DEMAND

DEFINITION OF DEMAND

Demand is the ability and willingness to buy specific quantities of a good at

alternative price in a given time period, ceteris peribus.

CLASSIFICATION OF GOOD AND SOLD CONVENTIONAL

PERSPECTIVE

Free Goods – Goods that do not have any production cost at all ( zero

production cost). Example: air and rain water.

Public Goods – goods which the benefits are in the indivisibly spread amount the

entire community whether or not individuals desire to purchase the public goods.

For example : stations, school, hospital and roads.

Economic Goods – Goods which supply is limited and require costs to purchase

them. Price involved in obtaining them.

Private Goods – You have to pay yourself and you can prevent others to use

your private goods.

ISLAMIC PERSPECTIVE

From Islamic economic, goods were classified according to its consumption

hierarchy. There are four classifications of good from Islamic perspective.

Dharuriyat (Essentials) – Goods that are classified as basic needs and necessary

for a living. For example food, clothing, houses, education, health service,

transportation and defense.

Hajiyat (Complementary) – Goods that will improve the quality of human life. For

example radio, TV, furniture and car.

Kamaliat (Perfection) – Goods that contribute towards the perfection of human

life. For example bungalow houses and luxury car.

Tarafiat (Extravagant) – Goods that are considered extravagant and wasteful.

For example golden bed and antique furniture.

LAW OF DEMAND

Economics might be referred to as “graphs and laughs” because economists are

so fond of using graphs to illustrate demand, supply and many other economic

concepts. Unfortunately, some students taking economics courses say they miss

the laughs. The law of demand state there is an inverse relationship between the

price of a good and the quantity buyers are willing to purchase in a defined time

period, ceteris paribus. The law of demand makes good sense. At a “sale”

consumer as buy more when the price of merchandise is cut.

PRICE OF MANGOES

QTY

OF MANGOES

PRICE (RM) PER KG

QUANTITY DEMANDED (KG)

1.4 81.2 131 20

0.8 300.6 500.4 900.2 100

MARKET DEMAND

To make the transition from an individual demand curve to a market demand

curve, we total, or sum, the individual demand schedules. Suppose the owner of

Rap City, a small chain of retail music stores serving a few states, tries to decide

what to charge for CD’s and hires a consumer buyers in Rap City market, and

they are sent a questionnaire that asks how many CD’s each would be willing to

purchase at several possible prices.

FRED’s DEMAND CURVE + MARY’s DEMAND CURVE

= MARKET DEMAND CURVE

PRICE per CDQUANTITY DEMANDED per YEARFRED + MARY = TOTAL DEMAND

25 1 0 120 2 1 315 3 3 610 4 5 95 5 7 12

CHANGE IN DEMAND

An increase or decrease in the quantity demanded at each possible price. An

increase in demand is a rightward shift in the entire demand curve. A decrease in

demand is a leftward shift in the entire demand curve.

D2

D0

D1

P0

Q1 Q0 Q2

CHANGES IN QUANTITY DEMANDED

A movement between points along a stationary demand curve, ceteris paribus.

DD

B

AP0

P1

P2

Q2 Q0 Q1

C

DETERMINANTS OF DEMAND

INCOMES

It is obvious that income will influence the amount of most goods and

service people will purchase at any given price. For most goods, the

quantity demanded at ant price will rise with income. Goods that have this

property are called normal goods. So – called inferior goods ( such as

ground beef with high fat content) are the exception to this general

pattern. For such goods, the quantity demanded at any price will fall with

income. The idea is that consumers abandon these goods in favor of

higher quality substitutes (such as leaner grades of meat in the ground

beef case) as soon as they can afford to.

TASTES

Not all people share the same tastes. Nor do tastes always remain fixed

over time. In Western societies, culture instills a taste for sitting on padded

furniture, whereas in many Eastern societies, people are condition to favor

sitting cross-legged on the floor. The demand for armchairs thus tends to

be larger in the West than in the East. By the token, the demand for skirt

with hemlines above the knee tends to vary sharply from one decade to

another.

PRICES OF SUBSTITUTES AND COMPLIMENTS

Bacon and eggs play a complementary role in the diets of some people.

For such people, a shop increase in the price of bacon would lead not only

to a reduction in the quantity of bacon demanded but also to a reduction in

the demand for eggs. Such goods are considered complements: an

increase in the price of one good decreases demand for the other good. In

the case of close substitutes, such as coffee and tea, an increase in the

price of one will tend to increase the demand for the other.

EXPECTATIONS

People’s expectations about future income and price levels also affect

their current purchase decisions. For example, some one who expects

sharply higher income in the future is likely to spend more today than an

otherwise identical person who expects a much smaller income in the

future. (After all, with a higher expected income, the need to save for the

future diminishes.) Similarly, people will often accelerate their current

purchases of goods whose prices are expected to rise sharply in the

months to come.

POPULATIONS

In general, the larger a market, the more a good or service at any given

rise will be purchase. Thus, in cities with growing populations, the demand

for housing increases from year to year, whereas it tends to fall in cities

with declining populations.

EXCEPTIONAL DEMAND

Generally, the demand for goods and services follow the law of demand,

which say that when prices increase, the demand for goods and services

will increase, and when prices decrease, demand will increase. However,

in certain cases, the demand for certain goods does not follow the law of

demand. For example, it goes against the law of demand: when a price

goes up, demand will increase as illustrated in the diagram below:

QUANTITY

PRICE

DD

Q0 Q1

P1

P0

GIFFEN GOODS

Lower income group normally use this type of good. Examples are low

grade rice, salted fish etc. The demand curve for giffen goods is normally

upward slopping instead downward slopping. This means that the

consumption of giffen goods falls as income rises, ceteris paribus. While

better quality rice is more attractive to consumers compare to the low

grade rice, so the consumer can be made much poorer by an increase in

the price of low grade rice. In the diagram below, it show that, at low

prices (section A), people tend to substitute for better quality rice and thus

reduces the quantity demanded for this low grade rice. Why? We can see

that the lower the price, the less quantity of rice demanded. Thus, the

demand curve is regressive at lower price levels. The lower the price,

people will substitute this lower grade rice for a better grade of rice,

example from rice grade C to rice grade B. While at higher price ( section

B), the demand curve is normal, mean the lower the price, the higher the

demand for rice.

``

PRICE

QUANTITY

P2

Pe

P1

P0

Q0 Q1 Q2 Qe

LUXURIOUS GOODS

Luxurious goods are those products that have income elasticity demand greater

than one. Example of luxuries goods are jewelry, luxury-imported cars, antique

furniture and famous printing like Mona Lisa, etc. The more expensive the goods,

the greater will be the demand. In this case, the consumer tries to measure

quality by price, that is, the higher the price the better the quality of the good is,

and higher the demand will be. Some consumers try to be different from others to

show that they are better off because they can afford to buy more at a higher

price. The curve can be divided into two section, example section C and section

D. Section D is the normal demand curve because it has a negative slope as said

in the law of demand when the price is 0P1, the quantity demand is 0q1; and

when the price falls to 0P0, quantity demand will increase to 0q0. The law of

demand will operate until the price is 0Pe. Now look at section C. When the price

increase from 0Pe to 0P2, the quantity demanded increase as well from 0qe to

0q2. Higher the price are, the better the quality products. Regressive demand

curve at high prices.

PRICE

QUANTITY

D

D

P2

Pe

P1

P0

Qe Q1 Q2 Q0

INTER-RELATED DEMAND

Inter-related demand is where a demand for a particular good may effect the

demand of another good. There are 4 types of inter-related demand namely joint

demand, competitive demand, derived demand and composite demand.

JOINT DEMAND

A demand for a particular good is likely to increase the demand for

another good. This type of demand is for complementary goods such as,

toothbrush and toothpaste, pen and ink, cars and petrol, etc. Thus, an

increase in the price of 1 good effectively decreases the demand of the

Qother good. Example pen and ink. If the price of pen decreases, the

demand for ink will increase. This can be shown in the diagram below:

D

Q0 Q1

QTY

D1

D0

Pe

QTY

Q0 Q1

PEN INK

PRICE of PEN

P0

P1

P P

QTY of INK

P0

P1Dd

Q0 Q1

COMPETITIVE DEMAND

An increase in the demand for 1 good will reduce the demand for another

good. This type of demand refers to demand for substitutes. Examples of

substitutes are butter and margarine, Pepsi cola and Coca-cola, Toyota

Car and Proton Wira. If the price of Toyota car increases, the quantity

demanded for Toyota will decrease but demand for Proton Wira will

increase. Consumers would prefer to buy local cars because is it relatively

cheaper than the price of Toyota. This can be shown in the diagram

below:

PRICE

PRICE

P1

P0

Q1 Q2

D

TOYOTA

D0

D1

Q0 Q1

Pe

QTYQTY

PROTON

P0

P1

Q0 Q1

PRICE OF TOYOTA

QUANTITY OF PROTON WIRA

DERIVED DEMAND

The demand for a good increases, demand for the factor of production/

input produce the goods will also increase. Examples are houses and

bricks, cement, tiles or planks, if the demand for houses increase,

developers need more building materials to make houses, this will lead to

an increase in the demand for cement, bricks, plank and tiles.

COMPOSITE DEMAND

This refers to multi-purpose products. Example: rubber can be used to

produce rubber shoes, tires, balls etc. If the demand for tires increase,

more rubber will be used to produce tires and there will be less rubber that

can be used to produce rubber shoes. The shortage of rubber to produce

rubber shoes will increase the price of rubber shoes.

ELASTICITY OF DEMAND

DEFINITION

The word elasticity has the same meaning as sensitivity, or

responsiveness. Therefore elasticity of demand means the

responsiveness of demand due to same changes to the factors which

influence demand. There are 3 types of elasticity of demand that are; price

elasticity of demand, income elasticity of demand and cross elasticity of

demand.

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is the ratio of the percentage change in the

quantity demanded of a product to a percentage change in its price. The

elasticity formula is

Ed = percentage change in quantity demanded

Percentage change in price

= Q - Q

Q X 100%

P – P

P

Q =Initial quantity

Q =New quantity

P =Initial price

P =New price

DEGREES OF ELASTICITY

After we know the definition Price elasticity of demand, now we are going to look

at the 5 degrees of elasticity of demand.

1. Demand is elastic

2. Demand is elastic

3. Demand is unitary elastic

4. Demand is perfectly inelastic

5. Demand is perfectly elastic.

DEMAND IS ELASTIC

Demand is elastic if given percentage changes in price results in a larger

percentage change in quantity demanded. Example, if a 2 percent decline in

price results in a 4 percent increase in quantity demanded, demand is elastic.

The coefficient of an elasticity is greater than 1. Goods, which have many

substitutes, have an elastic demand. This can be shown as below.

D

P1

P0

Q0 Q1

PRICE

QTY

DEMAND IS INELASTIC

Demand is inelastic when the percentage change in price is more than

the percentage change in quantity demanded. If a 3% increase in leads to

only - % decrease in the quantity demanded, so demand is inelastic.

Normally goods that have less substitutes such as rice has an inelastic

demand as below:

D

PRICE

QTY

P1

P0

Q1 Q0

DEMAND IS UNITARY ELASTIC

A demand relationship in which the percentage changes in quantity is the same

as the percentage in price. The coefficient of a unitary elastic is always equals to

1. The demand curve is as illustrated below :

P

D

P

Q

P

QTY

DEMAND IS PERFECTLY INELASTIC

This is an in extreme situation where a price change result in no change to the

quantity demanded. It’s numerical value is 0. An example of perfectly inelastic

demand is demand insulin by a serious diabetic patient or addict’s demand for

heroine. The demand curve is parallel to the vertical axis such as in the diagram

below:

DEMAND IS PERFECTLY ELASTIC

A perfectly elastic demand curve is a horizontal straight – line such as below:

D

Q

QTY

P1

P0

P

QTY

DP

Q0 Q1

P

DETERMINANTS OF PRICE ELASTICITY OF DEMAND

AVAILABILITY OF SUBSTITUTES

By far the most important influence on price elasticity of demand is the availability

of substitutes. Demand is more elastic for a good or service with cloth

substitutes. If the price of cars rise, consumer can switch to busses, trains,

bicycle, and walking. The more public transportation is available, the more

responsive quantity demanded is to a change in the price of cars. When

consumer have limited alternatives, the demand for a good or service is more

price inelastic.

Price elasticity also depends on the market used to measured demand.

SHARE OF BUDGET SPENT ON THE PRODUCT

When the price of salt changes, consumers pay little attention. Why should they

notice? The price of salt or matches can double, and this purchase will remain a

small percentage of a household’s budget. If, however, college tuition, the price

of dinners at restaurants, or housing prices double, people will look for

alternatives. These goods and services account for a large part of people’s

budgets.

TIME

Time affects the price elasticity of demand. Car owners can’t switch to electric

autos every time the price of gasoline goes up. In the short run, the elasticity of

demand for gasoline is quite low. With more time to adjust, however, consumers

can buy more fuel-efficient cars, relocate their homes or jobs, and even switch

fuels. As a consequence, the long-run price elasticity of demand is higher than

the short-run elasticity.

INCOME ELASTICITY OF DEMAND

To measure exactly how consumption responds to changes in income,

economists calculate the income elasticity of demand. Income elasticity of

demand is the ratio of percentage change in the quantity demanded of a good or

service to a given percentage change in income. We use a midpoints formula

similar to the one we used for calculating price elasticity of demand:

E i = Percentage change in quantity demanded

Percentage change in income

= Q – Q

Q X 100%

Y – Y

Y

Q = New quantity

Q = Original quantity

Y = New income

Y = original income

TYPES OF INCOME ELASTICITY

1. 0 < E <1 : normal goods, example: food, clothes, newspaper. Upward

sloping curve

2. Ey > 1 : luxury goods, example: antique furniture, luxury goods, jewellery

3. Ey < 1 : giffen goods or inferior goods, example: used car, salted fish

4. Ey = 1 : necessity good, example : rice, salt,

CROSS-ELASTICITY OF DEMAND

Cross-elasticity of demand is the ratio of the percentage change in the quantity

demanded of a good or service to a given percentage change in the price of

another good or service. Again, we use the midpoints formula as follows to

compute the cross-elasticity coefficient of demand:

Ec = percentage change in quantity demanded of one good

percentage change in price of another good

= Q X – Q X

Q X

P Y – P Y

P Y

TYPE RESPONSES OF CROSS ELASTICITY

1. Positive cross elasticity

An increase in the price of 1 good will increase the opportunity of another

good and vice versa. Apply for substitutes goods. When price of chicken

increase, quantity demanded for beef will increase.

2. Negative cross elasticity

Increase in the price of 1 good will decrease the quantity demanded of

another good and vice versa. Apply for compliment good. When price of

increase quantity demanded for pen.

3. 0 cross elasticity

Increase in the price 1 good will not effect the demand of another good and

vice versa. The product has no relationship. Increase in price of oil has no

effect on demand for houses.

THE END

4 TODAY

ONLY

3 MAC 2006