Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Demand Theory Demand theory is a concept in economics that explains the relationship between the price of a good or service and the quantity demanded by consumers at a given time. The theory of demand states that the higher the price of a good or service, the lower the quantity demanded by consumers, and conversely, the lower the price of a good or service, the higher the quantity demanded by consumers. There are several factors that affect demand, such as prices of goods or services, consumer income, consumer preferences, prices of substitutes, prices of complementary goods, economic conditions, and social and cultural factors. In economic theory, there are two types of demand, namely elastic demand and inelastic demand. Elastic demand occurs when a change in price causes a large change in the quantity demanded, whereas inelastic demand occurs when a change in price causes only a small change in the quantity demanded. Demand theory has an important role in business decision making, because companies must consider the factors that affect demand when setting the price of their products. Low demand can reduce the company's income, while high demand can increase the company's income. Demand theory explains the nature of buyer demand for a commodity, and explains the relationship between the quantity demanded, price, and the formation of the demand curve. A commodity is produced by producers because it is needed by consumers, and consumers are willing to buy it. Consumers are willing to buy the commodities they need if the price of the product is in accordance with their wishes. According to Rahardja and Manurung (2008), several factors influence the demand for goods, namely: 1. The price of the item itself The nature of the relationship between demand and price is described in the law of demand. The law of demand hypothesis states that the lower the price of a commodity, the greater the quantity of the commodity demanded, conversely the higher the price of a commodity, the less the commodity is demanded. According to Sugiarto (2007), the hypothesis is based on the assumptions: a) If the price of a commodity falls, then purchases of other related commodities will decrease and increase purchases of commodities that have experienced a decrease in price. A decrease in the price of a commodity causes the real income of buyers to increase, thus encouraging them to increase purchases. b) When the price of a commodity rises, buyers will look for other commodities that can be used as substitutes for commodities that have experienced price increases. Price increases cause buyers' real income to decrease, thus encouraging buyers to reduce their purchases. 2. Price of other related goods. The relationship between two kinds of goods can be a substitute or a complement. According to Djojodipuro (1991) substitute goods are goods that fulfill the same need. Usually, substitute goods cannot absolutely replace one another, so that consumers can choose which one is more suitable to meet their needs. In substitute goods, if the price of one good rises, regardless of the effect of income, the price of the other good will also rise. This is due to an increase in the price of the first good resulting in a transfer of demand to other goods and an increase in price. Therefore for substitute goods, the price movement is unidirectional. 3. Per capita income level. Per capita income level can reflect purchasing power. 4. Taste or habit. 5. Total population. 6. Future price forecast. 7. Income distribution 8. Business Djojodipuro (1991) mentions that the demand curve The relationship between the quantity of goods demanded as a function of price and holding other variables constant (ceteris paribus). The effect of changes in the price demanded, namely item x, on the quantity is described as a movement along the demand curve or commonly called the law of demand. In Figure 2b changes in other variables such as prices of other goods, income and tastes are described as shifts in the demand curve. The curve shifts to the right if the change is positive, and shifts to the left if the change is negative. For example, a shift in the curve due to an increase in income. At the same price consumers are willing to buy large quantities (0Qx–0Q'x) or the same amount of goods, for example 0Qx, consumers are willing to pay a higher price (0P – 0P'x). In demand theory, there is the concept of a demand curve which describes the relationship between price and quantity demanded. The demand curve shows that the higher the price of a good or service, the lower the quantity demanded, whereas the lower the price of a good or service, the greater the quantity demanded. In addition, demand theory also relies on the concept of elasticity of demand, which measures how responsive demand is to changes in price. The elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. If the elasticity of demand is greater than one, then demand is considered elastic, meaning that a small change in price can cause a large change in the quantity demanded. Conversely, if the elasticity of demand is less than one, demand is considered inelastic, meaning that a small change in price causes only a small change in the quantity demanded. Demand theory is also important in economic policy and business strategic planning. Governments and companies can use demand theory to plan pricing and promotion policies, and to understand consumer responses to economic changes or changes in consumer preferences.