THE LAW OF DEMAND The law of demand states that there is an inverse or negative relationship between the price

of a good and the quantity demanded for that particular good, ceteris paribus. This means, with all other factors being equal, ceteris paribus, if the price of a product increases, the quantity demanded for that product decreases. On the other hand, if the price of a particular product decreases, more consumers will buy the product.

DETERMINANTS OF DEMAND 1) Price When price of the product increases, the demand for that product will increase. 2) Price of related products Substitutes goods are the goods or services that can be used in place of other product or service. Price of substitute good and demand for the other good are directly related. For example, margarine is a substitute for butter. A rise in butter price will see a rise in demand for margarine and vice versa. Complement goods are the goods that are used together with another product. Price of complement good and demand for the other good are inversely related. For example, demand for cars is affected by the change in price of petrol. If the petrol price increases, the demand for the cars will decrease.

3) Fashion and Taste When a product becomes fashionable, the demand for that product will rise. For example, when the new design of shawls are produced and enter the market, the people mostly female youngsters will desire to get the shawls.Therefore, the demand for the new shawls will increase significantly.In contrast, when the same product becomes outdated, demand can quickly fall away. In the same way, change in taste of people affects the demand of a commodity. For example, as time goes by, the taste for the import fruits increases among Malaysian people, this increases the demand for that fruits. 4) Population A size of population affects the demand for the goods and services. The larger population with higher growth rate require more houses, food supply, clinics and other goods and services.Therefore, the demand for those goods and services will rise. 5) Expectations for the 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. For example, when the government plans to increase the sugar for the following week, the demand for the sugar will quickly increase as the consumers want to store the sugars due to expected higher price. b. Future income: consumers current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.

6) Income When an individuals income goes up, their ability to purchase goods and services increases, and this causes demand for the goods and services to increase. Goods that increase in demand as income increases are the normal goods, such as books and shirts. Goods that decrease in demand as income decreases are the inferior goods such as low-grade rice and low-grade eggs. For example,as income increases, the demand for the used cars decreases. In constrast, the demand for the new cars increases. 7) Festive seasons and climate Different products will be in great demand during the festive seasons. For example, during Chinese New Year, the demand for mandarin oranges rises rapidly. The demand for lemang increases during the Hari Raya festivities.

CHANGES IN DEMAND VERSUS CHANGES IN THE QUANTITY DEMANDED Change in quantity demanded is defined as a movement between points along a stationary demand curve, ceteris paribus.

Fi gure 1 : Graph of quantity demanded.

In Figure 1, at the price of $30 the quantity demanded is 10 thousands. This is shown by the first point on the most top of the of the demand curve. At a lower price of say $20, the quantity demanded increases to 30 thousands which is shown by the middle point on the demand curve. Verbally, we describe the impact of the price decreases as an increase in the quantity demanded of 10 thousands. The relationship between the price and the quantity demanded is shown on the demand curve as the movement along the curve. Under the law of demand, any decrease in price along the vertical axis will cause an increase in quantity demanded, measured along the horizontal axis. Change in demand is defined as an increase in the quantity demanded at each possible price. An increase in demand is a rightward shift in the entire demand curve while a decrease in demand is a leftward shift in the entire demand curve.

Changes in non price determinants can produce only a shift in the demand curve and not a movement along the demand curve, which is caused by a change in the price.

The market demand curve is initially at D1 and there is a shift to the right which is an increase in demand from D1 to D2. This means at all possible prices consumers wish to purchase a larger quantity than before the shift occurred. At $30 , for example the quantity demanded will be 40 thousands (point B) instead of 10 thousands(point A). There is also a possibility that due to a change in some non-price determinants the demand curve D1 will shift leftward (a decrease in demand). The interpretation for this case is that at all possible prices consumers will buy a smaller quantity than before the shift occurred.

PRICE ELASTICITY OF DEMAND, P Price elasticity of demand measure the responsiveness of quantity demanded of a product to a change in the products own price. It is a ratio of the percentage change in quantity demanded of a product to percentage change in its price. It can be calculated using this formula: = percentage change in quantity demanded / percentage change in price = %Q / %P

Degrees of price elasticity of demand Based on coefficient, price elasticity can be categorized into five (5) degrees. Each degrees of elasticity shows how responsive the quantity demanded to a change in price. 1) Fairly elastic

Demand said to be fairly elastic

when the coefficient is larger than one.

The percentage change in quantity demanded is greater than the percentage change in price. Demand is more than unitary elastic when change in quantity demanded in response to change in price of the commodity is such that total expenditure on the commodity increases and decreases when price increases. Fig. 7 shows the situation of unitary elastic demand. Here, elasticity of demand is greater than unity or .

2) Fairly inelastic Demand is inelastic if the coefficient is less than one. This means

that the percentage change in quantity demanded is smaller than the percentage change in price. Demand is less than unitary elastic when change in quantity demanded in response to change in price of the commodity is such that the total expenditure on the commodity decreases when price falls, and increases when price rises. Fig. 8. shows the situation of less than unitary elastic demand. Here,

elasticity of demand is less than unitary or .

3) Unitary elastic Unitary elastic demand exists if the coefficient is equal to one. In this

case, the percentage change in quantity demanded is equal to the percentage

change in price. When change in quantity demanded in response to change in price of the commodity is such that total expenditure on the commodity remains constant implying a situation of unitary elastic demand. Here, elasticity of demand is unity or . Fig. 6 shows the situation of unitary elastic demand. In this case, TE

before the change in price(OBTP) = TE after a fall in price (OCRP1).

4) Perfectly elastic

Perfectly elastic demand refers to price change. change in

slightest rise In Fig. 4, DD this case,

demand, which is super sensitive to a

A small percentage change in price brings about an infinite percentage

in price causes the quantity demanded of the commodity to fall to zero. is the perfectly elastic demand curve which is parallel to OX-axis. In

quantity demanded. The coefficient is infinity. It is a situation where the

elasticity of demand is infinite or . .

5) Perfectly inelastic

A perfectly inelastic demand ha a

coefficient of zero. This means that

quantity demanded does not change as price change. A perfectly inelastic demand refers to a situation when change in price has no effect on quantity demanded i.e., demand remains unchanged. It is a situation when even substantial change in price leaves the demand unaffected. In Fig.5, DD is the perfectly inelastic demand curve which is parallel to OY-axis. Elasticity of demand is zero or .

Price Elasticity Price elasticity tells how much of an impact a change in price will have on the consumers' willingness to buy that item. If the price rises, the law of demand states that the quantity demanded of that item will decrease. Price elasticity of demand tells you how much the quantity demanded decreases. Elastic demand means that the consumers of that good or service are highly sensitive to changes in price. Usually, a good which is not a necessity or has numerous substitutes has elastic demand. Inelastic demand means that the consumers of that good are not highly sensitive to price changes. If the price of an inelastic good, say cigarettes, rises by 10 percent, maybe sales will only decrease by 1 percent. Consumers will still buy that good, typically because it is essential or has no substitutes. DETERMINANTS OF PRICE ELASTICITY OF DEMAND 1) Availability of substitutes Demand is elastic if the product has many substitutes. For example, if the price of a particular brand of detergent increases, the quantity demanded for it will fall by a larger percentage simply because there are many other brands of detergents which are close substitutes to it. These substitutes are now relatively cheaper, so consumers buy more of these substitutes in response to the price increase. Therefore, the demand for a particular brand of detergent tends to be relatively price elasticity.

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Demand is inelastic if the product has few substitutes. For example, there is no substitute for electricity. So, if its price increases, people will not reduce the quantity demanded very much. They might be able to reduce the consumption of electricity marginally, for example, by going to bed a bit earlier. As such, the demand for electricity is fairly price inelastic. 2) Time In a short period of time, demand is inelastic because it is quite difficult to find substitutes and customers do not have enough time to make adjustments to a price change. Given a longer period of time, demand will be elastic because the time is long enough for consumers to find substitutes, or to adjust their behavior in response to price change. For example, an increase in the price of petrol will not change the demand for cars very much in the short run because those with a car need petrol to run the car. Therefore, demand tends to be less elastic in short run. In the long run, more efficient cars, which consume less petrol, can be invented, or people can move and live at places closer to their offices, thereby reducing the demand for petrol. So, demand is more elastic in the long run.

3) Type of the product For luxuries, the demand will be elastic, but for necessities or essentials, the demand will be inelastic. Essentials are things that we must not go without or things that we must have. Insulin is necessary to diabetic patients. Even if its price increases, diabetic patients will not reduce the quantity demanded, that is to say that its demand is inelastic. However, people can do without luxurious car. So, its demand tends to be elastic, which means consumers would respond significantly to a fall in its price by demanding more of its

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4) Habits If the demand of the product is associated with some habit, for example cigarettes and smoking or alcohol and drinking, their demand will be inelastic because these products have become necessities to them. Therefore, a price, for example, will not reduce the quantity demanded much. 5) Share of budget spent on the product If consumers have to spend a large portion of their income or budget on a product, its demand will be elastic. Otherwise demand will be elastic. A 10% increase in the price of a car whose price is RM 50,000 represents a large proportion of a consumers budget compared to a 10% increase in the price of a candy bar. This demand for cars is therefore elastic and the demand for candy bars is inelastic. This is because consumers tend to be very responsive to the change in the price of cars, but may ignore the increase in the price of candy bars.

REFERENCES 1. Jamaliah binti Taib, Norizan binti Mohammad, Siti Badariah binti Saiful Nathan, Fatimah Setapa. (2012). Understanding Economics : Theory and Application (3rd Ed).Malaysia. Mc Graw-Hill. (pp 26). 2. Jamaliah binti Taib, Norizan binti Mohammad, Siti Badariah binti Saiful Nathan, Fatimah Setapa. (2009). Understanding Economics : Elasticity of Demand and

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Supply.(2nd Ed).Malaysia. Mc Graw-Hill. (pp 68 -76). 3. Nur Huda Abdul Wahab, Jamaliah Mhd. Khalili, Geetha Subramaniam, Sabariah Yusoff, Jamaliah binti Taib, Norizan binti Mohammad, Fatimah Setapa, Afiza Azyra Mohamad Arshad, Irvin B. Tucker. (2010). Economic Theory in The Malaysian Context : Market Demand and Supply. Cengage Learning Asia Pte. Ltd. (pp 38-41). 4. Deviga Vengedasalam, Karunagaran Madhavan (2010) Principles of Economics, (2nd Ed).Malaysia.Oxford Fajar Sdn Bhd.(pp 31-32) 5. Retrieved from November 2012 6. Retrieved from November 2012 7. Retrieved from November 2012 :http://www.dineshbakshi.com Accessed on :11 :http://staffwww.fullcoll.edu Accessed on :11 :http://staffwww.fullcoll.edu Accessed on :11

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