Advanced Subsidiary Economics

Markets: Theory of Demand

(Lesson 04)

Dr Taimur RM Sharif
Content:
– Demand
• Concept of and Factors influencing demand
• Movements along and shifts in demand curve

Learning objectives:
At the end of the lesson students should:
– Understand the underlying features of demand and supply
– Appreciate the difference between movements along and shifts in
the demand and supply curves
– Explain the real life examples through graphical presentations
Teaching method:
– Student activity and mind mapping
– Power point
– Use of tables and graphs
– Case studies
Theory of Demand

Demand - the quantity of a good or service that

consumers are willing and able to buy at a
given price in a given time period.

Market demand - the sum of the individual

demand for a product from each consumer in
the market. If more people enter the market,
demand at each price level will rise.
Theory of Demand

The Demand Curve

A demand curve shows the relationship
between the price of an item and the quantity
demanded over a period of time. For normal
goods , more of a product will be demanded as
the market price falls.
There are two reasons why, for a normal good,
more is demanded as price falls:
• the income effect
• the substitution effect
 Market demand for potatoes (monthly)
Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
Price (pence per kg)

80

60

40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 Market demand for potatoes (monthly)

E Point Price Market demand

100 (pence per kg) (tonnes 000s)
A 20 700
D
Price (pence per kg)

80 B 40 500
C 60 350
C D 80 200
60 E 100 100

B
40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Theory of Demand

• Effective Demand and Willingness to Pay

Demand in economics must be effective. Only
when a consumers' desire to buy a product is
backed up by an ability to pay for it do we
speak of demand.
For example, many people would be willing to
buy a luxury sports car, but their demand would
not be effective if they did not have the financial
means to do so. They must have sufficient
purchasing power.
Theory of Demand

Latent Demand
Latent demand exists when there is willingness
to purchase a good or service, but where the
consumer lacks the purchasing power to be
able to afford the product.
Latent demand is affected by advertising –
where the producer is seeking to influence
consumer tastes and preferences.
Theory of Demand

Derived Demand
The demand for a product X might be strongly
linked to the demand for a related product Y –
giving rise to the idea of a derived demand.
For example, the major producer of steel in the
UK is Corus. They produce for a wide range of
different industries; from agriculture, aerospace
and construction industries to consumer goods
producers, packing and the transport sector.
If the UK economy goes into a downturn or
recession, so we would expect the demand for
steel to decline likewise.
Derived Demand
Theory of Demand

The Law of Demand

There is an inverse relationship between the
price of a good and demand.

As prices fall, we see an expansion of demand

If price rises, there should be a contraction of
demand.
Theory of Demand

The Demand Curve

A demand curve shows the relationship
between the price of an item and the quantity
demanded over a period of time.

There are two reasons why, for a normal good,

more is demanded as price falls:
• the income effect
• the substitution effect
Theory of Demand

The Income Effect:

There is an income effect when the price of a
good falls because the consumer can maintain
current consumption for less expenditure

Provided that the good is normal, some of the

resulting increase in real income is used by
consumers to buy more of this product.
Theory of Demand

The Substitution Effect:

There is also a substitution effect when the price

of a good falls because the product is now
relatively cheaper than an alternative item and
so some consumers switch their spending from
the good in competitive demand to this product.
THANK YOU

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Questions
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