Principles of Economics

ECN30305
Lecture 2

1. Price Theory: Demand and Supply

DEMAND
 LECTURE 2
When you have completed your study of this chapter,
you will be able to

• Understand the relation between price and quantity

demanded

• Understand that there are non-price factors which

produce changes in demand

• Distinguish between a change in quantity demanded

and a change in demand
 Lecture 2 Demand
• Quantity demanded is the amount of a good,
service, or resource that people (consumers or
households) are willing and able to buy during
a specified period at a specified price.

• The quantity demanded is an amount per unit

of time.
For example, litres of milk per week, kilograms per
day or tons of steel per month

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 Demand
The Law of Demand
Other things remaining the same (ceteris paribus),
• If the price of the good rises, the quantity
demanded of that good decreases.

• If the price of the good falls, the quantity

demanded of that good increases.

Negative (inverse) relation between

price and quantity demanded

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 Demand
Demand Schedule and Demand Curve

Demand is explained by a demand schedule and

illustrated through means of a demand curve.

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 Demand
Demand schedule is a list of the quantities
demanded at each different price when all the other
influences on buying plans remain the same.
Demand curve is a graph of the relationship
between the quantity demanded of a good and its
price when all other influences on buying plans
remain the same.

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Demand Schedule Demand
The Law of Demand
Downward sloping curve
Other things remaining theNegative same, relationship between
• If the price of the good rises, theprice
quantityand quantity
demanded demanded
of that good
decreases.
Demand Curve
• If the price of the good falls, the quantity demanded of that good
increases.

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 Demand
Individual Demand and Market Demand
Market demand is the sum of the demands of all
the individual buyers in a market.
The market demand curve is the horizontal sum
of the demand curves of all buyers in the market.

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 Demand

Tina’s Tim’s Market

Demand Demand Demand

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 Demand schedule for Ice-cream
  Ahmad Chin Moony Market
6.50 1 0 2 3 
6.00 2 1 3 6 
5.50 3 2 4 9 
5.00 4 3 5 12 

What is the market demand for ice-cream if the price

is $6.00 per ice-cream?

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To re-cap, the important points so far:

The law of demand refers to the _________

relationship between ________ and ________

When price increases, quantity demanded __________

When price falls, quantity demanded __________

Thus, the law of demand indicates there only one factor

which affects quantity demanded i.e. price

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 Demand

Apart from price, what other factors

affect demand?

Non-Price Factors or Other

determinants of Demand

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 Demand
Changes in Demand
Change in demand is a change in the quantity
that people plan to buy when any influence other
than the price of the good changes.
A change in demand means that there is a new
demand schedule and a new demand curve.

Demand curve
shifts

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 Changes in Demand
Figure 4.3 shows
changes in demand.

1. When demand
decreases, the demand
curve shifts leftward
from D0 to D1.

2. When demand
increases, the demand
curve shifts rightward
from D0 to D2.
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 Changes in Demand
The main influences on buying plans that
change demand are
Substitutes &
• Prices of related goods Complements
• Expected future prices
• Income
• Number of buyers
• Preferences

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 Changes in Demand
Prices of Related Goods
A substitute is a good that can be consumed in
place of another good.
For example, apples and oranges are substitutes.

The demand for a good increases if the price of one

of its substitutes rises.

Change in
Change in
P2 quantity
demand
demanded as P
P1
price rises

Q2 Q1 Oranges Q1 Q2 Apples
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 Changes in Demand
A complement is a good that is consumed with another good.
For example, ice cream and chocolate fudge sauce are
complements.

The demand for a good increases if the price of one of its

complements falls.

Change in
P1 quantity Change in
demanded as demand
P
P2 price falls

Q1 Q2 Ice cream Q1 Q2 Fudge sauce

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 Demand
Expected Future Prices

A fall in the expected future price of a good decreases

current demand for that good.
For example, if the price of a computer is expected to
fall next month, the demand for computers today
decreases.

Change in
P demand

Q2 Q1 Computers

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 Changes in Demand
Income

A normal good is a good for which the demand increases if

income increases, vice versa.
An inferior good is a good for which the demand
decreases if income increases, vice versa.

E.g. income rises

Mazda vs Proton

P P

Q1 Q2 Normal goods Q2 Q1 Inferior Goods

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 Changes in Demand
Number of Buyers
The greater the number of buyers in a market, the larger is
the demand for any good.

Preferences
When preferences & tastes change, the demand for one
item increases and the demand for another item (or items)
decreases.
Preferences change when:
• People become better informed.
P
• New goods become available.

Q1 Q2 Wine
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 Demand
Change in Quantity Demanded
Versus
Change in Demand
Law of
• A change in the quantity demanded P1 Demand
is a change in the quantity of a good
P2
that people plan to buy that results from
a change in the price of the good.
Q1 Q2 Ice cream
• A change in demand is a change in
the quantity that people plan to buy
when any influence other than the P
price of the good changes.
Q1 Q2 Wine
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Demand – additional notes
Figure 4.4 illustrates and summarizes the distinction.

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 Change in Demand
The table below shows the weekly demand schedule for a popular
ice-cream
Price
Price per
per Ice
Ice Quantity
Quantity Quantity
cream
cream ($)
($) Demanded
Demanded Demanded 2
10.00 300 400
9.50 350 450
9.00 400 500
8.50 450 550
The company introduces a new flavour which proves very popular
with young kids and demand increases by 100 ice-creams for each
given price
What is the change in demand?
• Price of related good
• Income
• Expected Future Price
• No. of Buyers
• Preferences
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 NEXT: LECTURE 3

Price Theory: SUPPLY

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