Page 30 - DECO405_MANAGERIAL_ECONOMICS

Unit 2: Market Demand

activities must be supplied by an energy production system requiring movements from zones Notes
of extraction, to refineries and storage facilities and, finally, to places of consumption.
Warehousing can also be labeled as an indirect derived demand since it is a non-movement of
a freight element. Warehousing exists because it is virtually impossible to move commodities
instantly from where they are produced to where they are consumed.
Transportation can also be perceived as an induced (or latent) demand which represents a
demand response to a reduction in the price of a commodity. This is particularly the case
in the context where the addition of transport infrastructures results in traffic increases
due to higher levels of accessibility. Roadway congestion is partially the outcome of
induced transport demand as additional road capacity results in mode shifts, route shifts,
redistribution of trips, generation of new trips, and land use changes that create new trips
as well as longer trips. However, the induced demand process does not always take place.
For instance, additional terminal capacity does not necessarily guarantee additional traffic
as freight forwarders are free to select terminals they transit their traffic through, such as
it is the case for maritime shipping.
Source: http://people.hofstra.edu/geotrans/eng/ch1en/conc1en/deriveddemand.html

2.1.4 Law of Demand

The Law of demand explains the functional relationship between price of a commodity and the
quantity demanded of the commodity. It is observed that the price and the demand are inversely
related which means that the two move in the opposite direction. An increase in the price leads
to a fall in quantity demanded and vice versa. This relationship can be stated as “Other things
being equal, the demand for a commodity varies inversely as the price”.

Example: Ram is demanding a motorbike manufactured by Company A. Now, if
Company A increases the price of the bike substantially, say by 10% , then Ram might change his
mind and decide to buy motorbike from company B whose price is lesser or he might postpone
his demand altogether.
A demand curve considers only the price-demand relation, other factors remaining the same.
The inverse relationship between the price and the quantity demanded for the commodity per
time period is the demand schedule for the commodity and the plot of the data (with price on the
vertical axis and quantity on the horizontal axis) gives the demand curve of the individual.

Example:
An Individual’s Demand Schedule for Commodity X

Price x (per Unit) Px Quantity of x demanded (in Units) Dx
2.0 1.0
1.5 2.0
1.0 3.0
0.5 4.5

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