Chap02-Theory of Demand

The aim of the programme is to
help youAIMhave a clear

understanding of the concepts
of
and theories of demand and assist
you THE
analyse the real life issues
PROGRAMME
based on the knowledge you will
gather from this programme.
 Define the concept of demand for a
commodity
 Describe the determinants of demand
for a commodity
 Explain the relationship between price
of the commodity and the quantity
demanded for the commodity
 Eplain the law of demand
 Draw the demand curve from a demand
schedule.
 Explain the reasons of the shifts of and
movements along a demand curve.
 Draw the market demand curve from
individual demand curves.
 The person is willing
to buy that commodity
 He/she has the
purchasing power
 He/she has the desire
to spend his/her
money
Determinants of demand
for a commodity
 Price of the commodity
 TasteP Q
 Price of the related commodities
 Income of the consumer

P
 Population sizeQ
 Age
Law of Demand
Remaining all other things
same, if the price of a
commodity rises, the demand
for the commodity decreases
and if the own price of the
commodity decreases, the
demand for the commodity
increases.
How Can the Relationship Between
Quantity Demanded and Price Be Portrayed?
Three methods are usually used to do that
Function Numerical data Graph

Demand Function Demand schedule Demand curve
DEMAND FUNCTION
Demand function shows the relationship between quantity
demanded and it determinants. We can show that by the following
demand equation:
Q   ( PX , M , PY , T , PZ , A, etc.)
D
X
 20  5PX  4 PY  0.2M  3 A  2 PZ  3T
Here, PX=Price of X, PY=Price of Y (X & Y are substitutes), PZ=Price of
Z (X & Z are complementary), M=Consumer’s Income,
A=Advertisement cost, T=Taste.
Q   (PX )
D
X  20  5PX
All Other things fixed
This equation reflects the theme of the law of demand.
Demand Schedule
Quantity
Price of demanded
Potato for Potato
(Tk/Kg) (Kg)
15 3
13 5
10 8
7 10
5 15
Demand Schedule
Quantity
Price of demanded
Potato for Potato
(Tk/Kg) (Kg)
5 15
7 10
10 8
13 5
15 3
Price Rightward SHIFT
Income
MovementIncome
Incomeis isalong
SHIFT
ofLeftward
D D1 the demand
15
A decreased
increased
theofdemand
the curve
demand
Population
curve
13 curvesize
D2
Taste, etc.
10
B C
A
7
D1
5
D
D2
0 3 5 8 10 15
Quantity
Consumer-1 Consumer-2 Market demand
d1
D
d2
10
Price
6
D
d1 d2
0 3 5 0 2 5 0 5 10
Quantity Demanded
WHAT IS CONSUMER SURPLUS?
The consumer surplus (sometimes named

consumer's surplus or consumers' surplus) is the
amount that consumers benefit by being able to
purchase a product for a price that is less than they
would be willing to pay. The difference between the
amount that consumer is willing to pay for the
commodity and its actual market price is called
consumer surplus. When a person buys any chosen
quantity of a commodity at a given price,
diminishing marginal utility guarantees that she/he
always attains some consumer surplus.
CONSUMER SURPLUS
Price
INDIVIDUAL CONSUMER
12 d
10 mer
ns u
Co lus
p
8 sur
6
E
4 Market price
2
d'
0
1 2 3 4 5
Quantity of Patty
CALCULATION OF CONSUMER SURPLUS
- INDIVIDUAL CONSUMER
The consumer is willing to pay Tk.10 for the

first unit, Tk.8 for the 2nd, Tk.6 for the 3rd and
Tk.4 for the 4th unit. So, in total, for 4 units of
patty, the consumer is willing to pay
(10+8+6+4)=Tk.28 . However, he/she can but
these 4 units at price Tk.4 each. That means,
he/she is paying for 4 units (4×4)=Tk.16.
Here the consumer surplus is =(28-16)=Tk.12
CONSUMER SURPLUS
Price
WHOLE MARKET
12
D
10 m er S'
o nsu
C
p l us
8 sur
6
E
4 Market price
2 S
D'
0
1 2 3 4 5
Quantity of Patty (in Thousands)
CALCULATION OF CONSUMER SURPLUS
- INDIVIDUAL CONSUMER
The area of the shaded triangle indicates the
consumer surplus in the market. We saw in the
previous slide:
The base of the triangle = 4 thousands of Patty.
The height of the triangle = Tk.11.00 -Tk.4.00 =
Tk.7.00 a piece of Patty
Therefore, the area of the triangle is:
1
 base  height
2
1
  4000  7
2
 Tk .14000.00

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The aim of the programme is to

help youAIMhave a clear

 Income of the consumer

Three methods are usually used to do that

Function Numerical data Graph

The consumer surplus (sometimes named

The consumer is willing to pay Tk.10 for the

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