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Chapter-3 (Part One) : Demand and Supply: Theory

This chapter discusses demand and supply theories separately and together. It defines demand as the quantity of a good consumers are willing and able to purchase at different prices. The law of demand states that quantity demanded decreases as price rises for two reasons: substitution effects and diminishing marginal utility. Individual demand refers to consumer demand while market demand is the total demand for a good from all consumers. A change in quantity demanded refers to a movement along a fixed demand curve from a change in price, while a change in demand is a shift of the demand curve from changes in non-price factors like income, tastes, prices of related goods, population, and expectations of future prices.

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67 views

Chapter-3 (Part One) : Demand and Supply: Theory

This chapter discusses demand and supply theories separately and together. It defines demand as the quantity of a good consumers are willing and able to purchase at different prices. The law of demand states that quantity demanded decreases as price rises for two reasons: substitution effects and diminishing marginal utility. Individual demand refers to consumer demand while market demand is the total demand for a good from all consumers. A change in quantity demanded refers to a movement along a fixed demand curve from a change in price, while a change in demand is a shift of the demand curve from changes in non-price factors like income, tastes, prices of related goods, population, and expectations of future prices.

Uploaded by

Musharrof Shishir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Chapter-3(Part one)

Demand and supply: Theory

In this chapter, we will discuss about


theories related to demand and supply
separately and lastly we will discuss
demand and supply together.
What is Demand?
Why Does Quantity Demanded Go Down as Price Goes Up?
The law of demand states that price and quantity demanded are inversely related. This
much you know. But you do know why quantity demanded moves in the opposite
direction of price? We identify two reasons. The first reason is that people substitute
lower priced goods for higher priced goods.

The second reason for the inverse relationship between price and quantity demanded
has to do with the law of diminishing marginal utility, which states that for a given time
period, the marginal (additional) utility or satisfaction gained by consuming equal
successive units of a good will decline as the amount consumed increases. For
example, you may receive more utility or satisfaction from eating your first hamburger
at lunch than from eating your second and, if you continue, more utility from your
second hamburger than from your third. What does this have to do with the law of
demand? Economists state that the more
Individual demand and Market demand
Change in Quantity demanded Change in Demand
• It refers to the movement on • It refers to the shift in
the demand curve demand curve
• In this case only price change, • In this case, price constant,
other things remaining other things changes.
constant.
• In this case due to change in
• Due to change in price,
other things like income,
quantity demanded increase
or decrease. As a result
preferences , either demand
movement has occurred on increase or decrease. As a
the demand curve. From A to result demand curve shift to
B or B to A. the right or left.
Change in Quantity demanded versus change in demand

Change in Quantity demanded Change in demand


What Factors Cause the Demand Curve to Shift?
• Income: Income can affect our demand.
Suppose, Income=Y
Quantity demanded of good x=Dx
X is a normal good: If income ↑ then DX ↑
If income ↓ then DX ↓

Y is an inferior good: If income ↑ then Dy ↓


If income ↓ then Dy ↑

Normal Good: A good the demand for which rises (falls) as income rises (falls).
Inferior Good :A good the demand for which falls (rises) as income rises (falls)
Neutral Good: A good the demand for which does not change as income rises or falls.
Determinants of demand
• PREFERENCES People’s preferences affect the amount of a
good they are willing to buy at a particular price. A change in
preferences in favor of a good shifts the demand curve rightward.
A change in preferences away from the good shifts the demand
curve leftward. For example, if people begin to favor Elmore
Leonard novels to a greater degree than previously, the demand
for Elmore Leonard novels increases, and the demand curve
shifts rightward.
• PRICES OF RELATED GOODS :
1. Substitutes goods: Two goods that satisfy similar needs or desires.
If two goods are substitutes, the demand for one rises as the price
of the other rises (or the demand for one falls as the price of the
other falls)
Complements Two goods that are used jointly in consumption. If two goods
are complements, the demand for one rises as the price of the other falls (or
the demand for one falls as the price of the other rises)
The demand for a good in a particular market area is related to the
number of buyers in the area: more buyers, higher demand; fewer
buyers, lower demand. The number of buyers may increase owing to a
higher birthrate, increased immigration, the migration of people from
one region of the country to another, and so on. The number of buyers
may decrease owing to a higher death rate, war, the migration of people
from one region of the country to another, and so on.
EXPECTATIONS OF FUTURE PRICE Buyers who expect the price of
a good to be higher next month may buy the good now—thus increasing
the current (or present) demand for the good. Buyers who expect the
price of a good to be lower next month may wait until next month to buy
the good—thus decreasing the current (or present) demand for the good.
For example, suppose you are planning to buy a house. One day, you
hear that house prices are expected to go down in a few months.
Consequently, you decide to delay your purchase of a house for a few
months. Alternatively, if you hear that prices are expected to rise in a few
months, you might go ahead and purchase a house now

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