Understanding Market Demand and the Law of Demand: Principles and Determinants, Lecture notes of Economics

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LECTURE 3:

MARKET AND

BASIC

PRINCIPLES OF

DEMAND

AGENDA

❑DEFINING THE MARKET

❑MARKET

❑TYPES OF MARKET

❑BASIC PRINCIPLES OF DEMAND

❑DEMAND

❑LAW OF DEMAND

❑DEMAND CURVE

❑NON-PRICE DETERMINANTS OF

DEMAND

MARKE T

It is composed of

consumers and suppliers of

a specific product.

The buyers/consumers

determine the demand, and

the suppliers/sellers

determine the supply of

goods and services.

4

TYPES OF MARKET

• refers to the purchasing and selling of factors of production.
• where we buy consumer goods. markets for the output of production .
• the venue for potential employees looking for a job and ready to provide services.
• where securities of corporations are traded

Financial

Labor Market Market

Goods Market

Factor Market

DEMAND is the willingness and ability of

consumers to buy a certain quantity of good or

service at a certain price.

MARKET DEMAND is the aggregate

demand of all consumers, who buy the goods in the

market.

LAW OF DEMA ND

DEMAND SCHEDULE

• (^) It indicates the different amount or quantity that the consumer is willing to buy at different given prices.
• (^) The Law of Demand states that when the price of a commodity falls, its demand increases and when the price of a commodity rises, its demand decreases; other things remaining constant. Thus, there exists an inverse relationship between price and quantity demanded of a commodity.

Price ↑ Demand ↓

Price ↓ Demand ↑

CURVE

It illustrates the demand schedule graphically, with the price

of a good on Y axis and the quantity demanded on X axis

PRICE QUANTITY DEMAND CURVE

FORMULA:

Qd = f - (P/n)

PROBLEM FORMULA: Qd = f

• (P/n) Qd = F - (P/N) (Note: F and N is always given) F = 6 N = 2 Qd = 6 - (P/2) Qd = 6 - (0/2) = 6 - (0) = 6 Qd = 6 - (2/2) = 6 – (1) = 5 Qd = 6 - (4/2) = 6 - (2) = 4 Qd = 6 - (6/2) = 6 – (3) = 3 Qd = 6 - (8/2) = 6 - (4) = 2 Qd = 6 - (10/2) = 6 – (5) = 1 Price per bottle of soy sauce (pesos) Number of bottles 2 4 8 10 0 6 6 5 4 3 2 1

DEMAND CURVE

PRICE

QUANTITY

DEMAND

0 1 2 3 4 5 2 4 6 8 10

If ceteris paribus is disregarded or dropped, the

variables other than price which also influence

demand can now affect demand

1. Income – the income of the consumer

influences the capacity to purchase

Income ↑ QD↑ Shift to the right

Income ↓ QD↓ Shift to the left

If ceteris paribus is disregarded or dropped, the

variables other than price which also influence

demand can now affect demand

2. Prices of related goods

a. Substitute PSUBSTITUTE ↑ QD of Chosen Good ↑ Shift to the right PSUBSTITUTE ↓ QD of Chosen Good ↓ Shift to the left b. Complementary PCOMPLEMENTARY ↑ QD of Other Complement ↓Shift to the left PCOMPLEMENTARY ↓ QD of Other Complement ↑Shift to the right

If ceteris paribus is disregarded or dropped, the

variables other than price which also influence

demand can now affect demand

4. Taste – preference that may influence the

demand for a commodity

Factors affecting taste:

a. Cultural values b. Peer pressure c. Power of

advertising

Taste ↑ QD ↑ Shift to the right

Taste ↓ QD ↓ Shift to the left

If ceteris paribus is disregarded or dropped, the

variables other than price which also influence

demand can now affect demand

5. Number of consumers (market) – size and characteristic of the population Population ↑ QD ↑ Shift to the right Population ↓ QD ↓ Shift to the left