Law of Demand

Law of Demand M.Y.
Gondal
MARKET
“Market is a geographically defined area where buyers and sellers interact to determine the
price of a product or a set of products”.
“A group of buyer and seller of particular goods and services”
Geographic boundaries
Gold: Lahore vs. Karachi
Housing: Islamabad vs. Rawalpindi
Range of Products
Clothe: Baby clothes, male clothes, & female clothes
Vehicle: bicycle, motor bike, Car
COMPETITIVE MARKETS
Competitive markets in which there are large number of buyers and sellers so that no
individual buyer or seller can huge influence the price.
Example: agricultural markets
PERFECTLY COMPETITIVE MARKET:

To reach this highest form of competition, a market must have two characteristics:
1- All goods exactly the same
2- Buyers & sellers so numerous that no one can affect market price – each is a
“price taker”
Example: There is no actual perfectly competitive market in the real world, a number
of approximations exist: Stock Market, Fish Market
NON- COMPETITIVE MARKET / MONOPOLY

Not all goods and services, however, are sold in perfectly competitive markets. Some markets
have only one seller, and this seller sets the price. Such a seller is called a monopoly.
Example: local cable television, WAPDA
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Law of Demand M.Y.Gondal
LAW OF DEMAND
Demand
Demand is the quantity of a good or service that consumers are willing and able to buy at a
given price in a given time period.
The Law of Demand

The Law of Demand states that when the price of a good rises, the quantity of the good
demanded will fall but everything else remains the same.
In short, ↑P → ↓Qd
Illustration 1
Price of Ice-cream cone Quantity of cones demanded
$0.00 12 Cones
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0
Demand curve
Demand curve, in economics, a graphic representation of the relationship between product
price and the quantity of the product demanded.
 Price on the Y axis
 Quantity demanded on X axis.
 The demand curve is delineated as sloping downward from left to right
Illustration 1 (Above Table)

DEMAND FUNCTION:
A demand function is an equational representation of demand as a function of its many determinants.
Qd = f (P, T, Ps, Pi, Y, FP, NB)

Where,
T = Tastes
The most obvious determinant of your demand is your tastes. If you like ice cream, you buy more of
it. Economists normally do not try to explain people’s tastes because tastes are based on psychological
forces that are beyond the realm of economics. Economists do, however, examine what happens when
tastes change.
Ps= Prices of substitute goods

Suppose that the price of frozen yogurt falls. The law of demand says that you will buy more frozen
yogurt. At the same time, you will probably buy less ice cream. Because ice cream and frozen yogurt
are both cold, sweet, creamy desserts, they satisfy similar desires. When a fall in the price of one good
reduces the demand for another good, the two goods are called substitutes. Substitutes are often pairs
of goods that are used in place of each other, such as hot dogs and hamburgers, sweaters and
sweatshirts, and movie tickets and DVD rentals.
Pi= Prices of complimentary goods

Now suppose that the price of hot fudge falls. According to the law of demand, you will buy more hot
fudge. Yet in this case, you will buy more ice cream as well because ice cream and hot fudge are often
used together. When a fall in the price of one good raises the demand for another good, the two goods
are called complements. Complements are often pairs of goods that are used together, such as gasoline
and automobiles, computers and software, and peanut butter and jelly.
Y = Income
What would happen to your demand for ice cream if you lost your job one summer? Most likely, it
would fall. A lower income means that you have less to spend in total, so you would have to spend
less on some—and probably most—goods. If the demand for a good falls when income falls, the good
is called a normal good.
Not all goods are normal goods. If the demand for a good rises when income falls, the good is called
an inferior good. An example of an inferior good might be bus rides. As your income falls, you are
less likely to buy a car or take a cab and more likely to ride a bus.
FP = Future prices
Your expectations about the future may affect your demand for a good or service today. If you expect
to earn a higher income next month, you may choose to save less now and spend more of your current
income buying ice cream. If you expect the price of ice cream to fall tomorrow, you may be less
willing to buy an ice-cream cone at today’s price.
NB = Number of Buyers
Number of Buyers In addition to the preceding factors, which influence the behavior of individual
buyers, market demand depends on the number of these buyers. If Peter were to join Catherine and
Nicholas as another consumer of ice cream, the quantity demanded in the market would be higher at
every price, and market demand would increase.

SHIFTS IN THE DEMAND CURVE:
Shifts in the demand curve plotted are caused by changes in any determinant of demand other than the
price of the good itself. Movements along the curve correspond to the changes in the variable on the
vertical axis.
FACTORS SHIFTING DEMAND CURVE:

Factors Changing Demand Effect on Demand Direction of Shift in Demand Curve
Increase in taste and preference Increase Rightward
for good
Decrease in taste and preference Decrease Leftward
for good
Increase in price of Substitute Increase Rightward
Decrease in price of Substitute Decrease Leftward
Increase in price of complement Decrease Leftward
Decrease in price of complement Increase Rightward
Increase in income (normal good) Increase Rightward
Decrease in income(normal good) Decrease Leftward
Increase in income (inferior good) Decrease Leftward
Decrease in income(inferior good) Increase Rightward
Increase in future price expected Increase Rightward
Decrease in future price expected Decrease Leftward
Increase in number of Consumers Increase Rightward
Decrease in number of Decrease Leftward

Consumers

MARKET DEMAND CURVE
Market demand curve is a graphic representation of a market demand which shows the quantities of a
commodity that consumers are willing and able to purchase during a period of time at various
alternative prices, while holding constant everything else that effects demand. The market demand
curve for a commodity is negatively sloped, indicating that more of a commodity is purchased at a
lower price.

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Law of Demand M.Y.

PERFECTLY COMPETITIVE MARKET:

NON- COMPETITIVE MARKET / MONOPOLY

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The Law of Demand

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Qd = f (P, T, Ps, Pi, Y, FP, NB)

Ps= Prices of substitute goods

Pi= Prices of complimentary goods

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FACTORS SHIFTING DEMAND CURVE:

Decrease in price of Substitute Decrease Leftward

Increase in price of complement Decrease Leftward

Decrease in price of complement Increase Rightward

Increase in income (normal good) Increase Rightward

Decrease in income(normal good) Decrease Leftward

Increase in income (inferior good) Decrease Leftward

Decrease in income(inferior good) Increase Rightward

Increase in future price expected Increase Rightward

Decrease in future price expected Decrease Leftward

Increase in number of Consumers Increase Rightward

Decrease in number of Decrease Leftward

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