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DEMAND
CHAPTER 2
Chapter 2 ::: DEMAND
DEFINITION OF DEMAND



The desire to buy goods & services with the ability to pay
The choice of the customer to buy certain goods & services & certain price level at a given time period
A relationship between the price of an item & the quantity demanded
CLASSIFICATION OF GOODS AND SERVICES
Economic goods
 2 types:
 Consumer goods/ final goods
- That yield satisfaction to the consumer
- Can be classified to:
i. Durable goods: cloth, radio
ii. Perishable gods: food, vegetables
 Capital goods
- Not intended to final use, but to produce other goods
- Eg: machinery, factories
Types of goods

Inferior goods/ giffen goods
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
Essential goods / necessity goods

Normal goods

Luxury goods
LAW OF DEMAND


An inverse relationship between quantity demanded & its price
Cateris paribus; when P , Qd & vice versa (P & Qd are negatively related)
The Individual & Market Demand
1) Individual Demand
The relationship between the total quantity of a product demanded by a single individual and its price
Demand Schedule – a list of the amount that a buyer is willing to buy at different prices at one particular
time
Demand Curve – a line curve on a graph showing the inverse relationship between the quantities demanded
of a product and its prices
2)
P of apple (RM)
Qd of apple (unit)
1
25
2
23
3
18
4
15
5
10
6
8
Market Demand
It is the horizontal summation of all the individual demand in the market at certain price level & certain time
period
The relationship between the total quantity of a product demanded by adding all the quantities demanded
by all consumers in the market and its price
Qd of apple (unit)
P of apple
(RM)
Indiv A
Indiv B
Indiv C
1
25
20
26
2
23
17
22
3
18
15
16
4
15
12
14
5
10
8
11
6
8
6
7
Market
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EXCEPTIONAL DEMAND
 The Law of Demand always holds for normal goods.
 Other type of goods may exhibit the opposite of what the law says.
 An exceptional demand curve can be regressive at higher prices(P ,Qd ) or regressive at lower prices(P ,Qd )
1) Luxury Goods
a) Regressive at higher prices
- An expensive good is perceived as having higher quality & show prestige.
- Status symbols goods are expensive goods that are generally bought by higher income consumers.
- Example of status of symbols are gold and diamond jewellery, expensive clothing, luxury cars, and other
goods that are symbols of wealth and opulence.
- Status symbols goods can evoke pride and symbolize the status of the owner.
- When the price of status symbol goods increase, the quantity demand will increase.
- When the price of status symbol goods increases, the higher income groups will purchase these goods as a
symbol of their wealth.
- When the prices decrease, there will be reduced demand among the higher income level as they considered
the goods to be affordable by the lower income levels. The goods are being cheaper goods.
- Other example: foreign exchange market and stock market  when the trading price of a stock suddenly
increase, the stock will be in demand because public expect the price of stock to increase further. Therefore
the public will buy more shares in hopes of accumulating higher profit.
b) Expectation
- If expect the P of shares to further, the DD for share
now
3) Giffen Goods
a) Regressive at lower prices
- Giffen good is an inferior good whose demand declines as real income rises due to the decrease in price.
- When the prices of inferior goods fall, the quantity demand will also fall.
- This is because when the price of inferior goods falls, the real income of this consumer will rise. Therefore,
consumer will purchase higher quality goods.
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DEMAND
b) Expectation
- If expect the P of shares to
further, the DD for share
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now
CHANGES IN QUANTITY DEMANDED VS CHANGE IN DEMAND

-
Change in Qd
Movement along the demand curve eg: point A B or C B
Occurs when price of a good changes but everything else remains the same eg: P1 P2 or P2 P3
Point B A = contraction (means decrease in Qd as price increase)
Point B C = expansion (means increase in Qd as price decreases)

-
Change in DD
Shift in the demand curve eg: point D0 D1
Occurs when price of good remain constant but changes in other non price factors such as population, income, price
of related goods.
Shift from D0 D1  increase in DD
Shift from D1 D0  decrease in demand
-
FACTORS WHICH INFLUENCE DEMAND / DETERMINANTS OF DEMAND
1)
The price of related goods
a) Substitute goods
- A good is a good that can be replacing or substitutes the function of another good.
- An increase in the price of one good can cause an increase in the demand for its substitute.
- i.e margarine and butter, palm oil and corn oil or coffee and tea.
- eg: If the P Coke , Qd Pepsi (positively related)
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b) Complementary goods
- Complimentary goods are goods that are used together with other goods to complete the function of an object.
- An increase in the price of one good will result in a decrease in the demand for its complimentary good.
- i.e camera and film or car and petrol
- eg: If the P car , Qd petrol (negatively related)
2)
Income
- The income of a household will determine consumer’s purchasing power and consumer’s spending patterns
- When consumer’s purchasing power increase, the demand for goods will increase respectively.
- The effect of income on the demand of goods is determined by the types of goods like normal goods and inferior
goods.
- When a consumer’s income increases, the consumers will increase their expenditure. This means that although
there are no changes in the price of goods, the quantity demand for goods will increase respectively with the
increase in income. (vice versa)
a) Normal goods
- There is a positive relationship between consumer’s income and the quantity demand for normal goods.
- If income , DD for normal goods
b) Inferior goods
- Inferior goods or giffen goods are normally of poor quantity and they constitute a large part of the poor man’s
expenditure.
- There is an inverse relationship between consumer’s income and quantity demand for inferior goods.
- If income , DD for inferior goods
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3) Taste & preference
- Taste is the preference of a household for a particular good. Taste change over time and is influenced by latest
trends in fashions, health awareness, the influence of advertising, and sales promotions.
- If a good is in fashion or to a consumer’s taste, there will be a higher demand and lead shift to the right.
- However, when consumers do not like a good, demand for the good will be lower and shift to the left.
- Eg: nowadays, the taste for skinny jeans is being more favorable than boot cut jeans.
4) Size of population
- The number of occupants in an area will also affect demand. When the population of an area increases, the
general demand for goods will increase and shift right.
- Increase in total population, DD for goods & services will be greater.
- eg: increase in population in Segamat, DD for houses & bus services will be increase.
5) Expectation about future prices (speculation)
- if consumer believe that the price of a good will rise in a future, consumers will buy more of that good. This will
cause an increased for the good. (vice versa)
- The higher the expected future price of a good, today’s demand for the good will be larger
- eg: If price of petrol will next week, DD for petrol today will
6) Government policies
- Government policies can influence demand through taxation and subsidies.
- When the government increase taxation rates on imported goods, there will be a reduced demand for imported
goods due to the increased in prices. (vice versa)
- When the government subsidizes the production of a good, the demand for the good will increase. This is because
the prices of the good will decrease due to the subsidy.
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7) Advertisements
- Advertising in electronic and print media can attract customers to purchase goods such as energy drinks and
camera phones.
- Advertised goods normally have higher DD because of awareness - advertisement will attract people about the
goods & services
8) Festive seasons & climate
- During festive seasons, different product will be demanded & higher DD for that particular products.
- i.e monsoon season, festivals season, and school seasons.
- Eg: during festivals, the demand for food, clothing and transparent will increase n shift to right.
INTER- RELATED DEMAND
1) Joint Demand
- It applies to the demands for complementary goods.
- The effect of change in the price for complementary goods is –ve.
- eg: toothbrush & toothpaste, pen & ink, cars & petrol P pen , Q ink
2) Competitive Demand
- It applies to the demands for substitute goods.
- The effect of change in the price for substitute goods is +ve.
- eg: butter & margarine,Pepsi Cola & Coca Cola,Toyota car & Proton Wira P Toyota , Q Wira
3) Derived Demand
- When the DD of good increases, the DD of the factor of production/input to produce the goods will also increase
- eg: DD for houses , DD for bricks, cement, tiles
4) Composite Demand
- Refers to multipurpose products
- eg:rubber is used to make shoes, tyres, ball etc
ELASTICITY OF DEMAND
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

Has same meaning as sensitivity/ responsiveness
Can be used to quantify the response in one variable when another variable changes
3 types of elasticity:
1) Price elasticity (єp)
2) Income elasticity (єy)
3) Cross elasticity (єx)
1) Price elasticity (єp)
- Def: To measure the responsiveness of quantity demanded due to the change in its own price
- Formula:
єp = % ∆ Qd
%∆P
=
%change in Qd
%change in price
= Q1 – Q0 X P0
Q0
P1 – P0
Where:
Q1=new quantity
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Q0=original quantity
P1=new price
P0=original price
Degree
Elastic
Description
Value of coefficient
Slope of DD curve
%∆Qd>%∆P
1< єp <∞
Inelastic
%∆Qd<%∆P
0< єp <1
Unitary Elastic
%∆Qd=%∆P
єp =1
Perfectly
Elastic
Any increase in P will cause
the Qd to be 0.
P is fixed
єp = ∞
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Perfectly Inelastic
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Any change in P will not
change the Qd.
Qd is fixed
єp = 0
Determinants of Price Elasticity of Demand
1) Availability of substitutes
- DD is more elastic when more substitutes for the product are available
- eg: soft drink has many substitutes - elastic DD (Pepsi Cola, Coca Cola, Mirinda, Sprite etc)
- Necessity good such as rice (less substitutes) has an inelastic demand
2)
Relative importance of the good in the budget
- DD is more elastic when the item takes a more significant portion of the consumer’s budget
- eg: cars – the purchase of a car takes a large amount of our income, therefore a small increase in the prices of
cars will have a very large effect on the demand for cars
- Some goods (small fraction of the income) such as pencil, chewing gum, salt is inelastic
3)
The importance of the goods
- The demand for necessity goods is inelastic- eg: DD for rice is elastic  because it is important to us (if there is a
great increase in price for rice, the DD will not change very much)
4)
Time dimension
- Short run the elasticity of DD is inelastic
- Long run  DD more elastic/responsive because consumers can make adjustments to their DD & have time to find
other substitutes
5)
Income level
- Higher income  inelastic DD because being richer they are less sensitive to price changes
- Lower income  more elastic
6)
Habits
- DD is inelastic when the item is consumed habitually
- eg: smokers need to smoke no matter how expensive cigarettes are
2) Income elasticity (єy)
- Def: To measure the responsiveness of quantity demanded due to the change in income
- Formula:
єy = % ∆ Qd = %change in Qd
%∆Y
%change in income
=
Q 1 – Q0 X
Y0
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Q0
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Y1 – Y0
Where: Q1= new quantity
Q0= original quantity
Y1= new income
Y0= original income
Types of good
Value of
Coeficient
Positive
ЄY>1
Luxury goods
(antique furniture)
Positive
ЄY≤1
Normal goods
(cloth, shoes)
Zero
ЄY=0
Necessity goods
(rice, fish)
Negative
Inferior goods
(low grade rice)
Type
Description
Y
, big
Y
,small
Y
in Qd
in Qd
, no change
in Qd
Y
, Qd
3) Cross elasticity (єx)
- Def: To measure the responsiveness of quantity demanded due to the change in the prices of other goods
- Formula:
єPQ = % ∆QQ
% ∆PP
=
%change in Qd of good Q
%change in P of good P
= QQ1-QQ0 X
QQ0
PP0
PP1-PP0
Where: QQ1=new quantity of good Q
QQ0=original quantity of good Q
PP1=new price of good P
PP0=original price of good P
Relationship between goods
Value of Coefficient
Relationship
Positive
Substitute
Negative
Complementary
Description
Py
,Qy
; Qx
Py
,Qy
;Qx
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Zero
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Py
,Qy ;
No change inQx
Not related
Price elasticity and total revenue


TR = P X Q
Whether TR / as the price increases depends on the elasticity of demand
Effect to TR
Coefficient
of elasticity
Terminology
Description
Єd>1
Elastic demand
%∆Qd>%∆P
Єd=1
Unitary
Elasticity of
demand
%∆Qd=%∆P
Inelastic demand
%∆Qd<%∆P
Єd<1
(P
P
P
TR
TR
X Qd
)
(P
TR
X Qd
)
TR
(P
X Qd
TR
)
(P
X Qd
)
(P
(P
X Qd
TR
X Qd
)
)
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