Demand

The term "demand" in economics refers to the desire for a good or Example:
service backed by the ability and willingness to pay for it. It's not
just the desire or want for something, but the desire combined with  Cars: The demand for cars is independent. People buy cars
purchasing power. because they need or want a vehicle, and their decision is not
influenced by the demand for any other product.
In other words, for something to be considered "demand," it must be  If the demand for cars increases, it doesn't depend on any
a desire that is accompanied by the financial means to fulfill it. If other product's demand.
someone wants a product but cannot afford it, it doesn't count as
demand in economic terms. 2. Derived Demand
So, "effective desire" becomes "demand" when it is both a want and Definition: Derived demand is the demand for a good or service that
a purchasing decision supported by the ability to pay for the product comes from the demand for another product. This type of demand is
or service. secondary, meaning it exists because people need something else.

Example:

The formula Demand = 1/Price means that as the price of  Wood for Furniture: The demand for wood is derived from
something goes down, the demand for it goes up, and when the the demand for furniture. When people want more furniture,
price goes up, the demand goes down. they need more wood. So, the demand for wood "derives"
from the demand for furniture.
So, the relationship between price and demand is inversely  Similarly, the demand for steel is derived from the demand
proportional. Lower price → higher demand. Higher price → lower for cars and buildings.
demand.
3. Joint Demand

Definition: Joint demand refers to the demand for two or more

1. Independent Demand products that are used together. The demand for one product leads to
the demand for the other product, and they are typically consumed
Definition: Independent demand refers to the demand for goods or together.
services that is not dependent on the demand for other products. It
stands alone, meaning that the demand for this product is based on
its own factors, like consumer preferences, income, etc.
Demand

Example:

 Printers and Ink: If people buy printers, they will also need Summary of Key Points:
ink cartridges. The demand for ink is directly linked to the
demand for printers, so they are in joint demand. 1. Independent Demand: Demand for a good that is not
 Another example: Smartphones and Phone Cases. If the influenced by other goods (e.g., cars).
demand for smartphones goes up, the demand for phone 2. Derived Demand: Demand that comes from the need for
cases also increases because they are used together. another good (e.g., wood for furniture).
3. Joint Demand: Products that are used together, and their
4. Cross Demand demand is linked (e.g., printers and ink).
4. Cross Demand: The relationship between the demand for
Definition: Cross demand refers to the demand for one product in one product and the price of another (e.g., substitutes like
relation to the price change of another product. It shows how the Coke and Pepsi, or complements like coffee and sugar).
demand for one good is affected by the price of another good. Cross
demand can be either complementary or substitute. What is Cost?
 Complementary goods: These are goods that are often used Cost in economics refers to the amount of resources (usually money)
together. A rise in the price of one good reduces the demand spent on producing goods or services. It is the expense incurred in
for both. producing and supplying a product or service.
 Substitute goods: These are goods that can replace each
other. If the price of one good rises, the demand for its Now, let’s go through the types of costs you mentioned:
substitute rises.

Example:
1. Monitory Cost (or Monetary Cost)
 Complementary Goods: The demand for coffee is related to
the price of sugar. If the price of sugar rises, the demand for Definition: Monitory cost is the actual out-of-pocket expenses, or
coffee may go down because people typically use both the money spent on the production of goods or services. It includes
together. all the direct financial expenditures, like payments for raw materials,
 Substitute Goods: The demand for Coke could be affected wages, utilities, and rent.
by the price of Pepsi. If the price of Pepsi increases, people
may buy more Coke, as they are substitutes for each other. Example:
Demand

 If a company manufactures shoes, its monetary cost would 3. Average Cost

include the cost of raw materials (leather, rubber), wages for
workers, machinery maintenance, electricity bills, and rent Definition: Average cost is the total cost of production divided by
for the factory. the number of units produced. It helps to determine the cost per unit
produced. The formula is:
In simple terms, it's the cash or money that a company directly pays
to run its business.

2. Real Cost Example:

Definition: Real cost refers to the actual total cost of production,  If a company spends $1000 to produce 100 shoes, the
which includes not just monetary costs but also the opportunity costs average cost per shoe is:
associated with using resources in a particular way. It is the total
cost, including both out-of-pocket expenses (monetary costs) and
the sacrifice of the next best alternative.

Example:
Average cost tells you how much, on average, it costs to produce
 Suppose you use land to build a factory, but you could have one unit of a product.
used that land to build a shopping mall that would have made
a higher return. The real cost includes the monetary costs of
building the factory and also the lost opportunity of not
building the mall. 4. Marginal Cost
 The real cost of producing shoes would include both the
direct monetary cost of making them and the missed profits Definition: Marginal cost is the additional cost incurred when
from choosing to use the resources (money, land, labor) for producing one more unit of output. It measures how much cost
shoes instead of something else. increases as production increases by one unit. The formula is:
Demand

 In business, if a company spends resources on manufacturing

product A, the opportunity cost is the profit it could have
earned if it had used those resources to produce product B
instead.

Opportunity cost helps businesses and individuals understand the

Example: true cost of their choices by considering what they are giving up
when they decide to allocate resources to a particular activity.
 If producing 10 shoes costs $100 and producing 11 shoes
costs $110, the marginal cost of producing the 11th shoe is:

Fixed Cost

Definition: Fixed costs are the costs that do not change with the
level of output or production. These costs remain constant regardless
Marginal cost helps businesses understand the cost of producing one of how much or how little a company produces. They are typically
additional unit and guides decisions on increasing production. incurred even if the business produces nothing.

Example:

5. Opportunity Cost  Rent: If a company rents a factory for $1,000 per month, that
cost stays the same whether the factory produces 100 units or
Definition: Opportunity cost is the value of the next best alternative 1,000 units of goods.
that is forgone when making a decision. It’s the cost of missing out  Salaries: The wages of permanent employees, such as
on the next best option when resources are used for one choice. managers, are fixed costs. These salaries do not change
based on the production levels.
Example:
In short, fixed costs are constant and don't vary with production
 Suppose you have $100 and can either spend it on a concert levels.
ticket or buy a new jacket. If you choose the concert ticket,
the opportunity cost is the jacket you could have bought
with that $100.
Demand

Variable Cost

Definition: Variable costs are costs that change in direct proportion 1. Complementary Goods
to the level of production. As production increases, variable costs
rise, and as production decreases, variable costs fall. These costs Definition: Complementary goods are products that are often used
depend on how much the business produces or sells. together. When the demand for one product increases, the demand
for its complement also increases. These goods are in joint demand,
Example: meaning they work together to fulfill a need or want.

 Raw Materials: The cost of raw materials, like fabric for Example:
clothing, increases as more clothes are made.
 Direct Labor: Wages paid to workers who are directly  Cars and Fuel: If the demand for cars increases, the demand
involved in production (e.g., factory workers) are variable for fuel will also increase because cars need fuel to run.
costs because if more units are produced, more labor may be  Printers and Ink Cartridges: A rise in the demand for
required. printers will lead to an increase in the demand for ink
 Utilities: If production increases and more machines are cartridges, as they are used together.
used, the cost of electricity or gas used in the factory will
rise. Key Point: The relationship between complementary goods is such
that an increase in the price or demand for one good will lead to an
In simple terms, variable costs vary with production. increase in the demand for its complement.

What are Goods? 2. Substitute Goods

In economics, goods refer to tangible items that satisfy human wants Definition: Substitute goods are goods that can replace each other.
or needs. They are physical products that can be touched, used, and If the price of one good rises, people may choose to buy a substitute
consumed. Goods can be classified into different types based on instead. These goods satisfy similar needs, so an increase in the
their characteristics and how they relate to other goods in terms of price of one can lead to an increase in the demand for its substitute.
demand.
Example:
Now, let's break down the different types of goods in detail:
Demand

 Coke and Pepsi: If the price of Coke increases, many 4. Luxury Goods
consumers might switch to Pepsi, which serves the same
purpose (a soft drink). Definition: Luxury goods are goods that have high demand as
 Tea and Coffee: If the price of tea rises, people may start incomes rise, and they are generally associated with higher prices.
drinking more coffee instead, as both are common beverages These goods are considered desirable and offer status or prestige to
consumed to satisfy similar needs. the consumer.

Key Point: Substitutes are goods that can replace each other, and Example:
their demand is inversely related to the price of the other.
 High-End Watches (like Rolex): People with higher
incomes tend to purchase luxury watches, as these items
signify wealth and status.
3. Inferior Goods  Designer Clothing: As income levels rise, people may
purchase luxury clothing brands that offer exclusive designs
Definition: Inferior goods are goods whose demand decreases as and premium materials.
consumers' incomes rise. These are typically lower-quality or less
expensive alternatives to more expensive goods, and when people Key Point: Luxury goods are expensive, non-essential goods that
have more income, they switch to better substitutes. people buy when their incomes increase, often for status or prestige.

Example:

 Instant Noodles: When people's incomes rise, they might 5. Important Goods
prefer fresh or more expensive meals over instant noodles,
reducing the demand for them. Definition: Important goods are essential goods that people need
 Public Transport: As incomes rise, individuals may prefer regularly and are necessary for daily living. These goods have
to buy private cars instead of using public transportation. consistent demand and are generally not highly sensitive to income
changes.
Key Point: Inferior goods are lower-quality goods that people
consume more when their income is low and less when their income Example:
increases.
Demand

 Bread and Rice: These are basic food items that people rely Key Point: Giffen goods are a special case of inferior goods where
on regularly. No matter the income level, they remain in a rise in price leads to a rise in demand, usually due to the lack of
demand because they are essential to daily living. better alternatives in poor economic conditions.
 Medicines: Essential medicines are another example of
important goods that people will buy regardless of economic
conditions because they are necessary for health.
Summary of Key Goods:
Key Point: Important goods are necessities that people consume
regularly and cannot easily do without. 1. Complementary Goods: Goods used together, like cars and
fuel.
2. Substitute Goods: Goods that can replace each other, like
Coke and Pepsi.
6. Giffen Goods 3. Inferior Goods: Goods whose demand decreases with an
increase in income, like instant noodles.
Definition: Giffen goods are a unique type of inferior good that defy 4. Luxury Goods: High-status, expensive goods that people
the basic law of demand. In the case of Giffen goods, when the price buy when their income rises, like Rolex watches.
of the good increases, the demand for it actually increases, contrary 5. Important Goods: Essential goods necessary for daily life,
to typical demand behavior. like bread and rice.
6. Giffen Goods: Inferior goods that defy the law of demand,
Example: where higher prices lead to higher demand, like rice in some
poor regions.
 Staple Foods in Poor Areas (e.g., Rice or Bread): In some
poor regions, if the price of rice rises, people may buy more
rice instead of other, more expensive foods. This happens
because rice is a staple, and with higher prices, people cut What is Elasticity?
back on buying more expensive alternatives, increasing their
consumption of rice. In economics, elasticity refers to the measure of how much the
 Potatoes in Ireland during the Potato Famine: When the quantity demanded or supplied of a good or service responds to
price of potatoes rose, people in Ireland consumed more changes in price or other factors. It helps to understand the
potatoes as they could no longer afford to buy other more sensitivity of demand or supply to price changes or other variables.
expensive food.
Demand

The formula you mentioned:

Where:

 ΔD% is the percentage change in demand.

 ΔP% is the percentage change in price.

Price Elasticity of Demand (PED)

This measures how much the quantity demanded of a good changes

when the price changes. It’s the most common form of elasticity and
helps businesses understand how a price change will impact their
sales.

 Elastic Demand: If the elasticity is greater than 1, demand is

considered elastic. This means that consumers are highly
responsive to price changes, and a small price change leads
to a large change in the quantity demanded.
 Inelastic Demand: If the elasticity is less than 1, demand is
considered inelastic. This means that consumers are less Types of Elasticity
responsive to price changes, and a large price change will
only result in a small change in the quantity demanded.
1. Elastic Demand (Elasticity > 1): The percentage change in
 Unitary Elastic Demand: If the elasticity equals 1, the
demand is greater than the percentage change in price. For
demand is unitary elastic. A price change results in an equal
example, if the price increases by 10%, the quantity
proportionate change in quantity demanded.
demanded may decrease by more than 10%.

Example: Luxury goods, such as designer clothes, where

demand drops significantly when prices rise.
Demand

2. Inelastic Demand (Elasticity < 1): The percentage change in

demand is smaller than the percentage change in price. Even
if prices increase significantly, the demand for such products
doesn't change much.

Example: Necessities, such as basic food items (e.g., bread),

where people still buy nearly the same amount regardless of
small price changes.

3. Unitary Elastic Demand (Elasticity = 1): The percentage

change in demand is exactly equal to the percentage change
in price. If the price changes by 10%, the demand changes by
10% in the opposite direction.

Example: A perfectly balanced situation, often theoretical,

where the elasticity equals 1.