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Introduction and Overview

This document discusses the theory of demand. It defines key concepts such as firms, entrepreneurs, households, and input and output markets. It then explains what demand is, including the factors that influence demand like price, income, tastes, population, and price expectations. It describes the law of demand, demand schedules, demand curves, and how a change in price leads to movement along the demand curve while other factors can shift the entire demand curve. Finally, it discusses different types of demand such as direct vs. derived demand and individual vs. market demand.

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39 views30 pages

Introduction and Overview

This document discusses the theory of demand. It defines key concepts such as firms, entrepreneurs, households, and input and output markets. It then explains what demand is, including the factors that influence demand like price, income, tastes, population, and price expectations. It describes the law of demand, demand schedules, demand curves, and how a change in price leads to movement along the demand curve while other factors can shift the entire demand curve. Finally, it discusses different types of demand such as direct vs. derived demand and individual vs. market demand.

Uploaded by

ghosh7171
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DEMAND ANALYSIS

THEORY OF
“DEMAND”
THE BASIC DECISION-MAKING UNITS

• A firm is an organization that transforms resources (inputs)


into products (outputs). Firms are the primary producing units
in a market economy.

• An entrepreneur is a person who organizes, manages, and


assumes the risks of a firm, taking a new idea or a new product
and turning it into a successful business.

• Households are the consuming units in an economy.


INPUT MARKETS AND OUTPUT MARKETS

• Output, or product, markets are


the markets in which goods and
services are exchanged.

• Input markets are the markets in


which resources—labor, capital, and
land—used to produce products, are
exchanged.
• Payments flow in the opposite
direction as the physical flow of
resources, goods, and services
(counterclockwise).
What is Demand ?

4
If necessity is the mother of
invention, then demand is the
mother of production.
DEMAND
NEED WANT
WHAT IS DEMAND?

The quantity of a product consumers are

willing and able to buy at different prices in a

specified time period.


CONCEPT OF EFFECTIVE DEMAND

Want Demand
LAW OF DEMAND

 Fundamental characteristic of demand:

All else equal (Ceteris paribus), as the price


falls, the quantity demanded rises, and as
price rises, the quantity demanded falls.

 Negative relationship between price and


quantity demanded  Law of Demand
DEMAND CURVE SLOPES DOWNWARDS
 The law of demand states
that there is a negative, or
inverse, relationship between
price and the quantity of a
good demanded and its price.

• This means that demand

curves slope downward.


DEMAND SCHEDULE
 It shows the price and output relationship.
 Tabular representation of price and demand.
DEMAND CURVE
 The geometrical representation of demand
schedule is called the demand curve.
DEMAND FUNCTION

The conditions of demand for a product in a market can be


summarized as follows:
D = f (Pn, Pn…Pn-1, Y, T, P, E)
Where:
Pn = Price of the good itself
Pn…Pn-1 = Prices of other goods – e.g. prices of Substitutes and
Complements
Y = Consumer incomes – including both the level and distribution
of income
T = Tastes and preferences of consumers
P = The level and age-structure of the population
E = Price expectations of consumers for future time periods
SHIFT OF DEMAND VERSUS MOVEMENT ALONG A DEMAND CURVE

• A change in demand is not the


same as a change in quantity
demanded.

• In this example, a higher price


causes lower quantity demanded.

• Changes in determinants of
demand, other than price, cause a
change in demand, or a shift of the
entire demand curve, from DA to DB.
CHANGE IN QUANTITY DEMANDED

• When demand shifts to the


right, demand increases. This
causes quantity demanded to
be greater than it was prior to
the shift, for each and every
price level.
A Change in Demand Versus a Change in Quantity Demanded

To summarize:

Change in price of a good or service


leads to

Change in quantity demanded


(Movement along the curve).

Change in income, preferences, or


prices of other goods or services
leads to

Change in demand
(Shift of curve).
TYPES OF DEMAND
Types of Demand
-Direct and derived demands

-Individual and market demand

-Recurring and replacement

-Complementary and competing


Direct demand refers to demand for goods meant
for final consumption; it is the demand for
consumers’ goods like food items, readymade
garments and houses. By contrast, derived
demand refers to demand for goods which are
needed for further production; it is the demand
for producers’ goods like industrial raw materials,
machine tools and equipments.
Thus the demand for an input or what is called a factor of

production is a derived demand; its demand depends on

the demand for output where the input enters. In fact,

the quantity of demand for the final output as well as the

degree of substitutability/complementary between inputs

would determine the derived demand for a given input.


INDIVIDUAL

MARKET

PRIMARY SELECTIVE

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