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1. Price Theory (Part 1) -
Demand
Principles of Economics (ECN30205)

2. A Quick Reminder
• Recall that most countries practice the capitalistic or free
market system these days.
• In this system, buyers and sellers are free to buy & sell
goods with each other.
Free Market
Businesses sell
Goods & Services
Consumers decide
what to buy &
at what price

3. A Quick Reminder
• For example, the restaurants at Lakeside campus are
sellers and the people who work and study there are
the buyers.
Sellers Buyers

4. Buyer Demand
• In this topic, we’ll learn how buyers decide when
buying goods and services, and other factors that
influence their decisions.
• In other words, we’ll look at market demand or
buyer demand.

5. The Individual Demand Curve

6. The Individual Demand Curve
• Imagine that you have received a $2000 cash gift
from your parents for your 18th birthday. Being a pet
lover, you have decided to spend all your money to
buy puppies.

7. The Individual Demand Curve
• Question: Given your $2000, how many puppies
could you buy at the following prices below?
Price
Quantity
demanded
$150 ??
$500 ??
$1000 ??

8. The Individual Demand Curve
• If you have to plot the table earlier on a graph, what
would it look like?
Price, $
??
0 Quantity

9. The Individual Demand Curve
• The downward sloping line is the main characteristic
of the individual (and also market) demand curve.
Price, $
Quantity
0
d
d

10. The Individual Demand Curve
• And this brings us to the law of demand - which
states that as the price of a product increases, the
quantity demanded will become lower, and vice
versa.

11. The Individual Demand Curve
• The demand curve only explains the relationship
between price of a product and its quantity of
demand.
• It assumes that everything else that can affect
demand for a product - such as income, taste, etc. - is
ceteris paribus (or constant).

12. The Individual Demand Curve
• So why do we buy less when the price is higher?
• Reason 1: the price of a product is an obstacle.
• This means a higher price makes the product less
affordable to us and therefore harder to obtain. As a
result, demand is less.

13. The Individual Demand Curve
• Reason 2: Opportunity costs.
• When we decide to buy a product, we give up the
benefits (i.e. opportunity cost) obtainable from an
alternative product.
• If the product we bought is expensive, then we have
chosen to give up more benefits from the alternative
product (since we could, instead, have used the
money to buy more of the alternative products).

14. The Individual Demand Curve
• Reason 2: Opportunity costs.
• As a result, people will demand less when a product
is expensive because they know they must give up
lots of benefits from the alternative products (if they
decided to buy the expensive product), and vice
versa.

15. The Individual Demand Curve
• Example: The price of a Big Mac is $9 but the price of
Char Keow Teow is $3 each.
• Each Big Mac has a high opportunity cost (i.e. you must
give up 3 CKTs). Therefore, people demand less Big Macs
since people must give up 3 CKTs just to get one.
If purchase
Opportunity
cost

16. The Individual Demand Curve
• In contrast, if the price of Big Mac is cheaper, say $3,
then its opportunity cost is also lower (assuming CKTs are
still $3 each):
• This will motivate people to demand more Big Macs
(since you give up fewer CKTs to obtain them)
If purchase
Opportunity cost

17. The Individual Demand Curve
• Quick Recap Questions:
– What is the law of demand?
– How does the demand curve look like?
– Why do we buy less when the product becomes
more expensive? Provide 2 explanations.

18. The Market Demand Curve

19. The Market Demand Curve
• Since each buyer follow the law of demand (i.e. buy
less when goods are expensive and vice versa),
therefore the market demand curve (for all buyers)
must also be downward-sloping.

20. The Market Demand Curve
• For example, if a market has a total of 3 buyers,
then the total demand can be computed and
subsequently plotted on a graph.
Price You Lisa Jamal Total
$20 20 22 40 82
$30 13 15 30 58
$45 8 7 22 37
=
=
=

21. The Market Demand Curve
• The market demand curve:
Price, $
Quantity
$45
37
$20
820
d
d

22. The Market Demand Curve
• Economists who research a market often can formulate a
demand equation for that market’s product.
• For example: the demand equation for textbooks in a
campus may be expressed as:
Qd (per year) = 20000 – 100 p
where,
Qd is quantity demanded
P is the price of the product

23. The Market Demand Curve
• So at $100, the quantity of textbooks demanded per year
will be:
= 20000 – 100 ($100)
= 20000 – 10000
= 10000 copies
• At a higher price of $150, the quantity demanded per
year :
= 20000 – 100 ($150)
= 20000 – 15000
= 5000 copies

24. The Market Demand Curve
• Therefore the market demand curve for textbooks
is as follows:
d
d
Price $
Quantity
150
100
5000 10000

25. The Market Demand Curve
• Review Exercise:
– The demand equation for blueberries in USJ city is
expressed as Qd (in Kg per week) = 34000 – 1750
(p).
– Prepare a table to show how Qd changes as prices
rise from $8 to $12 (use $1 intervals). Then draw
the demand curve.

26. Other Factors (besides Price)
that Affect Demand

27. Factors that Affect Demand
• So far, the demand curves only indicate the
relationship between price and quantity demanded.
• However, there are other forces that also can affect
demand:
– Buyers’ income
– Number of buyers in the market
– Consumer taste or popularity
– Prices of related goods
– Expectations

28. Factors that Affect Demand
• The 1st Factor: Buyers’ Income
– Households with higher income can buy more
goods and services.
– For example, a higher monthly allowances would
increase your consumption of food,
entertainment, etc.

29. Factors that Affect Demand
• The 1st Factor: Buyers’ Income
– Of course, a fall in income would have an opposite
effect.
– These goods and services, whose demand changes
directly with the rise and fall income, are called
normal goods.
– Can you name 2 more examples of normal goods?

30. Factors that Affect Demand
• The 1st Factor: Income
– On the other hand, there are goods whose
demand falls as income rises and vice versa. They
are called inferior goods.
– For example, as a person’s income rises, her
demand for a bus service would decrease (as she
decides to buy a car instead).

31. Factors that Affect Demand
• 2nd Factor: Number of buyers
– A rise in number of buyers would increase the
number of goods demanded and vice versa.
– For example, the population growth over time has
steadily increase the demands on various goods
and services.

32. Factors that Affect Demand
• 3rd Factor: Consumer Tastes or Popularity
– Consumers’ tastes in a particular good or services
change over time.
– For example, the demand for tablet PC is very high
presently due to its strong popularity.

33. Factors that Affect Demand
• 3rd Factor: Consumer Tastes or Popularity
– Conversely, a product which is “out of fashion” will
see its demand fall.
– Example: Consumers changing perception about
eating healthful foods have seen demand for fast
food decreased.

34. Factors that Affect Demand
• 4th Factor: Price of Related Goods
– The demand for a product can also rise or fall due
to changes in price of other goods.
– There are 2 types of related goods:
• Substitute goods
• Complementary goods

35. Factors that Affect Demand
• 4th Factor: Price of Related Goods
– Substitute goods – goods that can replace one
another.
– Example: When beef increases in price, people will
switch over to chicken and thereby increase its
demand, even though the price of chicken didn’t
change.
Price $$ Demand

36. Factors that Affect Demand
• 4th Factor: Price of Related Goods
• Complementary goods - goods that are used
together with another product.
• Examples include petrol and car; French fries
and ketchup; gun and bullets.

37. Factors that Affect Demand
• 4th Factor: Price of Related Goods
• Because these goods are used together,
therefore if the price of one product goes up, it
will reduce the demand of both products, and
vice versa.
• For example, the price of cars has increased,
therefore the demand for both cars and petrol
reduces.

38. Factors that Affect Demand
• 4th Factor: Price of Related Goods
• Why? When the price of cars increase, the
demand for cars decreases (as per the law of
demand).
• With fewer cars demanded/purchased by
buyers, less petrol will be consumed as well,
since fewer number of cars on the road leads to
lower petrol consumption.

39. Factors that Affect Demand
• 5th Factor: Expectations
– Changes in consumers’ expectation about the
future can affect a product’s demand.
– Example: if people think that the price of gasoline
will go up soon, they may demand more gasoline
now to avoid paying a higher price in the future.

40. Factors that Affect Demand
• 5th Factor: Expectations
– Another example: A person who has just received
a job promotion may decide to buy a new car now
even though he doesn’t receive his pay raise until
end of the month.

41. Movements & Shifts
of Demand Curve

42. Movements & Shifts
of Demand Curve
• Now that we have looked at the factors (other than
price) that can affect demand, we want to know next
how these factors can affect the demand curve.
Price, $
`
Quantity
0
d
d

43. Movements & Shifts
of Demand Curve
• First some terms: if the demand quantity changes as
a result of changes in price, then this is known as “a
movement” along the demand curve (see graph
below):
$45
$20
37 820
Price $
Quantity
d
d

44. Movements & Shifts
of Demand Curve
• On the other hand, a change in the factors (other
than price) is represented by “a shift” in the demand
curve i.e. from “d” to “d1”.
Price $
Quantity
0
d
d
d1
d1

45. Movements & Shifts
of Demand Curve
• Going back to the example on puppies, what if you
receive another $1000 from an uncle (on top of the
$2000 cash gift)?
• Obviously the number of puppies that you can buy have
increased!
Puppies
Prices
Original
Demand
New Demand
(w/ Uncle’s $)
$150 13 20
$500 4 6
$1000 2 3

46. Movements & Shifts
of Demand Curve
• In this case, the increase in demand for puppies due
to the extra cash gift lead to a rightward shift of the
demand curve.
Price $
Quantity
0
d
d
d1
d1

47. Movements & Shifts
of Demand Curve
• The shift in the demand curve represents an overall
increase in demand, and it is not affected by price
changes.
d
d
d1
d1
Price $
Quantity
$500
4 6

48. Movements & Shifts
of Demand Curve
• But what if your total cash gift was only $1000? How
would that be represented on the graph?
Price $
Quantity
0
??

49. Movements & Shifts
of Demand Curve
• Obviously a decrease in cash gift would have an
opposite effect i.e. a leftward shift.
Price $
Quantity0
d
d
d1
d1

50. Movements & Shifts
of Demand Curve
• A few quiz questions:
– Show the shifts in the demand curve(s) for:
• Fast food as it is becoming unpopular with
consumers.
• Chicken as the price of lamb increases.
• Steak sold at Ali’s Steakhouse as residents
surrounding his restaurant has moved elsewhere.
• Bullets as prices of gun decreases.

51. Movements & Shifts
of Demand Curve
• A few quiz questions:
– Draw the shifts in demand curve(s) for:
• Cheap/budget clothes when the income of city
dwellers have increased.
• Michael Jackson CDs as it is expected to sell out
soon.
• Ogawa massage chairs as the income of
Malaysian’s have increased.
• Diapers as the number of babies given birth this
year is more than last year.

52. Summary
• The Individual and Market Demand Curve
• Factors that Affect Demand (other than Price)
– Income
– Preference or Consumer Tastes
– Prices of Related Goods
– Number of Buyers
– Expectations
• Shifts and Movements in the Demand Curve.