The Theory of Demand

1
The Theory of Demand

• Santo Dodaro
• Econ 100
• Stfx

2
Key Concepts

• Quantity Demanded
• Effective Demand
• Demand Schedule
• Demand Curve
• The Law of Demand
• Demand versus Quantity Demanded
• Quantity Actually Bought or Quantity Exchanged
• Ceteris Paribus (other things being equal)
• Normal versus Inferior Goods
• Substitutes versus Complements

3
Quantity Demanded

• Amounts which households or individuals want to
  buy or purchase given the price of a particular
  good, ceteris paribus
• Represents a flow of desired purchases (amounts
  per unit of time)

4
Effective Demand

• the household actually wants to buy and pay for
  a certain amount a commodity at a given price
• There is no idle speculation involved

5
Determinants of Quantity Demanded per Unit of Time

• The particular commoditys own price
• Tastes and Preferences
• The price of related commodities or goods
  (substitutes or complements)
• The average income of the household or individual
  (depending on whether the good is normal or
  inferior)
• The size of the population
• Consumer expectations with respect to future
  prices and incomes
• The distribution of income

6
Demand

• Demand refers to the entire relationship between
  price and quantity demanded, ceteris paribus
• Represents the entire functional relationship
  between price and quantity

7
Demand Schedule

• Demonstrates in a table the quantity demanded at
  each price level, ceteris paribus

8
Demand Curve

• Shows on a graph the different price and quantity
  combinations, ceteris paribus
• It is downward sloping reflecting an inverse
  relationship between the price and quantity
• Inverse relationship between price and quantity
  defines the Law of Demand

9
Law of Demand

• Ceteris paribus, the lower the price (P) the
  greater the quantity demanded (Qd) and vice versa
• As price (P) goes down, quantity demanded (Qd)
  goes up, ceteris paribus
• As price (P) goes up, quantity demanded (Qd) goes
  down, ceteris paribus
• Inverse or indirect relationship between price
  (P) and quantity demanded (Qd), ceteris paribus

10
Shape Versus Location of Demand Curve

• The shape of the Demand Curve is determined by
  the relationship between quantity and the
  products own price
• The location of the demand curve is determined by
  all the other factors, aside from the products
  own price, that determine the quantity demanded

11
Change in Quantity Demanded (Qd)

• Refers to a movement from one point to another
  along a gives curve
• Comes about as a result of a change in the
  products own price.

12
Change in Demand (D)

• Refers to a shift in the whole demand curve
• Comes about as a result of a change in any of the
  determinants of quantity demanded, aside from the
  products own price.

13
Explaining the Law of Demand Common Sense
Explanation

• As the price falls, new buyers emerge and some
  current buyers buy more, resulting in a greater
  quantity demanded
• As the price rises, some current buyers either
  stop their purchases or reduce them, resulting in
  a smaller quantity demanded

14
Explaining the Law of Demand Diminishin Marginal
Utility

• As more is consumed, the additional to total
  utility or satisfaction obtained from consuming
  an extra unit declines and hence consumers will
  pay less for each additional unit (thus as price
  falls, quantity demanded increases)

15
Explaining the Law of Demand Income and
Substitution Effects

• As price falls, purchasing power rises and hence
  more can be bought (income effect)
• As price falls consumers will substitute this
  good for other goods (substitution effect)
• Overall, therefore as Price goes down quantity
  demanded increases due to both effects)
• The reverse holds for a rise in price