Chapter 2 DEMAND Prepared by Kokab Manzoor Chapters

Chapter # 2 DEMAND Prepared by Kokab Manzoor

Chapter`s Outlines Definition of Demand Law of demand Assumptions of Law Its tabular and graphical presentation Market Demand Types of Demand Rise and Fall in demand Extension and Contractions in demand

Definition of Demand The quantities of a good that a consumers are willing and able to purchase at various prices during a given period of time. 1 2 3 4 Ability to purchase Willingness to Purchase In a period of time At various prices.

LAW OF DEMAND Statement of the law Other things remaining the same, the quantity of a good demanded will rise with every fall in its price and the quantity of a good demanded will fall with every rise in its price The law of demand explains the inverse relationship between quantity demanded and price.

Mathematically it can be stated as follows, qd = f (P) [ Y, Ps, N, T ]constant This explains that qd, the quantity of a good demanded functionally depends on its price P. However, the quantity demanded is also causally related to other factors such as income of an individual (Y), prices of substitutes (Ps), number of members in the family (N) and the tastes of the consumer (T). In order to satisfy price-demand relation, the effect of these other variables are assumed to be constant.

DEMAND SCHEDULE Prices of Juice(In $) Q. D (Per Month) 4 40 3 70 2 90 1 100

Graphical Presentation of the LOD D D

Explanation Now the demand schedule is explained with the help of graph. On y-axis price of juice is given and on x-axis the quantity demanded is shown. At price $4 the Q. d is 40, at $3 , 2 & 1 the Q. d is 70, 90 & 100 respectively. By joining all these points we get a line i. e. DD line and this DD line is known as Demand curve.

MARKET DEMAND Market demand is the quantity demanded of a product by all the consumers at different prices.

MARKET DEMAND SCHEDULE CONSUMERS PRICES (In Afs) Ali Ahmed Amir Adil TOTAL Q. D 8 2 0 1 2 5 7 3 1 3 4 11 6 4 2 5 6 17 5 5 3 7 8 23 4 6 4 9 10 29

Assumptions of the Law 1 2 3 No change in income If income of a consumer increased or decreased, the law of demand does not hold. So income must remains constant. No change in Taste or Fashion It is also assumed that the taste of the consumer remains unchanged. No change in Price of related goods Like change in the price of substitute or complementary goods etc makes law of demand inapplicable

CONT`D 4 6 No change in future expectation. The consumer`s products expectations regarding the future behavior of the market should not be changed Weather & Population should remain same. Like in winter the demand of woolen clothes increased etc. Political instability 7 Wars, dearth, Emergencies etc 5

Exceptions/Limitation of Law 1 Very high priced goods For exp diamonds, luxury cars etc. Even their prices are high the consumer do not decrease its demands 2 Very low priced goods For exp salt, pepper etc. if the price falls the demand for it does not increase. 3 Ignorance of the consumers Some times consumers are not aware of low prices.

TYPES OF DEMAND 1 2 INCOME DEMAND It is the quantity of goods purchased by consumer at various level of incomes In other words, it is the change in demand due to change in income. PRICE DEMAND It is the quantity of goods purchased by consumer at various prices. In other words, it is the change in demand due to change in price.

3 CROSS DEMAND It is the quantity of goods purchased by consumer due to change in the price of other goods. For exp Substitute goods i. e. Pepsi and coca cola or tea & Coffee, etc Complementary goods like, fuel & cars etc

Changes in Demand. Changes in Demand takes place in two ways: 1 Shifting of Demand. 2 Extension and contraction of Demand.

1. SHIFT IN DEMAND • A shift in the demand curve, either towards the left or right caused by various factors other than price. e. g. Consumer income Prices of related goods Tastes Expectations Number of buyers

Rise in Demand When there is an increase in demand due to various factor(s), other than price, it is known as rise in demand. A B Price Q. d 12 100 12 200 6 250 6 350 4 300 4 400

Graphical Presentation of Rise in Demand Price Y 12 10 8 6 4 2 D D` D` D` 100 200 300 400 500 Quantity demanded 600 X

Fall in Demand When there is a decrease in demand due to certain factor(s), other than price, it is known as fall in demand. Price A Q. d Price BQ. d 12 100 12 50 6 200 4 500 4 300

Graphical Presentation of Fall in Demand Price Y 12 10 8 6 4 2 D D D `D 100 200 300 400 500 Quantity demanded 600 X

2. Extension and contraction. When the quantity demanded is increased with the a decrease in price, such kind of change in demand is known as extension of demand, and decrease of quantity demanded with an increase in price shows contraction of demand. A change in price, causes a movement along the demand curve, changes the quantity demanded

Graphical Presentation of Extension and Contraction of demand. Price When the price of a good rise and the quantity demanded is y decreased, this is known as Contraction of demand vice versa. D Extension contraction D x Quantity

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