function is a behavior function for producers.

 Law of Demand

 The law of demand states that, if all other factors remain

equal, the higher the price of a good, the less people will
demand that good.

 In other words, the higher the price, the lower the quantity
demanded.
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 The Law of Demand is simply the statement that as the

price of a good decreases (increases), more (less) of it
will be purchased.

 That is, the demand curve is downward sloping. There are

two factors that explain this relationship:
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1. As the price of a good increases, consumers will

substitute into other goods (substitution effect);
2. As the price of a good increases, consumers will have
less real income to purchase all goods
(income effect).
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 Explanation
 A, B and C are points on the demand curve.

 Each point on the curve reflects a direct correlation

between quantity demanded (Q) and price (P).

 So, at point A, the quantity demanded will be Q1 and the

price will be P1, and so on.
 Explanation
 The demand relationship curve illustrates the negative
relationship between price and quantity demanded.

 The higher the price of a good the lower the quantity

demanded (A), and the lower the price, the more the good
will be in demand (C).
 Movement 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.
 Change in Quantity Demanded

Rs2 B
Price (per unit) Change in quantity demanded
(a movement along the curve)

A
Rs1

D1
0
100 200
Quantity demanded (per unit of time)
 Shift in Demand

A shift in demand is the graphical

representation of the effect of anything
other than price on demand.
 Shift in Demand

Change in demand
(a shift of the curve)
Rs2
Price (per unit)

B A
Rs1

D0

D1
100 200 250
Quantity demanded (per unit of time)
 Determinants of Demand

Number of buyers
Income

Tastes

Expectations
Prices of related goods
 Shift Factors of Demand

• Shift factors of demand are factors that cause shifts in the

demand curve:
– Society's income.
– The prices of other goods.
– Tastes.
– Expectations.
– Number of Buyers
– Taxes on subsidies to consumers.
 Income

• An increase in income will increase demand for normal

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

• A change in taste will change demand with no change in

price.
 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.
 Taxes and Subsidies

• Taxes levied on consumers increase the cost of goods to

consumers, thereby reducing demand.
• Subsidies have an opposite effect.
 Changes in Demand
and Quantity Demanded
• Change in Quantity Demanded - movement along the
same demand curve in response to a price change.
• Change in Demand - shift in entire demand curve in
response to a change
in a determinant of demand (a ceteris paribus variable)