topic 2 (part 1) - basic concffepts of demand_2

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Topic 2 (Part 1)

Basic Concepts in Demand

Economics and Society

Emeric Hing



KEF0014/2 - Emeric Hing

2. Introduction

• Have you ever wondered why some products are more expensive than others? Compare TESCOand KR1M

• Why are houses in prime locations far moreexpensive? Compare KL and Rawang

• Why is a Rolex watch priced at $30,000?

• Why does the price of petrol varies from time to

time?In order to answer this questions, one needs tounderstand the concept of demand and supply




2.1. Demand

Definition

One must have the following characteristics:

•

The desire to own anything• The ability to pay for it

• The willingness to pay for it

Example: If we want an MP3 player, but cannotafford it, we are then not part of the demand for

MP3 players.




2.1.1 Quantity Demanded

• The amount of good that buyers are willing

and able to purchase during a given time and

at a particular price

Factors relating to demand and buying behavior

• Ability to buy (do we have the money?)

• Willingness to buy (is the price right?)




2.1.2. Law of Demand

• When the price of a good rises, the quantity

demanded of the good falls

• When the price of a good falls, the quantity

demanded of the good rises.

In the event of ceteris paribus (whereby other

things remain the same or constant such as your

salary)




2.1.3. Demand Curve

• A graph of the relationship between the price

of a good and the quantity demanded

• Demand curve shows how the quantity

demanded will change if the price of that

particular goods change



2.1.3. Demand Curve


A movement along Demand

curve

D e m a n d Sc h e d u l e

P ric e Qua ntityD em a nde d

$ 5 .0 0 1

4 .5 0 2

4 .0 0 3

3 .5 0 5

3 .0 0 7

2 .5 0 9

2 .0 0 12

1 .5 0 15

1 .0 0 20

Price

A $5.00

B

4.50C

4.00D

3.50E

3.00F

2.50 G 2.00

H

1.50I

1.00

0.50

0 2 4 6 8 10 12 14 16 18 20Quantity of Web Design Demanded

McGraw-Hill/I rwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.




2.1.3. Demand Curve



2.1.3.1. Movement vs Shift

in the Demand Curve

Note the difference

• Movement along the demand curve happens

when there is a change in the price of the

product

• Shift in the demand curve happens when the

determinants (factors) affecting the demand

changes.




2.1.3.1. Movement vs Shift

in the Demand Curve


P

R I C E

A Shift in Demand

$5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

Demand shifts if tastes, income, other goods, or expectations change

d 1

d 2

increased demandSHIFT

D 2

D 1

initial demand

0 2 4 6 8 10 12 14 16 18 20

QUANTITY

McGraw-Hill/I rwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.



2.1.3.2. Change in Quantity Demanded


vs Change in Demand

• Change in quantity = movement along the

demand curve

• Change in demand = shift in the demand curve

• Change in quantity = if everything is constant but

the price of good changes = movement along the

demand curve

• Change in demand = if the price is constant, butother determinants come into play = shift in the

demand curve




2.1.4. Determinants of Demand

1. Prices of goods

2. Income

3. Prices of related goods4. Tastes

5. Expectations

6. Number of buyers

Causes Movement along the

Demand Curve

Causes Shift in

Demand Curve





2. Income

Good income means more demand, bad

income, lesser demand.

If the demand for a good falls when income falls,

the good is called a normal good.

If an increase in income leads to a decrease in

demand, then the good is called an inferior

good. Example: bus rides.





3. Prices of Related goods

a. Substitutes

Two goods for which an increase in the price of one leads to

an increase in the demand of the other. Example: yogurt and ice cream, hot dogs and hamburgers, movie tickets and video rentals

b. Complements

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Example: computers and software, gasoline and automobiles





4. TasteIf you like something, you buy more of it. It is your preference.Example: if your doctor advices you to eat more fish, your demand will increase

5. ExpectationYour expectation about the future will affect your demand today. Example: People tend to buy more food before the

festive season and store them up because the expectation isthat prices will increase during the festive period. It is the same with petrol prices. Cars will line up the day before.





6. Number of buyers/ Population

The larger the population, the greater is the

demand for all goods and services. And the

smaller the population, the smaller is the

demand for all goods and services.

topic 2 (part 1) - basic concffepts of demand_2

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