1. DEMAND
Micro Economics

2. Objectives
Enabling the students to learn about
 Fundamentals of demand and supply.
 Define demand with the help of demand
curve.
 The movement along the demand curve
 the shifts of the demand curve.
 Determinants of Demand

3. Recap: Answer first!!!
 Economic problem
 Scarcity
 Differentiate micro & macro
 Positive & normative economics
 Opportunity cost
 3 big questions
 Factors of production
 Trade off
 Model building
 PPF

4. Objectives of the day
By the end of this lecture you will be able to
 Define demand curve
 Draw your own & market demand curve
 Analyze the movement along demand curve
 Predict when & why to shift to another
demand curve
 Elaborate ceteris paribus/determinants of
demand

5. Markets
 A market is a group of buyers and
sellers of a particular good or service.
 The terms supply and demand refer to
the behavior of people . . . as they
interact with one another in markets.
 And Economics, especially
Microeconomics is about how supply
and demand interact in markets.

6. Market Types
 Goods Market
 Money Market
 Labour Market
 Capital market

7. Goods Market: The markets in which goods
and services are exchanged.
Money Markets: The money market is a
component of the financial markets for
assets involved in short-term borrowing and
lending with original maturities of one year
or shorter time frames. Trading in the
money markets involves Treasury bills ,
commercial paper, bankers' acceptances.

8. labor market :The input/factor market
in which households supply work for
wages to firms that demand labor.
capital market: The input/factor
market in which households supply
their savings, for interest or for
claims to future profits, to firms that
demand funds to buy capital goods.

9. Consumer
 Consumer is a
broad label for any
individuals or
households that use
goods and services
generated within the
economy.

10. Demand
 Economists record
demand on a demand
schedule and plot it
on a graph as a
demand curve that is
usually downward
sloping.
 The downward slope
reflects the
relationship between
price and quantity
demanded: as price
decreases, quantity
demanded increases.

11. Demand
 Derive Demand
 Joint Demand

12. Utility
 In economics, utility is a measure of relative
satisfaction. Given this measure, one may
speak meaningfully of increasing or
decreasing utility, and thereby explain
economic behavior in terms of attempts to
increase one's utility.

13. Firms and Households: The Basic Decision-Making Units
 A firm is an organization that transforms
resources (inputs) into products (outputs).
Firms are the primary producing units in a
market economy.
 An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm,
taking a new idea or a new product and turning
it into a successful business.
 Households are the consuming units in an
economy.

14. Demand in Markets
• The price of the product in question.
• The income available to the
household.
• A household’s decision about the quantity
of a particular output to demand depends
on:

15. Demand in Product/Output
Markets
• The household’s amount of
accumulated wealth.
• The prices of other products
(substitutes and complements)
available to the household.
• A household’s decision about the
quantity of a particular output to
demand depends on:

16. Demand in Product/Output Markets
• The household’s tastes and
preferences.
• The household’s expectations
about future income, wealth,
and prices.
• A household’s decision about the
quantity of a particular output to
demand depends on:

17. Demand in Product/Output Markets
 Quantity demanded is the amount
(number of units) of a product that a
household would buy in a given time
period if it could buy all it wanted at
the current market price.

18. Price and Quantity Demand: The Law of Demand
 A demand schedule
is a table showing
how much of a given
product a household
would be willing to
buy at different
prices.
 Demand curves are
usually derived from
demand schedules.
PRICE
(PER CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
$ 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS

19. Price and Quantity Demanded: The Law of Demand
 The demand curve is
a graph illustrating
how much of a given
product a household
would be willing to
buy at different
prices.
PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
$ 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS

20. Activity
Think about any product that you
wanted to purchase these days.
Make your table, showing increase or
decrease in prices and then make
your demand curve.

21. Why does the Demand Curve Slope Downward?
 Law of Demand
 Inverse relationship between price and quantity.
 Law of Diminishing Marginal Utility.
 Utility is the extra satisfaction that one receives
from consuming a product.
 Marginal means extra.
 Diminishing means decreasing.

22. Price and Quantity Demanded: The Law of Demand
 The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity
of a good demanded
and its price.
• This means that
demand curves slope
downward.

23. From Household Demand to Market Demand
 Assuming there are only two households in
the market, market demand is derived as
follows:

24. Activity
Take any product and make 3 demand curves of
separate households ,now make one market
demand curve for them.

25. Determinants of Demand
 Market price
 Consumer income
 Tastes
 Expectations
 Number of buyers and sellers
 Substitutes
 Complements

26. Other Determinants of Household Demand
 Normal Goods are goods for which demand
goes up when income is higher and for
which demand goes down when income is
lower.
 Inferior Goods are goods for which demand
falls when income rises.

27. Other Determinants of Household Demand
 Substitutes are goods that can serve
as replacements for one another;
when the price of one increases,
demand for the other goes up.

28. Other Determinants of Household Demand
 Complements are goods that “go
together”; a decrease in the price
of one results in an increase in
demand for the other, and vice
versa.

29. Shift of Demand Versus Movement Along a Demand
Curve
• Changes in determinants of
demand, other than price,
cause a change in demand,
or a shift of the entire
demand curve, from DA to DB.

30. A Change in Demand Versus a Change in Quantity Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded
(Movement along the curve).
Change in income, preferences, or
prices of other goods or services
leads to
Change in demand
(Shift of curve).

31. The Impact of a Change in Income
• Higher income
decreases the demand
for an inferior good
• Higher income
increases the demand
for a normal good

32. The Impact of a Change in the Price of Related Goods
• Price of hamburger rises
• Demand for
complement
good
(ketchup)
shifts left
• Demand for
substitute
good
(chicken)
shifts right
• Quantity of hamburger
demanded per month falls

33. Change in Quantity Demanded
versus Change in Demand
Change in Demand
 A shift in the demand curve, either to the
left or right. Caused by a change in a
determinant other than the price.
 Extension in demand
 Contraction in demand

34. Changes in Quantity Demanded
0
D1
Price of
Cigarettes
per Pack
Number of Cigarettes
Smoked per Day
A tax that raises the
price of cigarettes
results in a movement
along the demand
curve.
A
C
20
2.00
$4.00
12

35. Consumer Income
Normal Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Increase
in demand
An increase
in income...
D1
D2

36. Consumer Income
Inferior Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Decrease
in demand
An increase
in income...
D1D2

37. What effect each of the following will have on the
demand curve for the product B? If
 product B becomes more fashionable
 The price of substitute product falls
 A decline in income if B is an inferior good
 Consumers anticipate the price of B will be
lower in the near future
 The price of complementary good D falls
 Foreign tariff barriers on B are eliminated

38. Answer please!!!
 Explain law of demand.
 Why does demand curve slope downward?
 What are the determinants of demand?
 What happens to the demand curve when any
of these determinants change? Explain by
making curves.
 Distinguish between change in demand and
change in quantity demand explain through
diagrams.
 Show extension & contraction of demand on
curve.