Demand and Its Determinants

UNIT 2 -
MICROECONOMICS
Microeconomics mind map.....
Microeconomics mind map.....
REAL WORLD ISSUE – 1
How do consumers and producers
make choices in trying to meet their
economic objectives?
Conceptual understandings
(WISE ChoICES)
• Consumer and producer choices are the
outcome of complex decision-making.
• Welfare is maximized if allocative

efficiency is achieved.
• Constant change produces dynamic

markets.
Market
• An open space where buyers and sellers of
good/services come together; No particular
location
• Local neighbourhood; as well as international
market; Buyers and sellers may meet or may not
also, such as internet
• Mechanism that allows buyers and sellers to
interact.
The Boxing ring and the Invisible Hand
DEMAND
• Demand is the quantity of a good or service that
customers are willing and able to buy at given
prices in a particular period of time. - Effective
demand
• Price – amount of money a customer pays in order to
purchase a good or service
Demand & Quantity demanded
Represented as an entire Represented as a single

demand curve point on the demand curve
Law of Demand
• The law of demand states that as the
price of a good or service rises, the
quantity demanded falls; ceteris
paribus.
• Implies a negative or indirect relationship

between price and quantity demanded.
The Demand Curve
Factors underlying the law of
demand
• 1. Income effect:
• As the price decreases, the
real income of the consumer
increases.
• Real income – purchasing
power
• Quantity demanded increases
Factors underlying the law of demand
• 2. Substitution effect: As the price of a good

decreases, consumers switch from other substitute
goods to this good because its price is comparatively
lower
Factors underlying the law of
demand
• 3.The law of diminishing marginal utility:
• This law states that as we consume additional
units of something, the satisfaction(utility) derived
from each additional unit (marginal unit) reduces
(diminishes).
• The extra benefit derived from the consumption of

each additional unit is called the marginal
benefit (MB) or marginal utility.
Demand curve as MB curve
• As the demand curve reflects
what we are willing to pay for a
good, it is a reflection of the MB
we receive from consuming
additional units of that good.
Individual demand and
Market Demand
• Individual demand is the demand of a single
consumer
• The Market demand shows the total quantities in the

market for the good consumers are willing to and
able to buy at different levels of prices during a
particular period of time, ceteris paribus.
• The sum of all individual demand curves for

the same good = Market demand
Market Demand for Cinema tickets
Price per Demand from Demand from Female Market demand

ticket Male customers customers (no. of (male + female)
(no. of tickets) tickets)
$15 500 400 900

The Market Demand Curve
Non- price Determinants of Demand
• Variables other than price that influence demand.
• Assumed to be constant when the relationship between

price and demand is examined.
• Change in these determinants cause shifts in the demand

curve:
• the entire demand curve moves to the right or to the left.
• Rightward shift – Increase in demand

• Leftward shift - decrease in demand
Non- Price Determinants
[RIPEN]
• Related products (substitutes and

complements)
• Income (in relation to Normal and Inferior goods)
• Preferences and tastes
• Expectations of future prices, and the
• Number of consumers.
Tastes and Preferences
• change over time.
• a preference for certain brands.
• emotions and desires attached to a product.

? Products jointly demanded as they go well
together - ___________________
? Rival or competitive products that can be used

as alternatives to each other - ________________
? Products that have higher demand when real

income increases - ________________________
? An increase in real income will lead to a fall in

the demand - ______________________
Movements along and shifts of the
demand curve
• Movement along a demand curve - caused by price
changes only,
• A change in all other (non-price) factors - cause a shift of
the demand curve.

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UNIT 2 -

• Welfare is maximized if allocative

• Constant change produces dynamic

Represented as an entire Represented as a single

• Implies a negative or indirect relationship

• 2. Substitution effect: As the price of a good

• The extra benefit derived from the consumption of

• The Market demand shows the total quantities in the

• The sum of all individual demand curves for

Price per Demand from Demand from Female Market demand

$15 500 400 900

• Assumed to be constant when the relationship between

• Change in these determinants cause shifts in the demand

• Rightward shift – Increase in demand

• Related products (substitutes and

• a preference for certain brands.

• emotions and desires attached to a product.

? Rival or competitive products that can be used

? Products that have higher demand when real

? An increase in real income will lead to a fall in

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