The Law of Demand

Demand is the desire to have some good or service and the ability to pay for it.

The law of demand states that when the price of a good or service falls, consumers buy
more of it. As the price of a good or service increases, consumers usually buy less of it.
In other words, quantity demanded and price have an inverse, or opposite, relationship.
 Demand Schedules

 Demand schedule is a listing of how much of an item an individual is willing to purchase

at each price.

 Market demand schedule is a listing of how much of an item all consumers are willing to
purchase at each price.
 Demand Curves

 A demand curve is a graph that shows how much of a good or service an individual will
buy at each price.

 A market demand curve shows the data found in the market demand schedule. In other
words, it shows the quantity that all consumers, or the market as a whole, are willing and
able to buy at each price.
Why do consumers demand more goods and services at lower prices and
fewer at higher prices? Economists have identified two patterns of
behavior as causes: the income effect and the substitution effect.

Income effect is the change in the amount that consumers will buy
because the purchasing power of their income changes.

Substitution effect is a change in the amount that consumers will buy

because they buy substitute goods instead.
factors can cause a change in demand

Six factors can cause a change in demand: income, market size, consumer tastes, consumer
expectations, substitute goods, and complementary goods. An explanation of each one follows.

1) Income: If a consumer’s income changes, either higher or lower, that person’s ability to buy goods and services also changes.
2) Market Size: If the number of consumers increases or decreases, the market size also changes. Such a change usually has a
corresponding effect on demand.
3) Consumer Tastes: Because of changing consumer tastes, today’s hot trends often become tomorrow’s castoffs. When a good
or service enjoys high popularity, consumers demand more of it at every price. When a product loses popularity, consumers
demand less of it
4) Consumer Expectations: Your expectations for the future can affect your buying habits today. If you think the price of a good
or service will change, that expectation can determine whether you buy it now or wait until later.
5) Substitute Goods: are goods and services that can be used in place of each other.
6) Complementary Goods: are goods that are used together, so a rise in demand for one increases the demand for the other
Elastic and inelastic demand

 total revenue, the amount of money a company receives for selling its products.
Total revenue is calculated using the following formula, in which P is the price
and Q is the quantity sold: TOTAL REVENUE = P*Q.
 If total revenue increases after the price of a product drops, then demand for that
product is considered elastic. For example, if a hot dog stand sells 100 hot dogs
for $2.50 each, the total revenue is $250 for the day. However, if the price of hot
dogs drops to $2.00 each and 150 are sold, the total revenue for the day will be
$300.
 But if the total revenue decreases after the price is lowered, demand is considered
inelastic. If the hot dog stand lowers its price to $1.00 each and sells 200 hot
dogs, it makes $200 in total revenue.
Elastic and inelastic demand
 What Determines Elasticity?

 FACTOR 1 Substitute Goods or Services:

o If there is no substitute for a good or service, demand for it tends to be inelastic.
o If many substitutes are available, however, demand tends to be elastic.

 FACTOR 2 Proportion of Income:

o The percentage of your income that you spend on a good or service is another factor that affects elasticity
 Suppose that photography is your hobby, and you spend about 10 percent of your income on a digital camera,
memory cards, software programs, and lenses. If the price for any of these rises even slightly, your demand will
likely fall because you just don’t have any more money to spend on your hobby. Your demand is elastic. At the
same time, demand for products that cost little of your income tends to be inelastic.
 FACTOR 3 Necessities Versus Luxuries:
o necessity is something you must have, such as food or water. Demand for necessities tends to be inelastic. Even if
the price rises, consumers will pay whatever they can afford for necessary goods and services.
supply

 supply refers to the willingness and ability of producers to offer goods and
services for sale. Anyone who provides goods or services is a producer
 As is true with demand, price is a major factor that influences supply.
 The law of supply states that producers are willing to sell more of a good or
service at a higher price than they are at a lower price.
 Producers want to earn a profit, so when the price of a good or service rises they
are willing to supply more of it. When the price falls, they want to supply less of
it. In other words, price and quantity supplied have a direct relationship.
example

 According to the law of supply, suppliers will offer more of a good at a higher price

 Think about it: If people are willing to pay more for what I am selling, then I want to make
as much of that product available as possible.

 Ex. The price of pizza goes from $10 to $11, but it still only costs me $8 to make, I want to
make as many as I can to maximize my profit (make as much money as I can!)
supply schedule

 A supply schedule is a chart that lists how much of a good a supplier will offer at different
prices.
What Factors Affect Supply?

1) Supply curve: The supply curve is a graphic representation of the correlation between the cost of a good
or service and the quantity supplied for a given period. The supply curve will move upward from left to
right, as explained in the law of supply: As the price of a given commodity increases, the quantity
supplied increases (all else being equal). When the prices of goods and services decline, the supply of
goods and services will then decrease.
2) Price: In the law of supply, when the price of a product goes up, the supply of the product also increases
and vice versa. This is considered as the variation in the price. However, if there is any speculation of a
rise in the price of the product, it is typical that the supply in the present market would drop in order to
gain more profit in the future. That also indicates that if the price is expected to decrease, the supply in the
current marketplace would strongly increase.
3) Cost of production: if the cost of production increases, the supply of products would shrink so as to save
resources. For example, due to the high wages rate of labor, poor natural conditions such as crop failure as well
as the increase in raw materials price, taxes, transportation cost … the cost of production is raised. In this case,
managers of the company would either supply a smaller quantity of product to the market or stock the product
till the market price is exceeded
What Factors Affect Supply?

4) Technology: Technology advances can improve production efficiency and therefore cut down
the cost spent for production. Computers, televisions and photographic equipment are good
examples of the effects of technology on the supply curve.

5) Governments’ policies: With the role to regulate and protect the industry, the Government has a
great influence on the supply of a product. The lower the tax, the higher the supply of that product.

6) Transportation condition: With the lack of transportation management, raw materials could
not be delivered to the manufacturer fast and in good condition. The lack of facilities would also
prevent the company from distributing its product to consumers when there is a burst in demand.
This would not only damage the company’s benefit but also lower the competitiveness of the
company towards its competitors.