The aim of the programme is to help AIM have a clear you understanding of the concepts of and theories of demand

and assist you analyse the real life THE PROGRAMME issues 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

Taste Price of the related commodities Income of the consumer Population size 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 tha

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=Consumers Income, A=Advertisement cost, T=Taste.

Q = (PX )
D X

AllOtherthingsfixed

= 20 5PX

This equation reflects the theme of the law of demand.

Demand Schedule
Price of Potato (Tk/Kg) 15 13 10 7 5 Quantity demanded for Potato (Kg) 3 5 8 10 15

Demand Schedule
Price of Potato (Tk/Kg) 5 7 10 13 15 Quantity demanded for Potato (Kg) 15 10 8 5 3

Price
D 1 5 1 3 D2 1 0 7 5 A A D1

Rightward Income Income Income Movement SHIFT Leftward SHIFT of the isof the demand is along the Populatio demand curve decrease increase demand size curve curve n d d Taste, etc. B C
D1 D
D2

1 0

11 55

Quantit y

Consumer-1 d1 10 6 d1 0 3 5

Consumer-2 d2 D

Market demand

Price

d2 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

Price
12 10 8 6 4 2 0 1 2

CONSUMER SURPLUS
INDIVIDUAL CONSUMER d
um s on C er plus r su

Market price
d'

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 (44)=Tk.16. Here the consumer surplus is =(28-

Price

CONSUMER SURPLUS
WHOLE MARKET
m su n Co er plus r su
S'

12 10 8 6 4 2 0

E
S 1 2 3 4 5

Market price
D'

Quantity of Patty (in Thousands)

CALCULATION OF CONSUMER SURPLUS

The area of the shaded triangle indicates the - INDIVIDUAL CONSUMER 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