Demand of Goods and Services

Classification of Goods and Services

From conventional perspectiveFree goodsPublic goodsEconomic goods

From Islamic perspectivesAl-tayyibatAl-Rizq

Conventional PerspectivesFree Good

Goods that have no production cost (air, sunlight, rain

water).

Public Goods

Goods that have a common use and are benefit to

everyone (public clinics, schools, hospital and others.)

Economic goods

Goods which supply is limited and require costs to

purchase them (books, clothes, houses, movies)

Price is involved in obtaining them.

Islamic PerspectiveAl-Tayyibat Al-tayyibat means good things, good and pure things,

clean and pure things, good and wholesome things and sustenance of the best.

Bad goods are not considered as goods in Islam.

Al- Rizq Al-rizq is used to denote the following meanings;

- Godly sustenance, divine bestowal, godly provision and heavenly gifts

All these meanings denote that Allah s.w.t is the only sustainer and provider for all creatures.

Hierarchy of needs Dharuriyah

Goods that are classified as basic needs and necessary for a living.

Hajiyat Goods that will improve the quality of human life

Kamaliat Goods that contribute towards the perfection of

human life Tarafiat

Goods that are consider extravagant and wasteful

DEMAND OF GOODS AND SERVICES

The quantity of various goods that people are willing and able to buy at a particular time and at a given range of prices.

The desire to buy goods and services with the ability to pay.

Definition of demand

Steps to draw demand curve:Draw a horizontal(x-axis) and vertical(y-

axis) axisName x-axis as quantity and y-axis as

price

Plot the graft according to the data given

Price

Quantity

The Individual Demand Curve andthe Law of Demand

Demand Schedule for Pizza

Price ($) Quantity of pizzas

per month2 13

4 10

6 7

8 4

10 1

The Individual Demand Curve andthe Law of Demand

The individual demand curve shows the relationship between the price of a good and the quantity that a single consumer is willing to buy, or quantity demanded.

• The The law of demandlaw of demand states that states that the higher the price, the the higher the price, the smaller the quantity smaller the quantity demanded, ceteris paribus demanded, ceteris paribus (Other thing remain constant).(Other thing remain constant).

Market Demand

Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

From Household Demand to Market Demand

Assuming there are only two households in the market, market demand is derived as follows:

How to calculate market demand?

Price Ind.1 Ind. 2 Market Demand

RM 2.00 600 300 (600 + 300) = 900

RM 3.00 400 200

RM 4.00 200 100

RM 5.00 100 50

Determinant of Demand Price of the goods Price of related goods or complementary

goods Consumers income Taste and preference The number of buyers in the market Expectation about the future price Weather Availability of credit facilities

What happens when the price increases for a good that has a complement?

The demand curve for the substitute good decreases

What aresubstitute goods?

Goods that compete with one another for consumer purchases

The Impact of a Change in the Price of Related Goods

• Price of hamburger rises

• Demand for complement good (ketchup) shifts left

• Demand for substitute good (chicken) shifts right

• Quantity of hamburger demanded falls

The Impact of a Change in Income

• Higher income decreases the demand for an inferior good

• Higher income increases the demand for a normal good

Change in Quantity Demanded vs. Change in Demand

Change in quantity demanded

Change in demand

Refer to a movement

along a given demand

curve

As a result of a change in the commodity price

Refer to a shift in the

demand curve (left / right)

As a result of a change in

the economics variable and

not the price

When price changes, what happens?

The curve does not shift.

There is a change in the quantity demanded

When something changes other than price, what happens?

The whole curve shifts,there is a

change in demand

$20

$15

$10

$5

10 20 30 40

D1

D2

P

50

A

When the ceteris paribus assumption is relaxed, the whole curve can shift

Q

B

A Change in Demand Versus a Change in Quantity Demanded

To summarize:

Change in price of a good or service leads to

Change in quantity demanded(Movement along the curve).

Change in income, preferences, orprices of other goods or services

leads to

Change in demand(Shift of curve).

1.Joint Demand A demand for a particular good is likely to increase the demand for another

good. Complementary goods Pen and ink, toothbrush and toothpaste

2.Competitive Demand An increase in the demand for one good will reduce the demand for another

good. Substitutes goods Pepsi cola and coca cola, KFC and McDonalds, PROTON and HONDA

3.Derived Demand The demand for a good increases, demand for the factor of production to

produce goods will also increase. House: bricks, cement, tiles etc

4.Composite Demand Refer to multi purpose products Rubber can be used to produce tires and shoes.

Inter related demand

What is aninferior good?Any good for which there is an inverse relationship between changes in income and its demand curve

What is a normal good?Any good for which there is a direct relationship between changes in income and its demand curve

What does an inverse relationship between price & quantity mean?

It means that the two move in opposite directions

Exceptional Demand Doesn't follow

the law of demand

Giffen goods The demand

curve for giffen goods is normally upward sloping.

P

Q

d

Luxuries goods Those products that have an income elasticity of demand greater than 1.

The more expensive the goods, the greater will be the demand.

Jewellery, antique furniture, picture of Mona Lisa etc

Q

Pd