DEMAND

MARKET
A market consists oI the buyers and sellers oI a good or service. It is an arrangement that brings
buyers and sellers together.
Markets may be a location where sellers go to sell their wares and buyers go to purchase these
wares. Example being our local market places.
Certain markets are conIined to a single speciIic time and location. For example all the
participating buyers and sellers during an auction.
Some markets cover a vast geographic territory and most participants never meet or even see one
another. E-commerce is an example. In this case the internet serves as a platIorm.
DEMAND THEORY
Demand Theory is the branch oI economics devoted to the study oI consumer behaviour,
especially as it applies to decisions related to purchasing goods and services through markets.
DEMAND
The demand Ior any good is the amount consumers want and are able to buy in a particular
period oI time.
THE DEMAND SCHEDULE
The demand schedule is a table that shows the relationship between the price oI the good and the
quantity demanded.
Price (GHC) Quantity Demanded
0.0
0.50 0
.0 8
.50 6
.0 4
.50
3.0 0

THE DEMAND CURVE
The demand curve is a graph oI the relationship between the price oI the good and the quantity
demanded ceteris paribus (all things being equal). That is holding supply constant.

02,3/:7;0
Price
Quantity
Demanded
2 4
6 8 10 12 0
3.00
2.50
2.00
1.50
1.00
0.50


From Household
Demand to Market Demand
Assuming there are only two
households in the market, market
demand is derived as follows:

THE LAW OF DEMAND
The law oI demand states that other things being equal (ceteris paribus), the quantity demanded
oI a good Ialls when the price oI the good rises.

The law oI demand thereIore indicates a negative or inverse relationship between price and
quantity demanded. This means that demand curves slope downwards Irom leIt to right.













DETERMINANTS OF DEMAND
Price
Price is the most important determinant oI demand.
A 'demand curve plots combinations oI prices and quantity demanded.
A shiIt in price causes a shift along the demand curve.
A shiIt along the demand curve is reIerred to as a 'shiIt in the quantity demanded
A shiIt in any other variable (determinant) except price causes a shiIt in the entire demand curve.
A shiIt in the entire demand curve is reIerred to as a 'shiIt in demand.

Income
Changes in income can increase or decrease demand.
A good whose demand decreases with an increase in income is called an 'inferior good
A good whose demand increases with an increase in income is called a 'normal good
Prices of other goods
Changes in the prices oI other goods can increase or decrease demand.
A good that causes an increase in the demand Ior another, when its price increases, is called a
'substitute good.
A good that causes a decrease in the demand Ior another good when its price increases, is called
a 'complementary good.
Number of Buyers
An increase in the number oI potential buyers will increase the demand Ior the good.
For example, the demand Ior land increases as the population increases.
Similarly Iootball match tickets are generally more expensive in larger cities.
Future Prices
An increase in the expected Iuture price oI a good increases current demand.
A decrease in the expected Iuture price oI a good decreases current demand.
For example, when a good is temporarily put on sale, people stock up on the good.
Tastes
Demand curves can shiIt due to changes in tastes over time.
For example, demand Ior breakIast cereal may be high in the morning but low at night.
Similarly demand Ior CD`s oI old highliIe tunes may be high in the 0`s but low in the 000`s.
Three reasons why demand is downward sloping
. The substitution eIIect
. The income eIIect
3. The law oI diminishing marginal utility
We shall look at these three reasons in details in later topics.
SUPPLY
Quantity supplied reIers to the amount (quantity) oI a good that sellers are willing to make
available Ior sale at alternative prices in a particular period oI time.
Determinants of Supply
. Prices Ior a given period
. Product`s own price
3. Input prices
4. Technology
5. Expectations
6. Number oI sellers
Supply Shifters
. Input prices
. Technology
3. Government regulations
4. Number oI Iirms
5. Substitutes in production
6. Taxes
. Producer expectations
The Law of Supply
The Supply Schedule
Price (GHC) Quantity Demanded
.0 0
.5 0
.5 0
3.0 30
4.0 45
5.0 50




The supply Curve










Market Equilibrium

Market Equilibrium
Market equilibrium is the condition
that exists when quantity supplied and
quantity demanded are equal.
At equilibrium, there is no tendency for
the market price to change.

Excess Demand
.ess demand, or
shortage, is the condition that
exists when quantity demanded
exceeds quantity supplied at
the current price.
When quantity demanded
exceeds quantity
supplied, price tends to rise
until equilibrium is restored.


Excess Supply
.ess supply, or
surplus, is the condition that
exists when quantity supplied
exceeds quantity demanded
at the current price.
When quantity supplied
exceeds quantity
demanded, price tends to fall
until equilibrium is restored.


Elasticity
lasti.ity is a general concept
that can be used to quantify
the response in one variable
when another variable
changes.
elasticity oI A with respect to B
A
B

I price rises by 10 - what happens
to demand
\e know demand will all
By more than 10
By less than 10
By same 10
Llasticity measures the extent to which
demand will change

%ypes of elasticity
W!rice elasticity of demand
WIncome elasticity of demand
WCross elasticity
WLlasticity Of priceLxpectations
WAdvertisement Llasticity
W!rice elasticity of supply

!rice Elasticity of Demand
A popular measure of elasticity is pri.e
elasti.ity of demand measures how
responsive consumers are to changes in
the price of a product.
price elasticity oI demand
change in quantity demanded
change in price

%he value of demand elasticity is

always negative, but it is stated in
absolute terms.

!#E ELAS%% OF DEMAND
!rice elasticity of demand is the degree
of responsiveness of the quantity demanded to
change in the price.
percentage change in quantity
demanded
Ed =
percentage change in price
= AQ/Q !/A! AQ-hange in demand
Q= Q1+Q2/2
! =!1+!2/2
= !/Q AQ/A! A! -hange in price

..
%ypes of price elasticity of demand
Ed= 0 perfectly inelastic ...
Ed< 1 nelastic or less than unit elastic-
Ed = 1 Unit elastic..
Ed >1 Elastic ..
Ed = perfectly elastic
Ed =o Ed < 1 Ed = 1 Ed >1 Ed >

EXAM!LE.
Q1=0, Q2=10 !1=6, !2=4
Q= Q1+Q2/2
!= !1+!2/2
A! = 6-4 = 2
AQ =10-0=10
Q =10+0/2= 5
! =6+4/2=5
Ed = !/Q AQ/A!
=5/5 10/2
= 5 Elastic

1. Factors affecting elasticity of demand
- availability of substitutes commodities having
substitutes is very elastic.
-postponement of consumption-
commodities, whose consumption can be
postponed for some time is elastic.
-proportion of expenditure- where a significant
part of income is spent-is very elastic
-nature of the commodity-necessities-inelastic
comforts& luxuries- elastic
-different uses of the commodity- which has
several uses- elastic
-habits- habituated of some commodities-
inelastic

mportance of price elasticity of demand
t helps the monopolist in maximizing his
profit.
t helps the govt. at the time of budget
preparation . Govt. can levy more tax on the
commodity , whose demand is inelastic.
terms & conditions of foreign trade are always
in favour of those countries ,whose import
demands are elastic , and export demands are
inelastic

Other mportant Elasticities
n.ome elasti.ity of demand measures
the responsiveness of demand to changes
in income.
income elasticity oI demand
change in quantity demanded
change in income

lasti.ity of supply: A measure of the
response of quantity of a good supplied to
a change in price of that good. Likely to
be positive in output markets.
elasticity oI supply
change in quantity supplied
change in price

FUNCTIONS OF THE PRICES
Prices perIorm rationing and allocative Iunctions in the market.
Rationing
Prices ration existing supplies oI goods to users who place the highest value on them. Generally
people want more oI virtually everything than could be supplied at a price oI zero. Equilibrium
prices serve to curtail these excessive demands such that those who value the goods most are the
ones who get them.
Allocative
Prices serve as a signal that directs Iactors oI production among the diIIerent sectors oI the
economy. In industries where there is excess demand, Iirms are able to charge more than they
need to cover their costs oI production. The resulting proIits act as an incentive that attracts
additional Iactors oI production into these industries. However, losses serve as a disincentive that
drives Iactors oI production out oI those industries in which there is excess supply.
ASSIGNMENT
Describe the nature oI elasticity oI demand Ior substitutes and complements.
Read on Price controls.