:

THEORY OF DEMAND

Presentation On

The quantity of goods consumers are willing and able to buy at different prices in a given period of time

Determinants of Demand

Examples Effect on Demand

Income of the consumer: a) Normal Goodsb) Inferior goods

Decrease in salary of customer

Decreases the demand or shift of demand curve to left

Taste and Preference Favorable preference Increase in demand

Price of Product: a) Substitute goodsb) Complementary

goods

Increase in price of onions

Decrease of demand

Consumer Expectation for future change in price

potatoes price will rise in future

More demand in present or increase in demand today

Population Population increases in country

Demand rises

Seasonal Conditions Woolen clothes in winter and in summer

Demand increase in winter & decreases in summer

Individual and Market DEMAND Individual Demand: from single

individual/family/household. Market Demand: Total demand of all

buyers, taken together.

Higher Price = less demand for product

Less Price= High demand for product

/

D

D

Degrees Of PED

quantity

PRICE

Type of demand that is not needed, typically those luxuries goodsMany substitutes…

Highly

Ed>1

Type of demand that is necessary for humans..No substitute or cannot be replaced

Highly

Ed<1

See the Difference…

Area of inelastic and elastic demand curves

PRICE

quantity0

quantity0

Ed<1

Ed>1

Perfectly Inelastic Demand

%change in price had no effect on Demand

Perfectly Elastic Demand

Ed= ∞

% change in quantity demanded is equal to the infinite price.

Unitary Elastic Demand

%change in price is equal to the % change in quantity demanded

Ed=1

Determinants of PED

the availability of substitutes: the more substitutes there are for a product, the more elastic its demand.

the importance of being unimportant: if an item represents a small part of the consumer’s budget, then less attention is paid to its price (demand is more inelastic).

time: the more time consumers have, the more responsive they are to price changes (and demand is more elastic).

Methods of measuring PED

Percentage method

Graphical Method

Total Outlay or Expenditure Method

Percentage Method

Graphical Method

0

Total Expenditure or Outlay Method

Diagram of TEM

Calculate by PRIICE × Quantity Demanded

Change in Demand

Shift along demand curve

Extension in demand

Contraction in

demand

Shift in demand curve

Increase in demand

Decrease in demand

Shift along demand curve

Shift in Demand Curve