DETERMINANTS OF DEMAND AND LAW OF DEMAND

John Byron C. Rodriguez II-BSAB-B

OBJECTIVES:

1. Demonstrate how a unique price and quantity are determined by

the interaction of supply and demand in a perfectly competitive
market.
2. Determine the factors that affects the curved of demand.
3. Explain the relationship between demands and its determinants.

OVERVIEW:

The law of demand focuses on those unlimited wants. Naturally,

people prioritize more urgent wants and needs over less urgent ones in their
economic behavior, and this carries over into how people choose among the
limited means available to them. For any economic good, the first unit of that
good that a consumer gets their hands on will tend to be put to use to satisfy the
most urgent need the consumer has that that good can satisfy.

TOPICS:

Law of demand

There is an inverse relationship between quantity demanded and its price.

The people know that when price of a commodity goes up its demand comes
down. When there is decrease in price the demand for a commodity goes up.
There is inverse relation between price and demand . The law refers to the
direction in which quantity demanded changes due to change in price.

A consumer may demand one dozen oranges at $5 per dozen . He may

demand two dozens when the price is $4 per dozen. A person generally buys
more at a lower price. He buys less at higher price. It is not the case with one
person but all people liken to buy more due to fall in price and vice versa. This is
true for all commodities and under all conditions. The economists call it as law of
demand. In simple words the law of demand states that other things being
equal more will be demanded at lower price and lower will be demanded at
higher price

The relationship between price of a commodity and its demand depends

upon many factors. The most important factor is nature of commodity. The
demand schedule shows response of quantity demanded to change in price of
that commodity. This is the table that shows prices per unit of commodity ands
amount demanded per period of time. The demand of one person is called
individual demand. The demand of many persons is known as market demand.
The experts are concerned with market demand schedule. The market demand
schedule means 'quantities of given commodity which all consumers want to
buy at all possible prices at a given moment of time'. The demand schedules of
all individuals can be added up to find out market demand schedule.

Determinants of Demand

When price changes, quantity demanded will change. That is a

movement along the same demand curve. When factors other than price
changes, demand curve will shift. These are the determinants of the demand
curve.

1. Income: A rise in a person’s income will lead to an increase in demand (shift

demand curve to the right), a fall will lead to a decrease in demand for normal
goods. Goods whose demand varies inversely with income are called inferior
goods (e.g. Hamburger Helper).

2. Consumer Preferences: Favorable change leads to an increase in demand,

unfavorable change lead to a decrease.

3. Number of Buyers: the more buyers lead to an increase in demand; fewer

buyers lead to decrease.

4. Price of related goods:

a. Substitute goods (those that can be used to replace each other): price
of substitute and demand for the other good are directly related.

Example: If the price of coffee rises, the demand for tea should increase.

b. Complement goods (those that can be used together): price of

complement and demand for the other good are inversely related.

Example: if the price of ice cream rises, the demand for ice-cream toppings will
decrease.
5. Expectation of future:

a. Future price: consumers’ current demand will increase if they expect

higher future prices; their demand will decrease if they expect lower future
prices.

b. Future income: consumers’ current demand will increase if they expect

higher future income; their demand will decrease if they expect lower future
income.

CONCLUSION:

In economics as a social science, it efficiently allocates the limited resources to

satisfy unlimited human wants. Since resources are scarce, but wants are
unlimited, we learn to make choices. When choices are made, certain wants
must be sacrificed.

For example, when I decided to take this class, I am prepared to give up

some of my leisure time. The leisure time I give up in order to finish this class plus
what I would have otherwise used the tuition money for is my opportunity cost
for this class. Since I decided to take this class, that means I valued the benefit of
this class more than the cost (which is the time I give up and what I would have
used the tuition money for).

Economists are making wise choices by comparing the extra benefit to

the corresponding extra cost at each decision.