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Advanced Subsidiary Economics

Markets: Theory of Demand(Lesson 04)

Dr Taimur RM Sharif

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Content:

Demand Concept of and Factors influencing demand Movements along and shifts in demand curve

Learning objectives:

At the end of the lesson students should:

Understand the underlying features of demand and supply

Appreciate the difference between movements along and shifts inthe demand and supply curves

Explain the real life examples through graphical presentations

Teaching method:

Student activity and mind mapping Power point Use of tables and graphs

Case studies

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Theory of Demand

Demand- the quantity of a good or service thatconsumers are willing and able to buy at a

given price in a given time period.

Market demand - the sum of the individual

demand for a product from each consumer inthe market. If more people enter the market,demand at each price level will rise.

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Theory of Demand

The Demand Curve

A demand curve shows the relationshipbetween the price of an item and the quantity

demanded over a period of time. For normalgoods , more of a product will be demanded asthe market price falls.

There are two reasons why, for a normal good,more is demanded as price falls:

the income effect

the substitution effect

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0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Price

(pence

perkg)

Price

(pence per kg)

20

Market demand

(tonnes 000s)

700A

Point

A

Market demand for potatoes (monthly)

Demand

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0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Price

(pence

perkg)

Price

(pence per kg)

20

40

60

80

100

Market demand

(tonnes 000s)

700

500

350

200

100

A

B

C

D

E

Point

A

B

C

D

E

Demand

Market demand for potatoes (monthly)

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Theory of Demand

Effective Demand and Willingness to Pay

Demand in economics must be effective. Onlywhen a consumers' desire to buy a product is

backed up by an ability to pay for it do wespeak of demand.

For example, many people would be willing to

buy a luxury sports car, but their demand wouldnot be effective if they did not have the financialmeans to do so. They must have sufficientpurchasing power.

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Theory of Demand

Latent Demand

Latent demand exists when there is willingnessto purchase a good or service, but where the

consumer lacks the purchasing power to beable to afford the product.

Latent demand is affected by advertising

where the producer is seeking to influenceconsumer tastes and preferences.

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Theory of Demand

Derived Demand

The demand for a product X might be stronglylinked to the demand for a related product Y

giving rise to the idea of a derived demand.For example, the major producer of steel in theUK is Corus. They produce for a wide range ofdifferent industries; from agriculture, aerospace

and construction industries to consumer goodsproducers, packing and the transport sector.

If the UK economy goes into a downturn orrecession, so we would expect the demand forsteel to decline likewise.

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Derived Demand

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Theory of Demand

The Law of Demand

There is an inverse relationship between the

price of a good and demand.

As prices fall, we see an expansion of demand

If price rises, there should be a contraction ofdemand.

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Theory of Demand

The Income Effect:

There is an income effect when the price of a

good falls because the consumer can maintaincurrent consumption for less expenditure

Provided that the good is normal, some of the

resulting increase in real income is used byconsumers to buy more of this product.

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Theory of Demand

The Substitution Effect:

There is also a substitution effect when the price

of a good falls because the product is nowrelatively cheaper than an alternative item andso some consumers switch their spending fromthe good in competitive demand to this product.

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