INTRODUCTION OF DEMAND THEORY

[Assoc. Prof.Nawawi Jusoh ] 1 [Deman Theory]

1.0 INTRODUCTION OF DEMAND THEORY

Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. A theory relating to the relationship between consumer demand for goods and services and their prices. Demand theory forms the basis for the demand curve, which relates consumer  desire to the amount of goods available. As more of a good or service is available, demand drops and therefore so does the equilibrium eq uilibrium price.

2.0 LAW OF DEMAND

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a resu result lt,, peopl peoplee will will natur natural ally ly avoi avoid d buyi buying ng a prod produc uctt that that will will forc forcee them them to for for go the the consumption of something else they value more. The chart below shows that the curve is a downward slope. A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded The higher the price of  a good the lower the quantity quantity demanded (A), and the lower the price, the more the good will be in demand (C).

[Assoc. Prof.Nawawi Jusoh ] 2 [Deman Theory]

[Assoc. Prof.Nawawi Jusoh ] 3 [Deman Theory]

3.0 GRAPHING DEMAND

[Assoc. Prof.Nawawi Jusoh ] 4 [Deman Theory]

4.0 FACTOR TO DETERMINE TOTAL DEMAND •

Increase of income and wealth of customer 

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Price of other products

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Taste and formality, fashion and weather 

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Season

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Interest rate

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Price expectation and earnings

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Size and structure of population

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5.0 PRICE DEMAND FLEXIBILITY

Ep =

6.0 TYPE OF PRICE DEMAND FLEXIBILITY •

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Flexible Demand (Ep >1)  Non-flexible Demand (Ep >1)

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Single Flexible Demand (Ep = 1)

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Imperfect Flexible Demand (Ep = 0)

[Assoc. Prof.Nawawi Jusoh ] 5 [Deman Theory]

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Perfect Flexible Demand (Ep =

)

7.0 RELATIONSHIP BETWEEN PRICE CHANGE (P), TOTAL REVENUE (TR) AND FLEXIBLE PRICE DEMAND (Ep)

TR = P x Q

, TR : Total Revenue P : Price of Product Q : Quantity of Product

8.0 EXAMPLE FOR CALCULATION OF DEMAND THEORY

TYPE OF BRICK

PRICE / UNIT (RM)

QUANTITY (PIECES)

Clay brick 

0.38

100

Sand brick 

0.23

200

POINT DEMAND FLEXIBLE Ep =

[Assoc. Prof.Nawawi Jusoh ] 6 [Deman Theory]

Ep, clay brick = = 2.53 , Ep >1 (Flexible Demand)

Ep, sand brick = = 0.77 , Ep