THEORY OF D E M A N D

⚫ Definition of Demand: The ability and willingness of

buyers to buy specific quantities of goods in a given
period of time at a particular price.

DEMAND = WILLINGNESS TO BUY + ABILITY TO BUY

(consumer MUST have money to BUY the product)

WITHOUT the ability to buy the product, it is only known

as DESIRE, WANT, and WISH.
Assumptions :
1. taste and preferences of consumers remain unchanged.
2. consumers’ income remain the same
3. price of related goods (complement or substitutes) should
remain unchanged.
4. goods should not have any prestige value.

Hence, based on law of demand, a negative(inverse)

relationship exists between price & quantity demanded.

P ↑ Qd ↓
P ↓ Qd ↑
• Goods are things that are tangible or non-
tangible. They are used to satisfy society’s
wants.

• Tangible goods are such as drinks, clothes, car,

etc.

• Non-tangible goods refers to air and sunshine

• Services cannot be grouped as goods

because it does not exist physically.
• Free goods : Goods or services that do not have
any production cost at all (zero production cost).
Examples: air, rain water, etc.

• Public goods: Goods or services which benefit the

entire community, whether or not individuals desire
to purchase the public goods.
Examples: radio station, school, hospital, road, etc.

• Economic goods: Goods or services which the supply

is limited and require cost in obtaining them.
Examples: car, reference books, etc.
• Economic goods: Created from scarce resources,
thereby these goods have opportunity cost, are
limited in supply, and are scarce in relation to
demand. These goods involve price & opportunity
price.

• Types of economic goods are as follows :

 Capital goods- used as inputs to produce other
goods. E.g. printing machines to produce books
& magazines.
 Intermediate/ Medium goods – use as inputs to
produce final goods. These goods need to further
processed before it can be used by consumers.
 Consumer/ Final/ Finished goods – Good which
are produced by various activity levels in the
economy & used to satisfy the needs and wants of
the society. These goods are divided into :
 Durable goods – televisions, motorcycles,
furniture.
 Perishable goods –vegetables, fresh fruits.
 Inferior goods – goods for which demand decrease
when income of a consumer increase beyond a
certain level. E.g. public transport, second-hand
cars / pre-loved clothes.
 Giffen goods – demand goes up with the rise in
price. E.g. wheat, low quality rice, frozen food.
 Necessity goods – essential to consumer for daily
uses. E.g. canned food stuff, rice, vegetables,
sugar, coffee, and tea.
 Normal goods – goods used by consumers to make
their life comfortable. E.g. table, chairs, rice
cooker.
 Luxury goods – good in which demand increases
more than proportionally as income rises. E.g.
jewelry, branded bags, luxury cars.

 Merit goods –goods for which the consumption

is deemed to be intrinsically desirable if the
consumers are unwilling to purchase such goods.
E.g. state education, public healthcare.
⚫LAW OF DEMAND

The law of demand states that:

i. the higher the price of a product,
the lower the quantity demanded
of that product,
ii. the lower the price of the product,
the higher the demand , ceteris
paribus.
Example

If the price of chicken decreases, the quantity

demanded for chicken will increase. The
consumer will prefer to buy more chickens
when these are cheaper. At the same time, a
consumer’s purchasing power increases since
he/she can save more money when the price of
chicken falls.
Demand Schedule Demand Curve
It is a table that shows the It is a graph of the relationship
quantity demanded for a good between the quantity
or service at each price level. demanded at each price.

Source: An Individual’s Demand Schedule of Good X (Normala Ismail, 2008,p.44) Source: The Downward Sloping Demand Curve Normala Ismail, 2008, p. 45)
⚫ Individual demand: The relationship between the
price of a good and the quantity demanded by a single
buyer.

⚫ Market demand: The sum of all the quantities

demanded by all buyers in the market for a particular
good or service at a given price and period of time.

Individual demand 1 + individual demand 2 = MARKET DEMAND

HENCE,

MARKET DEMAND = 𝛴 INDIVIDUAL DEMAND.

Market Demand Schedule Market Demand Curve

⚫ A table showing the quantity ⚫ A market demand curve shows the price-
demanded for a good by all buyers in quantity relationship of good for all
the market. buyers.

⚫ It is derived by adding the quantities ⚫ It is derived by adding up horizontally

demanded at each price. the individual demand curves.

Source: Deriving a Market Demand Schedule and a Market Demand Curve Source: Deriving a Market Demand Schedule and a Market Demand Curve (Roger
(Roger 2011, pg. 59) 2011, pg. 59)
Change in quantity demanded Changes in Demand

⚫ Occurs only when the price ⚫ Due to a change in one or

of a good changes; other more of the determinants of
factors are constant. demand; price of a good
⚫ Involves a movement remains constant.
between points on the same ⚫ The demand curve shifts so
demand curve, ceteris that different quantities
paribus. correspond to each of the
possible prices.
Changes in quantity demanded Changes in Demand

Source: Amir b.Jusoh (2012) Source: Amir b. Jusoh (2012)

An upward movement (from point B to point A) An increase in demand is a rightward shift in

along the demand curve is due to a rise in price of the entire demand curve, from D 0 D 0 to D 1 D 1 .
a good and quantity demanded decrease. It is
called contraction of demand.
A decrease in demand is a leftward shift in
A downward movement (from point B to point C) the entire demand curve, from D 0 D 0 to D 2 D 2 .
along the demand curve is due to a fall in price of
a good and quantity demanded increase. It is
called expansion (extension) of demand.
INTERNAL FACTOR :
price of goods
 price depends on cost of production which will in
turn determine quantity that will be purchased by
the consumer. Higher the price, the lower the
demand.

Service policies or terms of payment

 better customer service in terms of payment by
credit instead of cash will increase sales.

Profit margin
 higher profit margin will lead to an increase in the
price of the product and reduce its demand and vice
versa.
EXTERNAL FACTORS :

1. Price of related goods

 Substitute goods – goods/services that can be used in place of
another product or services. E.g. tea vs tea, apple vs oranges,
Samsung vs iphone.
 change in P of substitute goods affect demand of product in the
same direction in which price changes.
P coffee ↑ Qd coffee ↓ Qd tea ↑
 Complementary goods – goods that are used in conjunction with
another product such as butter and bread, Cds and radio, mouse and
laptop, etc.
 Change in the P of complementary goods affect the demand for
product in the opposite direction to the price change.

P pen ↑ Qd pen ↓ Qd Ink ↓

EXTERNAL FACTORS :
2. Consumers Income – when income increases, consumers demand for
goods & services increase. Goods that increase in demand are normal
goods while goods that will decrease in demand are inferior goods.

3. consumer’s fashion, taste & preference – if the products become

more fashionable and in trend, the demand will most likely to be
increased

4. Expectation of future prices – the higher the expectation of future

prices of a product, the higher the demand for current price. E.g. gov
predicted to increase the price of sugar next month, so the demand for
sugar this month will most likely to be increased.
EXTERNAL FACTORS :

5. Advertisments – advertised goods normally have higher demand

because of more awareness of its existence.

6. Festive seasons & climate change :

 Weather
 Rainy season there tend to have higher demand for umbrellas, raincoats as
compared to other times during the year.
 Demandfor winter clothes will increase in winter,
while the demand for summer clothes will go down.

 Festival
 Different products will be demanded at different festive seasons.
 During Christmas the demand for Christmas tree and christmas ornaments, etc. will be
highly demanded. While during Hari Raya Aidilfitri, traditional Malay cookies and
cakes will be highly demanded compared to other days. Similarly, the Chinese will
demand mandarin oranges, and other products to heighten the Chinese New Year
spirit.
EXTERNAL FACTORS :

7. Level of taxation – the higher the taxes, the lower

the purchasing power of consumers, and vice versa. This
will lead the decrease in demand.

8. Supply of money circulation – the larger the supply

of money in circulation, the greater the demand for
goods & services, because consumers have more money
to spend on.
 Exceptional
demand curve slopes
(abnormal)
upward
from left to right, showing a
positive (direct) relationship
between price and
quantity demanded.

 The higher the price of Source: Ritika Muley (2016)

good,
a the more is quantity When the price of the good rises
demanded, the lower from OP 1 to OP 2 , quantity
demanded increases from OX 1 to
price, the lesser is
the OX 2 .
quantity demanded
Examples:

 Giffen (inferior) goods

 Are normally consumed by those in the lower income group.

 Ostentatious goods (goods with snob appeal / status symbol

goods).
 the demand for these goods will most likely increase when the income
increase because it shows the status of the buyer. For example, the rich
will buy Mercedez instead of Perodua to show their status to the
people.

 Speculation (expectations of future price increases).

Examples:

 Emergencies (usually necessities in time of war and

disaster).
 people will buy more goods even thought he prices of the
goods are high. These goods are usually basic necessities. Just
like how it was during our first MCO.

 Highly priced goods (consumer’s perception of high priced

goods as superior and of high quality).
 the exceptional demand may also apply to goods that
consumer considers quality or superior goods. Usually
consumer perceived highly priced items are high quality
products.
DEMAND FUNCTION

1. Demand function illustrates the relationship between quantity demanded

and price in a mathematical form. Generally, the demand function is
expressed as follow :
Qd = a-bP

where,
Qd = the quantity of demanded goods
a = the quantity of demanded goods when the P is 0.
this value will intersect the quantity axis.
‘-’ = the negative symbol that indicates the inverse
relationship between P and Qd
b = gradient of the demand curve
P = Price of the goods (usually RM or $)
DEMAND FUNCTION

EXAMPLE

The demand function is Qd = 36-4P . Calculate the quantity demanded at

different prices for the following table :

P (RM) Qd (units)

4
DEMAND FUNCTION

SOLUTION

a= 36, b= 4 and P = 0 However, if Qd = 0,

Qd = 36 – 4P
Therefore, 0 = 36 – 4P
Qd = 36-4P 4P = 36-0
= 36 – 4(0) 4P =36
= 36 -4 P = 36/4
= 32 = RM9
DEMAND FUNCTION
DEMAND FUNCTION
DEMAND FUNCTION

Two methods to create demand function are :

 Using the function below:

P-P1 = (P2-P1) / (Q2-Q1) X (Q-Q1)

 Using simultaneous equation

DEMAND FUNCTION

EXAMPLE :

The table below shows the quantity demanded of goods

at various prices. Find the demand function.
P (RM) Qd (units)
1 30
2 28
3 26
4 24
DEMAND FUNCTION

SOLUTION: (USING FORMULA)

DEMAND FUNCTION

SOLUTION: (USING FORMULA)

DEMAND FUNCTION

SOLUTION: (SIMULTANEOUS EQUATIONS)

DEMAND FUNCTION

SOLUTION: (SIMULTANEOUS EQUATIONS)

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2. Irvin B. Tucker (2008). Economics for Today’s World (5th Ed.). International Student Edition.
Thomson South-Western.

3. Normala Ismail (2008). Micro Economics (ECO162). Institut Perkembangan Pendidikan,

Universiti Teknologi M A R A , UiTM. Shah Alam

4. Rodney H. Mabry & Holley H. Ulbrich (1989). Introduction to Economic Principles. International
Edition. Singapore. McGraw-Hill.

5. Roger A . Arnold (2011). Principles of Economics, (10th Ed). South-Western . Cengage Learning
International Edition.

6. Amir bin Jusoh. (2012, January 7). Change in quantity demanded (movement) & change in demand
(shift).
Retrieved from http://amir-economy.blogspot.my/2012/01/change-in-quantity-demanded-
movement.html
7. Ritika Muley (2016). 6 Main Exceptions to the Law of Demand (With Diagram).
Retrieved from http://www.economicsdiscussion.net/law-of-demand/exceptions/6-main-
exceptions-to-the-law-0f-demand-with-diagram/16675