Lecture 4
Principles of Microeconomics: ECO 101
The Demand Side of the Market
Sumaiya Nabi Khan
The Demand Side of the Market
There is a definite relationship between the market price of a good and the quantity
demanded of that good, other thing held constant.
This relationship between price and quantity bought is called the demand schedule, or
demand curve.
The Demand Schedule
A demand schedule is a tabular presentation that shows how much of a good or service
consumers will want to buy at different prices.
At each market price,
consumers will want to
buy a certain quantity of
Cornflakes.
As the price of
cornflakes falls, the
quantity of cornflakes
demanded will rise.
The Demand Curve
The graphical
6
representation of the
Price of Cornflakes (dollar per box)
5 A demand schedule is the
4 B
demand curve.
3 C A demand curve can be
2 D obtained by plotting a
demand schedule.
1 E
0
8 10 12 14 16 18 20 22
Quantity of Cornflakes (million of boxes)
The Demand Curve
The demand curve DD´
6
illustrates that the quantity
Price of Cornflakes (dollar per box)
5 A and price are inversely
related: if P goes up Q goes
4 B
down.
3 C
The curve slopes
2 D
downward , going from
1 E northwest to southeast.
0
8 10 12 14 16 18 20 22
.
Quantity of Cornflakes (million of boxes)
The Law of Downward-sloping demand
The negative slope of the demand curve illustrates the law of downward sloping
demand
The Law of Downward-sloping demand
When the price of a commodity is raised (and other things are held constant), buyer
tend to buy less of the commodity, that is, quantity demanded decreases. Similarly,
when the price lowered, other things being constant, quantity demanded increases.
Reasons: Downward-Sloping Demand
Substitution Effect
It becomes relatively more
Price of one good rises expensive than it’s
substitute goods
Quantity demand People start to The substitute goods
of the good falls consume more becomes relatively
substitute goods cheaper
Reasons: Downward-Sloping Demand
Income Effect
Price of one good rises Consumer is paying more
money for one good
The consumer has less
money available to buy
Quantity demand
the same amount of the
of the good falls Real income falls
good
Market Demand
The fundamental building block for demand is individual preferences.
The market demand represents the sum total of all individual demands. The
market demand is what is observable in the real world.
The market demand curve is found by adding together the quantities de-
manded by all individuals at each price.
Shifts in Demand
When there are changes in factors other than a good’s own price which af-
fect the quantity purchased, we call these changes shifts in demand.
Demand increases when the quantity demanded at each price increases.
Demand decreases when the quantity demanded at each price decreases.
Forces Behind the Demand Curve
1. Average Income
2. Size of the market
3. Prices of Related Goods
4. Taste and preferences
5. Special Influences
Shifts in Demand Curve
As income rises, people increases car purchases.
A growth in population increases car purchases.
Lower gasoline prices raise the demand for cars.
Having a new car becomes a status symbol.
Special influences include availability
of alternative forms of transportation,
safety of automobiles, expectations of
future price increases.
Demand Function
Demand function states the relationship between demand for a product
(dependent variable) and its determinants (the independent variable).
Demand function for a linear demand curve can be stated as:
P = Price, QD = Quantity demanded
QD a bP At price zero, that is when P=0, consumer will
buy a unit. That is, QD = a.
Finally, b denotes the quantity demanded change
because of price change.
The quantity demanded increases by b units for
every $1 price falls.