Chap02-Theory of Demand

8/6/2019 Chap02-Theory of Demand

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AIM

of

THE PROGRAMME

The aim of the programme isto help you have a clearunderstanding of the concepts

and theories of demand andassist you analyse the real lifeissues based on theknowledge you will gather

from this programme.


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Define the concept of demand for acommodity

Describe the determinants of demandfor a commodity

Explain the relationship between price ofthe commodity and the quantity

demanded for the commodity Eplain the law of demand Draw the demand curve from a demand

schedule. Explain the reasons of the shifts of and

movements along a demand curve. Draw the market demand curve from

individual demand curves.


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The person is willing to buyThe person is willing to buy

that commoditythat commodity

He/she has the

purchasing power

He/she has thedesire to spendhis/her money


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Determinants of demandDeterminants of demandfor a commodityfor a commodity

Price of the commodityPrice of the commodity

Taste Price of the relatedcommodities

Income of the consumer

Population size

Age

P Q

P Q


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How Can the Relationship Between

Quantity Demanded and Price Be Portrayed?

hree methods are usually used to do th

FunctionDemand Function

Numerical dataDemand schedule

GraphDemand curve


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Demand function shows the relationship between quantity

demanded and it determinants. We can show that by the following

demand equation:

TPAMPP

etcAPTPMPQ

ZYX

ZYX

D

X

3232.04520

.),,,,,,(

++++=

=

Here, PX=Price of X, P

Y=Price of Y (X & Y are substitutes), P

Z=Price of

Z (X & Z are complementary), M=Consumers Income,

A=Advertisement cost, T=Taste.

XfixedthingsOtherAll

X

D

X 5P20)(PQ == This equation reflects the

themeof the law of demand.

DEMAND FUNCTION


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Price ofPotato

(Tk/Kg)

Quantitydemandedfor Potato

(Kg)15 3

13 5

10 8

7 10

5 15

Demand Schedule


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Price ofPotato

(Tk/Kg)

Quantitydemandedfor Potato

(Kg)5 15

7 10

10 8

13 5

15 3

Demand Schedule


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15

3 5

13

10

8 10

7

5

15

D

D

D1

D1

Price

Quantity

0

A

B

D2

D2

C

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Movementalong thedemand curve

Income

Population size

Taste,etc.

RightwardSHIFTof thedemand curve

Incomeisincreased

Incomeisdecreased

Leftward SHIFTof the demandcurve

A

5


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QuantityDemanded

5 10

D

D

d1

d1d2

d2Price

0 0 0

Consumer-1 Marketdemand

Consumer-2

6

5

10

3 2 5


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The consumer surplus (sometimesnamed consumer's surplus orconsumers' surplus) is the amountthat consumers benefit by being ableto purchase a product for a price thatis less than they would be willing topay. The difference between the

amount that consumer is willing topay for the commodity and its actualmarket price is called consumersurplus. When a person buys any

chosen quantity of a commodity at a

WHAT IS CONSUMERSURPLUS?


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Marketprice

d

d'

Price

Quantity ofPatty

E

Cons

um

er

surplus

0

2

4

6

8

10

12

1 2 3 4 5

CONSUMER SURPLUS

INDIVIDUAL CONSUMER


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CALCULATION OF CONSUMER

SURPLUS- INDIVIDUAL CONSUMER

The consumer is willing to payTk.10 for the first unit, Tk.8 for the2nd , Tk.6 for the 3rd and Tk.4 for the4th unit. So, in total, for 4 units ofpatty, the consumer is willing to

pay (10+8+6+4)=Tk.28 . However,he/she can but these 4 units atprice Tk.4 each. That means, he/sheis paying for 4 units (44)=Tk.16.

Here the consumer surplus is =(28-


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S'

S

CONSUMER SURPLUS

WHOLE MARKET

Market

price

D

D'

P

rice

Quantity of Patty (inThousands)

E

Cons

um

ersu

rplus

0

2

4

6

8

10

12

1 2 3 4 5


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The area of the shaded triangle indicates theconsumer surplus in the market. We saw in the

previous slide:

The base of the triangle = 4 thousands of Patty.

The height of the triangle = Tk.11.00 -Tk.4.00 =Tk.7.00 a piece of Patty

00.14000.

740002

1

2

1

Tk

heightbase

=

=

Therefore, the area of the triangle is:

CALCULATION OF CONSUMERSURPLUS

- INDIVIDUAL CONSUMER

Chap02-Theory of Demand

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