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Welcome to the Presentation

Microeconomics
Course Code: 2304

MD Abdullah Al Noman
Lecturer , DBA, BAIUST Bangladesh Army International University of Science and Technology
 CONSTITUENTS OF THE PRESENTATION

• Demand
• Law of Demand
• Factors affecting Demand
• Demand function
• Supply
• Law of Supply
• Factors affecting Supply
• Supply function
 Demand

In ordinary speech, the word demand is often confused with desire. Desire is the wish to have
something or to enjoy a service. But demand implies more than mere desire. It means that the
person is willing and able to pay for the object he desire. In economics, demand refers to the
quantity of a good or service that consumers are willing and able to purchase at various
prices over a given period of time.

A beggar’s desire to travel by air from Delhi to Bombay has no signifies as he cannot pay for
it. On the other hand, a businessman’s desire to go to Bombay by air is demand, as he is able
to pay for it and is willing to do so. Demand thus means desire backed by willingness and
ability to pay.

Both willingness and ability to pay are essential. If a man is willing to pay
but he is unable to pay, his desire will not become demand. In the same
manner, if he is able to pay but is not willing to pay, his desire will not be
changed into effective demand. In order to change desire into demand, it
is essential that he should be both willing and able to pay.
 Law of Demand

The law of demand states that, all else being equal, there is an inverse relationship
between the price of a good or service and the quantity demanded by consumers. As the
price of a good rises, the quantity demanded tends to decrease; conversely, as the price
falls, the quantity demanded generally increases.
 Factors affecting Demand

These factors include:

[Link] of the Good or Service: The primary factor, as dictated by the law of demand, is that an
increase in price generally decreases quantity demanded, and a decrease in price increases it,
assuming other factors remain constant.

[Link] Income: Higher income levels tend to increase demand for goods and services, as
people have more purchasing power. Conversely, a drop in income typically reduces demand.
Normal goods see increased demand with rising income, while demand for inferior goods may
decrease.

[Link] of Related Goods: Demand can be influenced by the prices of complementary goods
(goods that are often used together) and substitute goods (goods that can replace one another):

1. Complements: If the price of a complementary good decreases, demand for the related
good might increase. For instance, if the price of coffee falls, demand for sugar (a
complement) may rise.

2. Substitutes: If the price of a substitute good increases, demand for the original good may
rise, as consumers switch to the more affordable option.
 Factors affecting Demand

4. Consumer Preferences and Tastes: Changes in trends, fashions, or consumer preferences can
increase or decrease demand for particular goods. Marketing, cultural influences, and public
perceptions often play roles in shaping preferences.

5. Expectations of Future Prices and Income: If consumers expect prices to rise in the future,
they may buy more now, increasing current demand. Likewise, if they expect a rise in income, they
might increase current spending.

6. Number of Buyers in the Market: An increase in the population or in the number of consumers
for a good will generally increase demand, while a decrease will reduce it.

7. Seasonal Factors: Certain goods experience demand fluctuations based on seasons or weather.
For instance, the demand for winter clothing spikes during colder months.

Each of these factors can cause shifts in the demand curve, either increasing or decreasing demand
independently of the good’s own price.
 Demand Schedule

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.
 Changes in Demand vs Changes in Quantity Demand

1. Change in Quantity Demanded

A change in quantity demanded refers to a movement along the demand curve due to a change in
the price of the good or service itself.

When the price decreases, the quantity demanded increases, and when the price increases, the
quantity demanded decreases, following the law of demand.

This is represented as a movement from one point to another on the same demand curve. For
example, if the price of coffee drops from $5 to $3, the quantity demanded might increase from
100 to 150 cups per day.
 Changes in Demand vs Changes in Quantity Demand

2. Change in Demand

A change in demand, on the other hand, refers to a shift of the entire demand curve, either to the
right (increase in demand) or to the left (decrease in demand).

This shift occurs when factors other than the price of the good itself change, such as:
• Consumer income
• Prices of related goods (complements and substitutes)
• Consumer preferences
• Future expectations about prices or income
• Changes in the number of buyers
 Changes in Demand vs Changes in Quantity Demand

For example, if there’s an increase in consumer income, people might be willing to buy more
coffee at all price levels, shifting the demand curve to the right.

In summary:

•A change in quantity demanded is a response to a price change for that specific good, resulting in
movement along the demand curve.
•A change in demand is a shift of the entire curve due to factors other than the good’s own price.
 Demand function

A demand function represents the relationship between the quantity of a good

demanded and the factors affecting it, primarily price. It provides a mathematical
framework to describe consumer behavior in response to changes in these factors.

The general form of a demand function is:

=f (P,I, , , T, E,N)

Where:
​: Quantity demanded of the good.
P: Price of the good.
I: Consumer income.
​: Prices of substitutes
​: Prices of compliments
T: Consumer tastes and preferences.
E: Consumer expectations about future prices.
N: Number of consumers in the market.
 Demand function

Simplified Linear Demand Function

=a−bp
Where:
a: intercept
b: Slope of the demand curve, representing the rate at which demand changes as price
changes.
P: Price of the good.

For example, if =100−2P

At P=10, =100−2(10)=80
Exceptions to the Law of Demand

• Giffen Goods is a concept that was introduced by Sir Robert Giffen. The
unique characteristic of Giffen goods is that as its price increases, the
demand also increases.
• A Giffen good, a concept commonly used in economics, refers to a good
that people consume more as the price rises. Therefore, a Giffen good
shows an upward-sloping demand curve and violates the fundamental
law of demand.
• Giffen goods are basic, low-quality essential goods. When price rises,
people get poorer in real terms. Since they can’t afford better
substitutes, they cut back on expensive food and buy more of the cheap
staple, even at the higher price.
Exceptions to the Law of Demand
• Potatoes: As one example of a Giffen good, think of the surging price
and demand for this root vegetable during the Irish potato famine in
the mid-1800s. Given the fact there were few substitutes available at
the time, the inflated price of potatoes didn’t prevent Irish citizens
from demanding more the root vegetable to feed themselves and
their families.
• People would buy up as much as possible because they were unsure if
greater shortages were on the horizon.
• The second exception to the law of demand is the concept of Veblen goods.
Veblen Goods is a concept that is named after the economist Thorstein
Veblen. Veblen goods are mostly luxury, status-symbol items—like perfumes
and certain cars—that see their demand climb as their prices rise.
• According to Veblen, there are certain goods that become more valuable as
their price increases. If a product is expensive, then its value and utility are
perceived to be more, and hence the demand for that product increases.
• And this happens mostly with precious metals and stones such as gold and
diamonds and luxury cars such as Rolls-Royce. As the price of these goods
increases, their demand also increases because these products then become
a status symbol.
Exceptions to the Law of Demand
• Another exception to the law of demand is necessary or basic goods.
People will continue to buy necessities such as medicines or basic
staples such as sugar or salt even if the price increases.
• Sometimes the demand for a product may change according to the
change in income. If a household’s income increases, they may
purchase more products irrespective of the increase in their price,
thereby increasing the demand for the product. Similarly, they might
postpone buying a product even if its price reduces if their income
has reduced.
Exceptions to the Law of Demand
• Bandwagon Effect: This is the most common type of exception to the
law of demand wherein the consumer tries to purchase those
commodities which are bought by his friends, relatives or neighbors.
Here, the person tries to emulate the buying behavior and patterns of
the group to which he belongs irrespective of the price of the
commodity.
• For example, if the majority of group members have smart phones
then the consumer will also demand for the smartphone even if the
prices are high.