introduction to price theory
Published on: Mar 4, 2016
Transcripts - Price theory
• This is the desire backed by willingness to have a
commodity. It can also be defined as a particular
quantity of a commodity that people and firms
want to buy at a particular price.
• It is also the schedule of quantities that will be
bought per unit of time at various prices
• Price of other related commodities. This may lower
or increase the quantity demanded of the commodity
or leave it unchanged. These commodities include.
• Substitutes. Here two commodities serve the same purpose
thus an increase in the price of one substitute increases
quantity demanded of the other as consumers leave the
expensive commodity and shift to it's substitutes and the
reverse is true. E.g. beans and peas are substitutes.
• Complements. These are commodities that are jointly
demanded e.g. cars and fuel. Increase in the demand for cars
will lead to increased demand for fuel and vice versa.
• Price theory refers to the study of prices. Prices are
the relative values of goods and services in terms of
money at a particular time. Prices are tools by which
the invisible hand (market) coordinates individual
desires and limits how much people are willing to
• Price theory involves the study of the markets and
how they operate. A market is that arrangement in
which buyers and sellers come together to exchange
ideas, commodities e.t.c
Determinants of demand
• Price of the commodity; As per the law of
demand when the commodity's prices increase
it's demand decreases and vice versa ceteris
peribus. (other factors being constant) this is the
law of demand. Demand of the good decreases
when price increases because;• People leave the cheap substitutes and buy more of the
• More people join the market to begin the consumption
of the commodity when it becomes cheaper.
• Tastes and preferences. These depend on age,
habit, education, religion e.t.c Incase they are in
favor of a particular commodity it's demand will
be high and vice versa. E.g. when a commodity is
out of fashion its demand will decrease as people's
tastes could have shifted making its consumption
• Income of the consumer. Arise in the income of
the consumer will be marched with a rise in the
amount of commodity that he demands. However
this is only incases of normal goods.
• For the case of inferior when the income
increases quantity demanded decrease as the
consumer now sees the goods as of a lower
status. E.g. some one shifting from local brew
to beer as his income rises.
• For necessities as the income of the consumer
increases quantity demanded remains constant.
E.g. demand for salt can not increase even if
the income of the consumer was to increase.
• Population. The higher the population the
higher the demand and vice versa.
• Age. The more the population is composed
of a mature and working population the
higher the demand and vice versa. I.e. if the
population is such that there are many
young people and the very old in society
demand will be low as they have low
• For the case of normal goods increase in the
consumers income is marched with an increase
in quantity demanded.
• Social and cultural factors. This considers
people's beliefs and religion. In some
societies the demand for particular goods is
very low because of the culture norms e.g.
pork in Saudi Arabia.
• Price expectations (speculation). Incase
people predict an increase in the prices in
future due to random events such as war,
they may demand more at the present to
store for that future date thus increasing
quantity demanded and vise versa.
• Seasonality. Some commodities are
highly demanded during particular
seasons and their demand falls when the
season elapses e.g. demand of Christmas
cards is high during the Christmas season
and very low when the season elapses.
• Qdx = Q ( Px, Py, Y, T, Pe, S, A,..)
• Where Qdx is quantity demanded of commodity x.
Px is the price of commodity x.
Py is the price of other related commodities.
Y is the income of the consumer.
T is the tastes and preferences.
Pe is the price expectations.
S are the social factors e.g. culture and religion.
A is the age of the society.
• The demand function shows that how
much of a good some one wants to buy
depends on many other things besides it's
price. I.e. Individuals tastes and
preferences, prices of other goods e.t.c.
These are some of the factors held
constant when making study of change in
price on the goods quantity demanded