Demand and its
determinants
Demand
Demand is:
–Willingness
–ability
–and desire of buyers to purchase a good or service
–at a particular price
–at a particular time.
Demand curve is a relationship between price and quantity, with all other
factors remaining constant.
Demand curve is represented graphically as a downward sloping curve with
price on the vertical axis and quantity on the horizontal axis
Demand
Law of Demand:
States that there is an inverse relationship
between price and quantity.
This means that the higher is the price level
the lower will be the quantity demanded
and, conversely, the lower the price the
higher will be the quantity demanded.
• Market demand is the sum of the demands
of all individuals within the marketplace.
Demand Schedule
Data Point Price ($) Quantity Demanded
A 5 0
B 4 1
C 3 2
E 2 3
F 1 4
G 0 5
Demand Curve
A The demand curve slopes downward
Price ($’s)
5 because price and quantity demanded
B are inversely related.
4
C
3
2 E
1 F Demand
G
0
1 2 3 4 5
Quantity
5
Exceptions to law of Demand
• Luxuries
• Giffen / Inferior goods
• Multiple uses of product
• Ignorance
Determinants of Demand
• Price of the Commodity, Px
• Income of Individual, Y
• Price of related good, Pr
• Advertisement Expenditure, A
• Taste and Preference of individuals, T
• Future expected Price, Pf
• Demonstration effect, Dr
• Credit facility, Cr
• Target Population, Pp
Dx= f(Px, Y, Pr, A, T, Pf, Dr, Cr, Pp)
Changes in Demand vs. Changes in
Quantity Demanded
Shift in Demand versus Movement along the Curve
A change in the price of a good causes a change in
the quantity demanded, but does not shift demand
Movement along the curve
A price change would
change the quantity
demanded which
involves movement
along the demand
curve.
Movement along the curve
Due to change in Price of
the commodity
Shift in the Curve
Movement along
Price ($’s)
the demand curve.
Decrease
Increase
Demand
Quantity
Factors causing Shift in Demand
Tastes and Preferences
Substitutes and Complements
Income
Population
Price Expectations
** all factors except price
Changes in Demand - Decrease
Demand
DemandShifts
ShiftsLEFT
LEFT
Price
When:
When:
Prices
Pricesofofsubstitutes
substitutesdecrease
decrease
Prices
Pricesofofcomplements
complements
increase
increase
Income
Incomedecreases
decreases
Population
Populationdecreases
decreases D1
Tastes
Tastes&&preferences
preferencesturn
turn D2
against
againstthe
theproduct
product
Quantity
13
Changes in Demand - Increase
Demand
Demand Shifts
Shifts RIGHT
RIGHT When:
When:
Price
Prices
Prices of
of substitutes
substitutes increase
increase
Prices
Prices of
of complements
complements
decrease
decrease
Income
Income increases
increases
Population
Population increases
increases
D2 Tastes
Tastes && preferences
preferences turn
turn in
in
D1 favor
favor of
of the
the product
product
Quantity
