2. 1.1 Meaning of Economics
Definition of Economics
•Economics is the study of how the society
choose to use scarce economic resources,
to produce goods and services, and to
distribute them for consumption among
the members of the society
•Economics is preoccupied by the following
basic problems: What to produce, how to
produce and for whom to produce
3. 1.1 Meaning of Economics
What to produce?
•This question refers to what types of goods
and services and the quantity of each that
the economy should produces.
•The problem arise because resources are
scarce
•No economy can produce as much of every
good or service as desired by all members
of society
•So every society must choose which goods
and service to produce and how much
4. 1.1 Meaning of Economics
How to reach the solution to what to
produce
• In a free enterprise economy, the problem
is solved by the price mechanism
• Producers will choose to produce those
goods and services for which consumers are
willing to pay a price sufficient to cover the
full cost of producing them
• In a mixed enterprise economy, the
government influence the decision of what
to produce through taxes, subsidies and
direct control
5. 1.1 Meaning of Economics
How to produce?
• This is the decision that refers to the choice of
combination of factors of production
• Normally a combination is chosen that uses the
least resource to produce a particular
good/service
• Least cost
• In a free enterprise economy “how to produce” is
solved by price mechanism, a method that
involves the least cost of production is chosen
• In a mixed enterprise economy government
modifies this decision
6. 1.1 Meaning of Economics
For Whom to produce?
• This is the decision as to how the total output is
to be divided among different consumers
• Again we are faced with this problem because
of scarcity
• No society can satisfy all the wants of all its people
• In a free enterprise economy, the economy will
produce the commodities that satisfies the
wants of those with money to pay for them
• Usually governments modify the working of the
price mechanism in the name of equity and
fairness
7. 1.2 Microeconomics
• Microeconomics is the branch of economics which
studies the economic behaviour of individual
decision making units such as consumers, resource
owners and business firms
• The flow of goods and services from business
firms to households and the composition of
such a flow
• How prices of goods and services are
determined
• The flow of economic resources from resource
owners to business firms and the use of the
resources
• How the prices of the resources are determined
9. 1.2 Macroeconomics
•Macroeconomics is the branch of
economics which studies the
aggregate levels of output, national
income, employment and prices for
the economy viewed as a whole
•It is preoccupied with the problems of
how to ration the commodity over
time, and how to provide for the
maintenance and growth of the
system
10. 1.3 Positive Economics and Normative
Economics
•A distinction is made between positive and
normative economics
•Positive Economics deals with what is.
• Positive economics is objective and fact based
•Positive economic statements can be
proved
•e.g. Raising the rate of taxation shrinks
economic activities
•Government financed education increases
public expenditure
11. 1.3 Normative Economics
• Normative Economics, on the other hand deals
with or studies what ought to be
• Normative economics is subjective and value –
based
• Normative economics is opinion based:
normally with such statement as should, ought
to be, etc.
• Economists need not agree on normative
statement because they are opinion based
• e.g. “government should provide healthcare for
all the people” is a normative economic
statement
12. 1.3 Positive and Normative Economics
• All of what we learn in the class, all that you will
read in books of economics constitute positive
economics, defining and explaining the subject
matter, they are empirical in nature
• All what the minister of finance, minister of
planning, minister of agriculture, minister of
industry and trade are doing, to address specific
problems constitute normative economics
• They deal with how to solve economic
problems facing the society
• They involve ethical position or value
judgement
13. 1.4 Scarcity
•Economics is the study of scarcity
•People’s material wants are unlimited
•Output to satisfy those wants is limited
• Quantity and quality of available resources
• The available technology to produce the
output at least cost
•The productive resources that are scarce
are known as economic goods, or factors
of production
14. 1.4 Scarcity
Economic resources
• Limited in supply
(scarce)
• Command a price
• At price zero demand
is greater than supply
• Examples: Land,
Labour, capital
Non Economic resources
• Unlimited in supply
(non scarce)
• Available for free
• At price zero supply
is greater than
demand
• Examples: air, lake
water for people of
locality
14
15. 1.4 Scarcity
• Economic resources are the services of the
various types of labour, capital, equipment,
land (natural resources) and entrepreneurship
• Land means the economy’s natural resources
such as land, forests, mineral, even water
bodies
• Labour means the mental and physical skills of
individuals in a society
• Capital means goods – such as tools machines
and factories used in production
• All these resources are scarce
16. 1.4 Choice and Opportunity Cost
• Due to scarcity of such resources choices have
to be made
• What to produce
• How to produce and
• For whom to produce
• When we choose to produce something we also
choose to forego to produce something else
• This is known as opportunity cost
• Opportunity cost is what is given up to produce
or obtain a particular good or service
• It is the value of the next best alternative
17. 1.4 Choice and Opportunity Cost
Production Possibility frontier
Is a curve that shows different combinations
of goods/services that a society can produce
when resources are used to the maximum
and the best technology is employed
• Assumptions
1. Society uses all resources to produce two goods
2. All the available resources and best available
technology are used
3. Society must choose the combination of the
number of the goods and services to be
produced
4. Whenever the production of one good is
increased, there must be a reduction of
another good
18. • The table represents alternative combinations of
guns and butter output for an economy
• In the decision of what to produce we can choose
any bundle A, B,.. or E
• In bundle C choice is made to produce 5000 guns and
14 mill butter units
Table
1.
Production
Possibility
Schedule
1.5 PPF
18
19. 1.5 PPF
• Table 1 is plotted in figure 1
• The figure is the production possibility frontier PP
• Point C in the PPF plots the combination of 5000 guns and 14 million
units of butter
• To move from C to D increase 4000 guns and decrease 8 million units of
butter
Fig.
1.
Production
Possibility
frontier
19
20. 1.5 PPF
• The PPF can shift outward over time
• When more resources are available
• Or when technology improves
• In this PPF it is a shift from PP to P’P’
• If the society chose C, with the shift of PPF 4000 additional
guns can be produced with the same butter production
20
21. 1.5 PPF
• Points on the PPF are considered to be efficient because all
available resources are used
• Points within the frontier are inefficient because some
resources are unemployed
• Points outside the frontier are unattainable as the frontier
defines the maximum amount that can be produced at given
time
21
22. 1.6 Methodology of Economics
• Economics is a social science that studies
individuals and organisations engaged in the
production, distribution and consumption of
goods and services
• The aim is to predict economic occurrences and
to develop policies to correct such problems as
inflation, unemployment, or lack of growth
• Economics has developed principles, theories
and models to isolate the most important
determinants of economic events
23. 1.6.1 Model Building
In construction of a model
•Assumptions are made
• To eliminate unnecessary detail
• To reduce the complexity of economic
behaviour
•Economic behaviour in a model is
presented as a relationship between
dependent and independent variables
•DV – behaviour being explained
24. 1.6.1 Model Building
•The DV is presented as being influenced by
one independent variable
• The influence of other independent variables
is held constant (ceteris paribus)
•An economic model will specify whether
the dependent and independent variables
are positively or negatively related
•e.g. We assume that the amount a
consumer spends (C) is positively
dependent on her disposable income (Yd)
25. 1.6.1 Model Building
Individual Disposable
income Y
Consumption
A 20,000 20,000
B 21,000 20,750
C 22,000 21,500
D 24,000 23,000
E 27,000 25,200
0
5000
10000
15000
20000
25000
30000
0 5000 10000 15000 20000 25000 30000
CONSUMPTION
DISPOSABLE INCOME
C=f(Y)
Table 2 presents data on
consumer spending for five
individuals with different levels
of income.
It is plotted in the adjacent graph
25
26. 1.6.1 Model Building
0
5000
10000
15000
20000
25000
30000
0 5000 10000 15000 20000 25000 30000
CONSUMPTION
DISPOSABLE INCOME
C=f(Y)
• The dependent variable
(consumption) is plotted
in the vertical axis
• The independent
variable (disposable
income is plotted on the
horizontal axis
• This graphical
representation of data
makes the positive
relationship visual
26
27. 2 Consumer Behaviour
2.1 Introduction to Consumer Behaviour
•Consumer behavior studies how the
consumer reaches important decisions
regarding his consumption and hence
demand for goods and services
•The basic issue is what drives the
consumer to want to consume a particular
good or service
•It has to do with utility, and how with the
limited funds the consumer has, utility is
maximized
28. 2.2 Utility
•An individual demands a particular
commodity because of the satisfaction or
UTILITY received from consuming it
•UTILITY is the property of commodity that
satisfies a want or a need of a consumer
•Utility can be approached by a cardinal or
ordinal utility
•We will distinguish between the two
approaches and study each approach
separately
29. 2.3 Cardinal vs Ordinal Utility
Cardinal Utility
Meaning
• Is the utility wherein
the satisfaction derived
by the consumers from
the consumption of
good or service can be
measured
quantitatively.
• It is assumed that utility
can be measured just as
we measure length,
height, weight etc.
Ordinal Utility
Meaning
• Is the utility wherein the
satisfaction derived from
the consumption of a
good or service cannot be
expressed numerically.
• Since they cannot be
measured numerically
they can be ranked in
terms of more than or
less than
29
31. 2.3 Cardinal Utility
• Total Utility is the overall satisfaction that an individual
receives from consuming a specified quantity of a
commodity per unit time
• Marginal utility is the change in the total utility per
unit change in the quantity of a commodity consumed
per unit of time
• It is the extra satisfaction a consumer gets from
consuming an additional unit of the product
• When you are very thirsty, the first glass of water
provides a lot of satisfaction to you, the second
increases the total satisfaction
• Additional glasses add total satisfaction but up to a
point
32. 2.3 Cardinal Utility
• Although total utility increases, the extra utility
(marginal utility) received from consuming each
additional unit of the commodity usually
decreases
• At some level of consumption total utility
received by the individual from consuming the
commodity will reach a maximum and marginal
utility will be zero
• This is the saturation point
• Additional units of the commodity cause total
utility to fall and marginal utility to be negative
33. 1 2 3
Qx TUx MUx
0 0 ..
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
2.3 Cardinal Utility
• In the table, a hypothetical total
utility (TU) schedule for
consuming alternative quantities
of commodity X per unit time is
given
• Utility here is measured by utils
(a fictitious unit)
• Column 1 shows quantity, column
2 total utility and column 3
marginal utility
• Note that up to the consumption
of the 5th unit total utility
increases
33
34. 1 2 3
Qx TUx MUx
0 0 ..
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
2.3 Cardinal Utility
• Upon the consumption of the 6th unit,
the marginal utility is 0.
• This is the saturation point
• On the consumption of the 7th unit of
the product the total utility decreases
and the marginal utility is negative
• Note that the Marginal utility
constantly decreases, and at on the 6th
unit ceases to increase, and on the 7th
unit becomes negative
• This is what is known as the principle
of diminishing marginal utility
34
35. 2.4 Diminishing Marginal Utility
• Plotting the total and
marginal utility curves we
get the TU and MU curve
• Note that each value of
MU are recorded midway
between the two levels of
consumption
• Saturation point is reached
when consumption is
increased from 5 to 6 units
• Falling MU curve illustrates
the principle of
diminishing marginal
utility 35
36. 2.4 Consumer Equilibrium
• The objective of a rational consumer is to
maximize the TU derived from spending
personal income
• The objective is reached and the consumer is
said to be in equilibrium when
• The consumer is able to spend personal income in
such a way that the utility of the last shilling spent
on various commodities is the same. This can be
expressed
•
𝑀𝑈𝑥
𝑃𝑥
=
𝑀𝑈𝑦
𝑃𝑦
= …
Subject to a constraint that
• 𝑃𝑥𝑄𝑥 + 𝑃𝑦𝑄𝑦 + … = 𝑀 (The individual’s income
37. 2.4 Indifference Curves
• An ordinal approach to consumer behavior uses
the concept of indifference curve, which shows
consumer’s tastes and equilibrium
• An indifference curve is a curve which shows
the various combinations of commodity X and Y
which yield equal utility or satisfaction to the
consumer
• A higher indifference curve shows a greater
amount of satisfaction and lower one less
satisfaction
• It is an ordinal rather than cardinal approach to
utility
38. 2.4 Indifference Curves
Indifference
curve I
Indifference
Curve II
Indifference
Curve III
𝑄𝑥 𝑄𝑦 𝑄𝑥 𝑄𝑦 𝑄𝑥 𝑄𝑦
1 10 3 10 5 12
2 5 4 7 6 9
3 3 5 5 7 7
4 2.3 6 4.2 8 6.2
5 1.7 7 3.5 9 5.5
6 1.2 8 3.2 10 5.2
7 0.8 9 3 11 5
8 0.5 10 2.9 12 4.0
9 0.3
10 0.2
This table gives points
on three different
indifference curves for a
consumer
When we plot the points
on the same set of axes
and join them by
smooth curve we get 3
indifference curves
38
39. 2.4 Indifference Curves
• When the points are plotted and joined by
smooth curves we have the three indifference
curves
39
40. 2.4 Indifference Curves
• All points in the same
indifference curve yield the
same satisfaction to the
consumer
• Point C (10Y and 1X) and
point D (5Y and 2X) are of
the same utility to the
consumer
• Points on indifference curve
II give greater satisfaction
than points on IC I, and less
satisfaction than points on
indifference curve III
• Absolute amount of
satisfaction is not indicated
• What is done is ordering
consumer preference
40
41. 2.4 Indifference Curve
•Indifference curves are a graphic picture of
a consumer tastes and preferences
•The consumer is indifferent among all the
different combinations of X and Y on the
same indifference curve
•But the consumer prefers points on a
higher indifference curve to points on a
lower one
•In our example we chose to present 3
indifference curves, but the field of
indifference curves is dense
42. 2.4 Indifference Curves
Characteristics of Indifference Curves
1. Indifference curves are negatively sloped
2. Indifference curves are convex to the
origin
3. Indifference curves do not cross
4. Indifference curves need not be and are
usually not parallel to one another
43. 2.4 Indifference Curves
Indifference curves are negatively sloped
•We are dealing with economic (scarce)
goods
•If consuming more of X the individual must
consume less of Y to remain on the same
level of satisfaction
•Therefore an indifference curve must be
negatively sloped
44. 2.4 Indifference curves
Indifference Curves are convex to the origin
•This is because they exhibit diminishing
marginal rate of substitution
•We will see the concept of marginal rate of
substitution later
45. • 2.4 Indifference curves
• IC do not intersect
• Suppose we assume the contrary as shown in the figure
• G and H are points on IC I, they yield equal satisfaction
• G and J are on IC II, yield equal satisfaction
• It follows that H and J are points of equal satisfaction,
and by definition lie in the same IC
• Thus it is impossible for ICs to intersect 45
46. 2.4 Marginal Rate of Substitution
•Marginal rate of substitution of X for Y
(MRSxy) refers to the amount of Y that a
consumer is willing to give up in order to
gain one additional unit of X (and still
remain on the same indifference curve)
•𝑀𝑅𝑆𝑥𝑦 = −
∆𝑄𝑦
∆𝑄𝑥
•As the individual moves down an
indifference curve, the MRSxy diminishes
47. 2.4 Marginal Rate of Substitution
MRSxy •In the figure, on IC I,
moving from point C
to D the individual
gives up 5 units of Y
in exchange for one
additional unit of X.
•Thus MRSxy= 5.
•Similarly from D to F
the MRSxy= 2
47
48. 2.4 Marginal Rate of Substitution
• On moving down the
indifference curve, the
individual is willing to give
up less and less of Y in order
to gain each additional unit
of X
• The MRSxy diminishes
• This is so because now the
individual has less and less
of Y, and Y becomes more
valuable to him/her
• So the individual is willing to
give up less and less of Y to
get each additional unit of X
48
50. 2.4 Marginal Rate of Substitution
•The MRSxy between two points on the
same indifferent curve is the absolute
(positive value) of the slope of the chord
between the two points
•The distance between two points on an
indifference curve decreases as we move
to the right and approaches zero in the
limit
•This is known as the Marginal Rate of
Substitution
51. 2.5 Budget Constraint Line
•The budget constraint line shows all the
different combinations of the two
commodities that the consumer can
purchase given his or her money income
and the price of the two commodities
•Suppose 𝑃𝑥 = 𝑃𝑦 = $ 1
•Suppose the consumer’s money income is
$10 per time period
•Suppose all income of the person is spent
on two products X and Y
52. 2.5 Budget Constraint Line
• The budget line of the
consumer is given by
the line KL
• If the consumer spends
all of her income on
commodity Y, she could
purchase 10 units of Y
• This defines point K
• If she spent all her
income on commodity
X she could purchase
10 units of X
• This defines point L
• By joining point K to
point L by a straight line
we get the budget line
52
53. 2.5 Budget Constraint Line
• The Budget line KL
shows all the different
combinations of X and
Y that this individual
can purchase given
her money income
and prices of X and Y
53
54. 2.5 Consumer Equilibrium
•A consumer is in equilibrium when,
given personal income and price
constraints, the consumer maximizes
the total utility or satisfaction from his
or her expenditure
•In other words, a consumer is in
equilibrium when, given his or her
budget line, the person reaches the
highest possible indifference curve
55. 2.5 Consumer Equilibrium
• By bringing together
on the same set of
axes the consumer’s
indifference curves
and the budget
constraint line, we can
determine consumer
equilibrium
• It is given by point E in
this figure
55
56. 2.5 Consumer Equilibrium
• The consumer would like
to reach indifference curve
III (the highest)
• But he or she cannot
because of the limited
income and price
constraints
• The individual could
consume at point N or R
on indifference curve I
• But he/she would not
maximize total satisfaction
from expenditure
56
57. 2.5 Consumer Equilibrium
• Indifference curve II is the
highest indifference curve this
individual can reach with this
budget constraint line
• To reach equilibrium the
consumer should spent $5 to
purchase 5 unis of Y and the
remaining to purchase 5 units of
X
• Note that equilibrium occurs
when the budget line is tangent
to an indifferent curve
• At point E the slope of the
budget line is equal to the slope
of the indifference curve II
57
59. 3. Foundation of Microeconomics
3.1 Demand
3.1.1 Demand vs Effective Demand
•Demand is the quantity of goods/services the
consumers are willing and able to purchase
at given price in a given period of time ceteris
paribus
•Effective demand refers to the amount of
goods or services that consumers are actually
buying
60. 3.1.1 Effective Demand
Need, Want and Demand
•Demand for a particular commodity arises
because of its ability to satisfy a need or a
want
•Demand, in economic sense, arise when
there is
• A need for the commodity and,
• The consumers have the money to pay for it
• So demand refers to effective demand rather
than a simple need
61. 3.1.2 Law of Demand
• In the graph we see that
the lower the price of X,
the greater the quantity
of X demanded by the
individual
• With some exceptions,
demand curve always
slopes downwards
• This is known as the law
of demand
61
62. 3.1.2 Explanation of the Law
Income Effect:
• Is the increase in the
quantity purchased of
a commodity with a
given money income
when the price falls
Substitution Effect
• Is the increase in the
quantity purchased of
a commodity when its
price falls as a result of
switching from
another similar
product
62
63. 3.1.2 Explanation of the Law
Income effect
• When price of a commodity falls, the real
income of the consumer increases
• Therefore, his purchasing power increases: he is
required to pay less for the same quantity
• The increase in real income encourages the
consumer to demand more of goods and
services
• The increase in demand on account of increase
in real income is known as the income effect
• For the case of inferior goods the income effect
is negative
64. 3.1.2 Explanation of the Law
Substitution effect
• When price of a commodity falls, price of all
other related goods remaining constant
(particularly substitutes), the substitute goods
become more expensive
• In other words, the commodity whose price has
fallen becomes relatively cheaper
• The rational consumers, wanting to maximize
their utility will substitute cheaper goods for
expensive ones
• The increase in demand on account of this
factor is known as substitution effect
65. 3.1.3 Determinants of Demand
•When we were defining demand we used
the term ceteris paribus
•What are these other things that remain
constant, and what happens if they do not.
•These other things are known as
Determinants of demand
•They include, money income, price of
other goods, changes in tastes and
preferences and changes in consumer
expectations
66. 3.1.3 Determinants of Demand
1. Price of related goods
• The demand for a commodity is affected by the
changes in the price of its related goods.
• Related goods may be substitutes or
complements
Substitutes
• Two commodities are deemed to be substitutes
for each other if change in the price of one
affects the demand for another in the same
direction
• If the price of x increases, the demand for y
increases
67. 3.1.3 Determinants of Demand
Complements:
•A commodity is deemed to be a
complement for another when the two
products go together so that their demand
changes together simultaneously
•e.g. Petrol is a complement to a car, butter
is a complement to bread, sugar is a
complement to tea or coffer, cartridge is a
complement to a printer etc.
•The increase in price of one causes a
decrease in the demand for the other
68. 3.1.3 Determinants of Demand
2. Consumer’s Income
• Income determines the purchasing power of
the consumer. So it is a basic determinant of
demand
• People with higher disposable income spend
larger amount on goods and services than
those with lower income
• The effect of income on the quantity of goods
demanded depends on whether the goods are
essentials, inferior goods, normal goods or
luxury goods
69. 3.1.3 Determinants of Demand
a. Essential Consumer Goods
• These are goods and services that are
consumed by all persons of a society
• They are called basic needs
• Examples: food grains, water, electricity, fuel for
cooking, salt, clothing, housing etc.
• Quantity demanded of this category of goods
increases with an increase in consumer’s
income, but up to a certain limit
• After that it tends to stabilize
70. 3.1.3 Determinants of Demand
b. Inferior Goods
• These are goods and services that are only used
when substitutes of better quality cannot be
afforded
• Examples: kerosene lamp is inferior to electric
light, kaniki is inferior to kitenge, travelling by
town bus is inferior to travelling by taxi or own
car etc.
• Quantity demanded of this category of goods
increases with an increase in consumer’s
income up to a certain point beyond which it
decreases
71. 3.1.3 Determinants of Demand
c. Normal Goods
•These are goods and services whose
demand increase as the consumer’s
income rises
•Examples: clothing, furniture, cars
•Quantity demanded of this category of
goods increases with an increase in
consumer’s income
72. 3.1.3 Determinants of Demand
d. Prestige or luxury goods
•These are goods which are consumed by
the rich section of the society e.g. gold and
diamond jewelry, luxury cars, expensive
cosmetics, expensive clothing, etc.
•Demand for these goods manifests itself
when the income rises beyond a certain
level
•For the rich people, the higher the income
the higher the demand for such products
•Also the higher the price the higher the
demand for the products
73. 3.1.3 Determinants of Demand
3. Consumer’s Tastes and Preferences
• Taste and preference depend on changing of
lifestyle, social customs, religious values
attached to a commodity, fashion, age and sex
of the consumer
• Change in any of these factors changes
consumers’ tastes and preferences
• Consumers may reduce or give up the
consumption of some goods and add new ones
to their consumption pattern
• Advertisement normally influence the change in
tastes
74. 3.1.3 Determinants of Demand
4. Consumers’ Expectations
• This is a factor that affects short run demand
• If consumers expect a rise in the price of a
storable commodity, they would buy more of it
at its current price to prepare for the price rise
• On the contrary, if consumers expect a fall in
the price of a certain good, they postpone their
purchase of such goods to take advantage of
future lower prices
• This factor applies mainly to non-essential
goods
75. 3.1.3 Determinants of Demand
5. Population of the Country
•The total domestic demand for a product
of mass consumption depends on the size
of the population
•Given the price, per capita income, tastes
and preferences etc. the larger the
population the larger the demand for a
product
•With an increase in size of population,
demand for a product increases ceteris
paribus
76. 3.1.3 Demand Schedule
•Demand Schedule is a chart that shows the
quantity demanded of a commodity at
different prices: An example is given below
77. 3.1.3 Demand Curve
The graphic representation of the demand
function is known as the demand curve
78. 3.1.3 Exception to Law of Demand
The law of demand does not apply to the following
cases
1. Expectation regarding future prices:
When consumers expect a continuous increase in the
price of a durable commodity, they buy more of it
despite increase in its price to avoid the pain of much
higher price in the future
2. Luxury goods
The law does not apply to commodities that are used
as status symbol of enhancing social prestige or to
display wealth and riches, e.g. expensive suits for MPs,
gold and diamond jewelry etc
• The rich buy these because the prices are high
79. 3.1.3 Exception to Law of Demand
3. Inferior goods (Giffen goods)
A giffen good may be any inferior good much
cheaper than its superior substitutes, consumed by
the poor households as an essential commodity
• If price of such goods increases (price of its
substitute remaining constant), its demand
increases instead of decreasing because of income
effect
• When the price of an inferior good rises, poor
people cut the consumption of superior
substitutes to buy more of the inferior good to
meet basic needs
80. 3.1.4 Change in Demand
•When any of the ceteris paribus condition
changes, the entire demand curve shifts.
•This is referred to as change in demand
•Note that this is different from change in
quantity demanded, which is the
movement along the same demand curve
82. 3.1.4 Change in Demand
Change in Quantity Demanded
• Movement along the
same demand curve
• Caused by change in price
Change in Demand
• Shift in demand curve
• Caused by change in
factors other than price
82
84. 3.1.5 Demand Function
• The quantity of a commodity that an individual
is willing and able to purchase over a specific
period of time is a function of the price of the
commodity, the person’s money income, the
prices of other commodities and individual
tastes
• By varying the price of the commodity under
consideration while keeping constant the
individual’s money income and tastes and the
price of other commodities (ceteris paribus) we
get the demand function
85. 3.1.5 Demand Function
•We can present the demand function as
𝑄𝑑𝑥
= 𝑓 𝑃𝑥 𝑐𝑒𝑡. 𝑝𝑎𝑟.
•Remember we said
𝑄𝑑𝑥
= 𝑓 𝑃𝑥, 𝑀, 𝑃𝑜, 𝑇
By keeping constant the individual’s money
income, the prices of other commodities
and the individual tastes we can write:
𝑄𝑑𝑥
= 𝑓 𝑃𝑥, 𝑀, 𝑃𝑜, 𝑇
The bar on top of M Po, and T means they
are kept constant
86. 3.1.2 Market Demand
Market (Aggregate Demand)
• The market or aggregate demand for a
commodity gives the alternative amounts of the
commodity demanded per time period, at
various alternative prices, by all the individuals
in the market
• The market demand depends on all the factors
that determine the individual’s demand and the
number of buyers in the market
• It is obtained by the horizontal summation of all
the individual demand curves for the
commodity
88. 3.1.2 Market Demand Curve
• In this case the individual demand functions
were identical represented by this demand
function
𝑑1 = 𝑑2 = 8 − 𝑃𝑥
• The market demand is given by
𝐷𝑥 = 𝑑1 + 𝑑2 = 16 − 2𝑃𝑥
• The market demand for a good is influenced by
the way income is shared among household
• The economy with many rich people, will have
high market demand for luxury goods
• The economy with many poor people will have
high market demand for inferior goods
