1. Introduction to Demand
Chapter 3
Introduction to Demand

2. The Law of Demand – Definitions
Demand is the number of units of goods a consumer will buy at various prices.
The Law of Demand states that an increase in price leads to a decrease in quantity demanded
(P  Q ) or a decrease in price leads to an increase in quantity demanded (P  Q ).

3. The Law of Demand – Definitions
Individual demand studies the quantities of a good that an individual consumer is prepared to buy at each price.
Market /aggregate demand shows the different quantities of a good that all consumers in the market are prepared to buy at each price. It is derived by adding together all the individual quantities demanded for the good.

4. The Law of Demand – Definitions
A demand schedule is a table that shows the different quantities demanded for a good at various market prices at any given time.
An individual demand schedule lists the different quantities of a good that an individual consumer is prepared to buy at each price.
The Law of Demand – Definitions

5. The Law of Demand – Definitions
A market/aggregate demand schedule lists the different quantities of a good that all consumers in the market are prepared to buy at each price. It is derived by adding together all the individual demand schedules for the good.

6. Demand Curve
A demand curve is a graph illustrating the demand for a good at various prices at any given time.
At higher prices, consumers are generally willing to purchase less than at lower prices.
The demand curve is said to have a negative slope – downward sloping from left to right.
Note: When drawing demand curve graphs, ensure that each element of the graph is labelled and graduated.

7. Other Types of Demand
Effective demand: Consumers must be willing to buy AND be capable of paying the price set by the supplier.
Consumer surplus: The benefit to consumers
due to the difference between what consumers actually pay to consume a good and what they would have been willing to pay rather than go without the good.

8. Other Types of Demand (Continued)
Derived demand: Derived demand occurs when one commodity is an essential part of another commodity and it is demanded not for its own sake but because it is required to manufacture another good.
Composite demand occurs when a commodity is required for a number of different uses, e.g. sugar.

9. Other Types of Demand (Continued)
Joint demand occurs when the demand for one commodity is joined with the demand for another. Ordinarily, the commodities involved cannot be separated and in fact form a single good or can also be called complementary goods.

10. Movement or Shift in the Demand Curve
A movement along the demand curve is caused by a change in the price of the good itself.
A shift in the demand curve is caused by a change in any non-price determinant of demand, e.g. a change in consumers’ income.

11. The Demand Function Dx = f (Px, Pog, Y, E, T, U, G)
Px = the price of the good itself
Pog = price of other goods (price of complementary goods and price of substitute goods)
Y = income of the consumer
E = consumers’ expectations concerning future prices
T = consumer tastes or preferences
U = unplanned factors
G = government regulations

12. Demand for a Good Depends on the Price of Other Goods
Complementary goods are goods that are used jointly. The use of one involves the use of the other.
Substitute goods are goods that satisfy the same needs and thus can be considered as alternatives to each other. If an increase in the price of one good leads to an increase in the demand for another good as an alternative, then the two goods are said to be substitute.

13. Demand for a Good Depends on the Price of Other Goods (Continued)
A normal good is a good that obeys the law of demand and that has a positive income effect.
An inferior good is a good with a negative income effect. A rise in income causes less of these goods to be demanded, while a fall in income causes more of these goods to be demanded.

14. Causes for Increase in Quantity Demanded
A decrease in the price of the good itself
An increase in the price of a substitute good
A fall in the price of a complementary good
An increase in income (if the good is normal)
Expectations of higher prices in the future or scarcity
A change in taste in favour of the good
Favourable unplanned factors
Government legislation influencing an increase in consumption

15. A Rightward Shift

16. Exceptions to the Law of Demand
Giffen goods
Status symbols/snob items/ostentatious goods/goods of conspicuous consumption
Goods influenced by consumer expectations/speculative goods
Goods of an addictive nature

17. Substitution + Income Effects
The Price Effect
The Price Effect =
Substitution + Income Effects
If the price of a good changes, it gives rise to both a substitution effect (i.e. more of the cheaper good will always be bought) and an income effect (i.e. because of the increased purchasing power, the demand for both goods can change).

18. Definition of Real Income
Real income refers to the purchasing power (the amount of goods and services you can buy) of your money income.