Demand

Learning Objectives:

• What is Demand?

• What determines the slope of the demand curve?

• What forces are behind the shifts in the demand curve?

• What is a demand function?

• What is the price elasticity of demand?

Definition of Market Demand

• Individual demand for a good is the quantity demanded of that good by an individual consumer at different prices, all other things being unchanged.

• Market demand for a good is the sum total of all the individual demand for that particular good.

• Demand curve traces the quantities of a good being demanded by all the consumers in an economy at different prices, all other things being unchanged.

Change in Quantity Demanded vs. Change in Demand

• Change in quantity demanded of a good is a movement along the demand curve following a change in the price of that good.

• Change in demand for a good is a shift of the demand curve following a change in any factor influencing the demand other than price of that good.

Factors Shifting the Demand Curve

• Income

• Price of substitutes/complements

• Consumers’ tastes

• Consumers’ expectations

• Population

Change in Income

• Demand for a (normal) good rises if income of consumers rises in general

Change in the Price of Substitutes/Complements

• Demand for a good rises if price of its complements falls.

• Demand for a good rises if price of its substitutes rises.

Change in Consumers’ Tastes

• A change in consumers’ taste in the favor of a good will lead to a rise in the demand for that good.

• Example: Stubble is cool now. Pity the razor companies.

• Example: Ebola themed toys selling like hot cakes, supplies nished

Change in Consumers’ Expectations

• If there is a favorable change in consumers’ expectation about future market conditions, then the demand for a good will rise.

Change in Population

• With a rising population, there are more people to buy a good, and this will increase the demand for that good.

• Composition of the population will also influence demand.

Demand Function

• The demand function for a good gives us the different quantities of the good that will be demanded at different price levels of that good, and different levels of all other factors affecting the demand for that particular good.

• Linear demand function:

Price Elasticity of Demand

• Price elasticity of demand gives us the percentage change in quantity demanded of a good following a one percent change in price of that good.

• Example: How to Get People to Pitch In

• Example: StarHub: English Premier League, 2008