Overview
This lecture covers the Theory of Demand in microeconomics, focusing on demand definitions, determinants, demand curves, types of goods, and exceptions to the law of demand.
Definition and Concept of Demand
- Demand is the willingness and ability of a consumer to purchase a specific quantity of a commodity at various prices in a market over a given period of time.
- Effective demand requires both willingness and purchasing power.
- Demand is a flow concept, measured over a period.
- Individual demand refers to one consumer; market demand is the sum of all individuals’ demands.
Demand Function and Market Demand
- The demand function shows the relationship between demand and factors affecting it (price, income, related goods, etc.).
- Market demand is calculated by summing individual demand functions.
- Market demand curves are flatter than individual curves due to larger numbers.
Factors Affecting Demand (Determinants)
- Price of the good: As price increases, demand decreases (law of demand).
- Price of related goods: Substitute goods have a positive relationship; complementary goods have a negative relationship.
- Consumer income: Normal/luxury goods (positive income effect), inferior goods (negative income effect), necessary goods (constant demand).
- Tastes and preferences: Favorable preferences increase demand.
- Distribution of income, population, season, and consumer expectations influence market demand.
Law of Demand and Demand Curve
- Law of Demand: Other things being constant, price and quantity demanded are inversely related.
- Demand curve is downward sloping; shift right if demand increases (due to factors other than price), left if decreases.
- Slope of demand curve = ΔP/ΔQ.
Types of Goods
- Necessary goods: Demand is constant regardless of income or price.
- Normal/luxury goods: Demand increases as income rises.
- Inferior goods: Demand decreases as income rises.
- Substitute goods: Used in place of each other.
- Complementary goods: Used together.
Movements vs. Shifts in Demand
- Change in quantity demanded (movement): Due to change in own price, along the demand curve (expansion/contraction).
- Change in demand (shift): Due to other factors, the whole demand curve shifts left or right.
Reasons for the Law of Demand
- Diminishing marginal utility: Satisfaction decreases with each extra unit.
- Substitution effect: Consumers switch to cheaper substitutes.
- Income effect: Increased prices reduce real income and demand.
- Additional consumers may enter market if price decreases.
Exceptions to the Law of Demand
- Giffen goods: Demand rises with price due to lack of substitutes (e.g., inferior goods like bread during scarcity).
- Veblen goods: Higher prices increase demand due to status symbol.
- Ignorance of price, fashionable goods, necessities, and urgent demand can also defy the law.
Key Terms & Definitions
- Demand — Willingness and ability to buy goods at various prices over time.
- Effective Demand — Demand backed by the ability to pay.
- Individual Demand — Demand by one consumer.
- Market Demand — Total demand by all consumers.
- Demand Function — Mathematical relationship showing factors affecting demand.
- Normal Good — Demand rises as income increases.
- Inferior Good — Demand falls as income increases.
- Substitute Good — Goods replacing each other in use.
- Complementary Good — Goods used together.
- Giffen Good — Inferior good with increased demand as price rises.
- Veblen Good — Good with higher demand due to its higher price/status.
- Diminishing Marginal Utility — Decreasing satisfaction from additional units.
- Expansion/Contraction in Demand — Movement along demand curve due to price change.
- Increase/Decrease in Demand — Shift of the whole demand curve due to other factors.
Action Items / Next Steps
- Practice drawing demand curves and identifying shifts vs. movements.
- Memorize definitions and factors affecting demand.
- Complete any assigned exercises on calculating and graphing market demand.
- Review exceptions to the law of demand for exam preparation.