Demand

Terms to know: The law of demand 1 Demand function 2 Demand schedule 3 Diagramatical representation 4 Elasticity of demand 7 Changes in Demand 6

What is Demand?  Demand in economics means that willingness of a customers to purchase a commodity and as well as ability to purchase. Demand=f(willingness, Money to pay)

Demand function  Demand function define as the relationship between Demand and price.  We can says that demand is the function of price.

Types of Demand Price demand Income demand Cross demand

Price Demand  Price demand means that demand relation with price, demand increase or decrease when price increase or decrease.  E.g. demand for motor car will increase when its price reduce.

Income Demand  When customer demand is related to income of the customer, that sort of demand is called income demand.  E.g. when income increase we will buy more and more products, and if income reduce our demand will decrees.

Cross Demand  Cross demand means that price of one product will increase while demand of others product will increases.  E.g. when price of hp laptop increase than demand for Dell laptop will increase.

Market Demand vs. Individual Demand  Market demand refers to the sum of all individual demands for a particular good or service.  Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

Definition:  Law of demand states that, other things remaining the same, amount demanded increases with a fall in price and diminishes with rise in price.

Definition (continued) Other things remaining the same Weather conditionPrice of substitute goods Taxes of the govt. Taste, habits of the consumer Income of the consumer Political stability

Demand function: Qd = f(P) Here, Qd= Dependent variable P= Independent variable Demand has a negative relationship with price; i.e.

Demand schedule: priceDemand 1O0100O 9O1050 8O1100 7O115O 6O120O 50125O priceDemand 1O0100O Decrease in price increase in demand Increase in price decrease in demand

Diagrammatical representation: PRICES Quantity demand O Demand curve D D

Changes in demand: Changes in the demand for a commodity can be shown through the demand curve in two ways: Movements along the demand curve: Shifts of the demand curve:

Changes in demand:  CHANGE IN DEMAND: Change in demand Movement along a demand curve Extension in demand Contraction in demand It is caused by change in the price alone. Shift in the demand curve Increase in demand It is caused by changes in factors other than the price. Decrease in demand

Changes in demand (cont’d):  Movements along the demand curve: if the change in demand is due to a rise or fall in the price of a commodity alone, it is known as contraction or extantion in demand. Quantity Price a b

Changes in demand (cont’d):  Shift in the Demand curve:  If the changes in demand is due to factor other than price, it is known as increase or decrease in demand.  In such case the demand curve shift to right or left from the original demand curve  The demand curve shift to right due to change in other factors.

Other factors Affecting Demand law We list some factors which may be expected to influence this consumer demand  The price of goods  The prices of others goods which related to that good  The consumer income(y)  The consumer taste(T)  The consumer future expectations about price(E)  Populations  Weather condition

Increase in income effect on Normal and inferior goods  Normal good: When an increase in income causes an increase in demand it is called as normal goods.  Example are car, cell phone.  Inferior good: When an increase in income causes a decrease in demand it is called as inferior goods. OR Demand remains the same.  Example are salt, soap etc.

Effect on demand by related goods substitutes and complementary  Substitutes: Two goods are substitutes if they satisfy the same need and an increase in the price of one of them causes an increase in the demand for the other.  Thus, an increase in the price of tea would increase the demand for coffee because both satisfy the same need.

Income  Demand for a commodity changes in income increase. Normally when income increase demand also increase. And when income decrease demand also decrease.  e.g your salary is 500 $ you are using one card per day. Now your income increase from 500$ to 1000$ than your demand also increase using 2 card per day.

Population  If population increase demand will increases because buyers increase consequently result will positive.  e.g. number of population in Afghanistan demand for car will also increase.

Consumer tastes  If people taste changes for a particular good than demand will also changes.  e.g. Normally people use Pepsi if taste changes now they using Sprite, than demand for Pepsi will decrease.

Price related Good A decrease in the price substitute of a good will cause fall in its demand. For instance fish is substitute for meat. A decrease in the price of fish will cause fall in the demand for meat.

 Terms to know: statement Degree/Cases of Ed Schedule of Ed Diagrammatical representation Formula form for Ed Elasticity Of demand Elasticity

Elasticity of demand:  Statement: To what extent or to what degree quantity demanded changes as a result of change in price is called elasticity of demand (Ed).

Elasticity and Demand  The law of demand tells us that there is an inverse relationship between price and quantity demanded.  But it does not tell us how responsive consumers are to price changes.

Elasticity  To find out exactly how responsive consumers are to a price change, we need the price elasticity of demand for that good or service.  Price elasticity of demand:  A measure of how responsive people are to price changes.

Cases/Degrees of elasticity of demand: Elasticity of demand Lesselastic Equal elastic More elastic

Cases of Ed (cont’d): Equal elastic More elastic Less elastic If there is a great change in price cause a less change in quantity demand, is called less elastic situation. If there is an equal change in price cause an equal change in quantity demanded, is called equal elasticity of demand. If there is a less change in price caused a great change in quantity demand, is called more elastic situation.

Schedule form of Ed: 50 2O Less elastic Price Demand More elastic Price Demand Price Demand Equal elastic

Diagrammatical representation of less elastic demand: Less elastic curve PRICE QUANTITY DEMANDED

Diagrammatical illustration for equal elasticity: Equal elastic curve PRICE QUANTITY DEMANDED

Diagrammatical illustration for more elasticity: PRICE QUANTITY DEMANDED More elastic curve

Measurement of elasticity (Formula for Ed): The formula form for elasticity of demand is; Elasticity of demand = change in quantity demanded ÷ change in price Quantity Price Ed = ΔQd ÷ ΔP Q P Ed = ΔQd × P Q ΔP Ed = ΔQd × P ΔP Q

Types of Elasticity of Demand:  There are many types of elasticity of demand: i.e.  Price elasticity of demand  Income elasticity of demand and  Cross elasticity of demand.

 Income elasticity of demand:  “Income elasticity of demand is the responsiveness of demand to changes in the income of the consumer.”  Income elasticity is calculated by using the following formula: E y = % change in quantity / % change in income E y = ΔQ/Q ÷ ΔY/Y E y = ΔQ/Q × Y/ΔY Types of Elasticity of Demand (cont’d):

 Income elasticity of demand is: a)Equal to unity i.e. when the proportion of income spent on goods remains the same even after increase in income. E y = 1 b)It is less than unity if the proportion decreases. E y < 1 a)More than unity if the proportion increases. E y > 1

Types of Elasticity of Demand (cont’d):  For example: monthly income of the consumer (Afs) Monthly demand for meat (Kg) E y = ΔQ/ΔY × Y/Q Ey = 10/3000 × 5000/40 Ey = 0.14 Ey = 0.14 < 1

Types of Elasticity of Demand (cont’d):  Cross elasticity of demand:  “The rate of responsiveness of quantity demanded of commodity A to changes in price of commodity B.” i.e.  E AB = % change in Qd of A ÷ % change in price of B E AB = ΔQ A /Q A ÷ ΔP B /P B E AB = ΔQ A /Q A × P B /ΔP B

Types of Elasticity of Demand (cont’d):  For example: Price of wheat (P B ) Quantity demand for rice (Q A ) E AB = ΔQ A /ΔP B × P B /Q A E AB = 200/100 × 200/1000 E AB =2/5 = 0.4<1