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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.
PRICE OF MANGOES
QTY
OF MANGOES
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.
D2
D0
D1
Q1 Q0 Q2
CHANGES IN QUANTITY DEMANDED
A movement between points along a stationary demand curve, ceteris paribus.
DD
P2
P0 A
P1 C
Q2 Q0 Q1
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.
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:
PRICE
P1 DD
P0
QUANTITY
Q0 Q1
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
P2
Pe
P1
P0
QUANTITY
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
P2
Pe
P1
D
P0
QUANTITY
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:
P P
D PEN D1 INK
D0
P0
Pe
P1
QTY QTY
Q0 Q1 Q0 Q1
PRICE of PEN
P0
P1
Dd
COMPETITIVE DEMAND
QTY of INK
An increase in the demand
Q0 for 1Q1good 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
D1
D
D0
P1 Pe
P0
QTY
QTY
Q1 Q2 Q0 Q1
TOYOTA PROTON
PRICE OF TOYOTA
P1
P0
QUANTITY OF PROTON
WIRA
Q0 Q1
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.
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.
PRICE
P1
P0
QTY
Q0 Q1
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:
PRICE
P1
P0
QTY
Q1 Q0
QTY
P
D
P1
P0
QTY
P D
QTY
Q0 Q1
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.
Q = New quantity
Q = Original quantity
Y = New income
Y = original income
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: