Introduction to
Economics and Demand
Economics
• It’s the study of scarcity, the study of how people use resources and respond to
incentives, or the study of decision-making.
• It often involves topics like wealth and finance, but it’s not all about money.
• Economics is a broad discipline that helps us understand historical trends,
interpret today’s headlines, and make predictions about the coming years
(American Economic Association).
Basic Economic Problem
•.
• Traditional view of Economics:
• Consumption
• Production
• Exchange
• Distribution
Cont…
• Modern view of Economics:
• Price theory
• Income theory Microeconomics (related to
determination of price= f (D,S))
• Growth theory
• Employment theory Macroeconomics
(Ecosystem as a whole)
Market Mechanism
Fundamental laws of market:
Law of Demand
Law of Supply
Demand
Demand
The willingness and ability of buyers to purchase a good or
service.
Demand for a particular product or service represents how much
people are willing to purchase at various prices.
Thus, demand is a relationship between price and quantity, with
all other factors remaining constant.
Law of demand
• Generally the relationship between price and
quantity is negative. This means that the higher
is the price level the lower will be the quantity
demanded and, conversely, the lower the price
the higher will be the quantity demanded, all
other factors remaining same.
• Demand is represented graphically as a
downward sloping curve with price on the
vertical axis and quantity on the horizontal axis.
Demand Function
Demand function shows relation between P & Qd when all
other variables are held constant
Demand Schedule
Data Point Price (in INR) Quantity Demanded
A 5 0
B 4 1
C 3 2
E 2 3
F 1 4
G 0 5
Demand Curve
The demand curve slopes downward
5 A because price and quantity demanded
B are inversely related.
4
C
3
E
2
F Demand
1
G
0
1 2 3 4 5 Quantity
12
Exceptions to law of Demand
• Luxuries
• Giffen goods/ Inferior goods
• Multiple uses of product
• Ignorance
Determinants of Demand
• Price of the Commodity
• Income of Individual
• Price of related good
• Advertisement expenditure
• Taste and Preference of individuals
• Future expected Price
• Target Population
Elasticity of Demand
• The degree to which changes in price cause changes in demand
or
• If we change the price, will demand change a lot or a little?
Elastic Demand
• If Demand for a good is very sensitive to changes in
price, the demand is ELASTIC
Or
• If prices changes a little bit, demand will change a lot!
Shifting Demand versus Movements along a
Demand Curve
A change in the price of a good causes a change in the
quantity demanded,
but does not shift demand
Inelastic Demand
• Demand for a good that consumers will continue to buy despite a
price increase is INELASTIC
OR
• Even if price changes a lot, demand changes very little
Example of Inelastic Demand
• The price of soap goes up a lot, the demand stays almost the same.
Changes in Demand vs. Changes in Quantity
Demanded
A price change would
change the quantity
demanded which
involves movement
along the demand
curve.
Changes in Demand vs. Changes in Quantity
Demanded
Movement along the demand curve.
Price ($’s)
Decrease
Increase
Demand
Quantity
Factors causing Shift in Demand
• Tastes and Preferences
• Substitutes and Complements
• Income
• Population
• Price Expectations
Changes in Demand - Decrease
Demand Shifts LEFT
Price
When:
Prices of substitutes decrease
Prices of complements increase
Normal good-income decreases D1
D2
Inferior good-income increases
Quantity
Population decreases
Tastes & preferences turn against the
product
23
Changes in Demand – Increase
Demand Shifts RIGHT
When:
Prices of substitutes increase
Prices of complements decrease
Normal good-income increases
Inferior good-income decreases
Population increases
Tastes & preferences turn in favor of the
product
Thank You!
