# Lecture-1_Demand_

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```					                                     Theory of Demand
Plan:
    Meaning of demand & its type
    Utility & its measurement
    Marginal utility and total utility. The low of diminishing MU.
    Consumer equilibrium and consumer’s surplus
    The law of demand, demand schedule and demand curve.
    Determinants of market demand.
    Shift of a demand curve.
Demand
Demand means something which is back by three things:-
    Desire/ willingness.
In practical view demand means the quantity of a commodity that one person willing to
buy with reference of three ‘P’s
1. Price
2. Place
3. Period
Example: Demand of a shirt in Dhaka city is 500 million at average cost Tk 400 in 2004.
Type of demand:
 Derived demand
 Direct demand
 Market demand
 Individual demand
Individual demand: the amount of a commodity that an individual is willing to buy with
reference of three P’s
Market Demand: The market demand is found by adding together the quantities
demanded by all individuals at each price.
For example: If there are three individual demands in a market like ABC then
A’s individual demand is 3 shirts
B’s individual demand is 9 shirts
C’s individual demand is 15 shirts
So, the market demand is 27 shirts
Direct demand: Demand for at once is direct or autonomous demand. For example: pen
Derived demand: Demand for farther processing of goods is derived demand. For
example: Labor
Demand vs. Quantity Demand
Demand refers to a schedule of the total quantities of a good or service that buyers will
buy at different prices at a given time.
Quantity demanded refers to a point on a demand curve—the quantity demanded at a
particular price.

Demand schedule
Demand schedule is a test containing the demand for a commodity at various prices.
Price              Quantity of demand
50                          1                   Demand
30                          2                   Schedule
20                          3
10                          4

Demand Curve
…is a diagrammatical presentation of a demand schedule. It shows the relationship
between the quantity demanded of a good and its price when all other influences on
consumers’ planned purchases remain the same. A demand curve generally slops
downwards to the right.

The Law of Demand
The law of demand states the relationship between the price and the quantity of
demand.
•   Other things remaining the same, the higher the price of a good, the smaller is the
quantity demanded.
•   There is an inverse relationship between price and demand.
•   Price assumed to be independent variable while Qd is dependent variables. So if
price increase then Qd decrease and if price decrease then the Qd increase.
# Quantity demanded tends to fall as price rises for two reasons:
•   Substitution effect
•   Income effect
Forces Behind the Demand Curve
•   The price of the good
•   The prices of related goods
•   Expected future prices
•   Income
•   Population
•   Taste or Preferences
Substitute Vs. Complement
•   A substitute is a good that can be used in place of another good.
•   A complement is good that is used in conjunction with another good

A Change in Demand
•   When any factor that influences buying plans other than the price of the good
changes, there is change in demand.
•   When demand changes, the demand curve shifts.
A change in the quantity demanded
•   A point on the demand curve shows the quantity demanded at a given price.
•   So a movement along the demand curve shows a change in the quantity
demanded.
Q. Why does a demand curve slop downwards to the right?
------Demand curves slop downwards to the right due to–
2. The inverse relationship between price & quantity of demanded.
3. The law of diminishing marginal utility (MU). That means if MU
increases, consumer pays less for the next unit.
4. Substitution effect.
5. Income effect
Q. Does demand curve always slope downwards to the right?
-----No, demand curve do not always slope downwards to the right. Generally demand
curves slop downwards to the right. But some times the demand curve is horizontal
where the perfect competition is applied.

Pric
e

P                                   D

Quantity
Secondly the demand curve may go up incase of hobby or the prestigious goods.
Pric
e
D

Market Demand:
D
Factors behind the market demand:
Quantity
1) Price factor                                   2) Non-price factor
Price of the commodity.                            Income and its distribution.
Credit facilities
Population
Seasonality-time period & testable
Price of other commodity
Design/ quality of a product
Pack again
Consumer taste, preference, weakness
etc

Q. What are the factors that determine the demand on a commodity? Or
What are the factors that determine the demand for?
a) Salt
b) Auto mobile
c) Hospital and health care
d) Higher education

Shift of a demand curve :
Q. What do you mean by shift of a demand curve? Why does demand curve sift?
Answer --When a demand curve changes from one position to another it is said to be
the shift of a demand curve.
Price

P
D1
D
D2
Quantity
Q2      Q           Q1

A demand curve may shift to the right or to the left. If the demand curve shifts to the
right, it means increase of demand.
On the other hand if the demand curve shifts to the left it means the decline of
demand.

In the diagram D is the original demand curve .The demand is the PQ. When it shift
to the right D to D1 .The demand increases that is from PQ to PQ1. On the other hand
if it shifts from D to D2 the demand decreases from PQ to PQ2.

A demand curve shifts due to the non price factor, like income, advertisement, credit
etc.

What is Supply?
Supply refers to the quantity of a commodity and which the suppliers and sellers are
If a firm supplies a good or services, the firm
•     1. Has the resources and the technology to produce it,
•     2. Can profit from producing it, and
•     3. Has made a definite plan to produce it and sell it.
Supply Curve
…shows the relationship between the quantity supplied of a good and its price when
all other influences are held constant

Price                S
P

0                            Quality of supply
Q

Shift of a Supply curve :
Q. What do you mean by shift of a supply curve? Why does supply curve sift?

Answer --When a supply curve changes from one position to another it is said to be
the shift of a supply curve.
Price

S2             S
S2

M1          M         M2
P

Quantity
O          Q2      Q             Q1

A supply curve may shift to the right or to the left. If the supply curve shifts to the
right, it means forward shift. In this case the supply increases inspired of same price.
So OQ1 is higher then OQ.
On the other hand if the supply curve shifts to the left it means the backward shift. In
this shift it means decline of supply.
In the diagram S is the original supply curve .The supply is the PQ. When it shift to
the right S to S1 .The supply increases that is from OQ to OQ1. On the other hand if
it shifts from S to S2 the supply decreases from OQ to OQ2.

A demand curve shifts due to the non price factor, like income, advertisement, credit
etc.
Price Elasticity of Supply
…measures how much the quantity supplied of a good changes when its price changes,
other things remaining the same.
The formula:
Es = Proportionate (or %) change in quantity (Qd)
Proportionate (or %) change in price
Es = ∆Q/∆P × Po/Qo

If,        Es > 1, price-elastic supply
Es = 1, unit-elastic supply
Es < 1, price-inelastic supply

The Factors that influence the Elasticity of Supply
    Resources substitution possibilities
    Time frame for the supply decision                   Price                 S2
S
Market Equilibrium:
The point M at demand curve DD and the supply                                                      S1
SS meet to gather, is known as market equilibrium                       M2
P2
M
point.                                                          P                M1
P1
D

Let draw a perpendicular or X axes. Those OQ is equilibrium quantity. Again form point                  Quality
M let us draw another perpendicular OY on OX axes. That Op is the equilibrium price.
O
Q2 Q Q1
a) If the supply curve shifts to the right that means S to S1then a new equilibrium
point create M1 at OQ1.This OQ1 is greater then OQ and the price is less then
from OP to OP1.
b) If the supply curve shifts to the left that means S to S2 then a new equilibrium
point create M2 at OQ2.This OQ2 is less then OQ and the price is greater then
from OP to OP2.                       S2
Price                           S

S1
M2
P2
M
P                  M1
P1

O                                    Quality
Q2    Q Q1

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