Theory of demand

Demand- It refers to the quantities of a

commodity which consumers are willing and able
to purchase at various prices at a particular period
of time.

This definition includes willing, able, period of

time.

Willing/Desire- is just a wishful thinking, Desire is

just a wish for a commodity and a person can desire a
commodity even if he does not have the capacity to
buy it from the market.
Able/purchasing power- If an individual have enough
money to buy a product its called as purchasing power.
Time- Demand is always express with reference to a
particular period of time.

DETERMINANTS/FACTOR AFFECTING
 DEMAND

1. Price of the commodity: There is an Inverse

relationship exists between price of the commodity and
demand of that commodity.
It means with the rise in price of the commodity the demand
of that commodity falls and vice-versa.
 2. Price of related goods: (i) Substitute Goods: Substitute goods are
those goods which can be used in place of another goods and give the same
satisfaction to a consumer.

There would always exist a direct relationship between the price of substitute
goods and demand for given commodity.
It means with an increase in price of substitute goods, the demand for given
commodity also rises and vice-versa. For example, Pepsi and Coke.

(ii) Complementary Goods: Complementary goods are those which are useless in

the absence of another goods and which are demanded jointly.

There would always exist an inverse relationship between price of complementary

goods and demand for given commodity.
It means, with a rise in price of complementary goods, the demand for given
commodity falls and vice-versa. For example, pen and refill.

3. Income of a Consumer:
[Link] Normal Commodity: For normal commodity, with a rise in
income, the demand of the commodity also rises and vice-
versa. Shortly, direct relationship exists between income of a
consumer and demand of normal commodity.

[Link] Inferior Goods: For inferior goods, with a rise in income,

the demand of the commodity falls and vice-versa.
Shortly, inverse relationship exists between income of a
consumer and demand of inferior goods.

[Link] Necessity Goods: For necessity goods, whether income

increases or decreases, quantity demanded remains constant
 4. Taste and Preferences of the Consumer: Tastes, preferences and habits of a
consumer also influence its demand for a commodity.

For example, if Black and White TV set goes out of fashion, its demand will fall.
Similarly, a student may demand more of books and pens than utensils of his
preferences and taste.
Miscellaneous: Some of the other factors affecting the demand of a consumer are:
Change in weather, change in number of family members, expected change in
future price, etc.

5. Population Size: Demand increases with the increase in population and

decreases with the decrease in population. This is because with the increase
(or decrease) in population size, the number of buyers of the product tends to
increase (or decrease). Composition of population also affects demand. If
composition of population changes, namely, female population increases,
demand for goods meant for women will go up.

6. Distribution of Income: Market demand is also influenced by change in

distribution of income in the society. If income is not equally distributed, there
will be less demand. If income is equally distributed, there will be more
demand.

LAW OF DEMAND
1. STATEMENT OF THE LAW:
THE LAW OF DEMAND STATE THAT, OTHER THINGS REMAINS
CONSTANT, THE QUANTITY DEMANDED OF A COMMODITY
INCREASES WHEN ITS PRICE FALLS AND DECREASE WHEN ITS
PRICE RISES.

2. ASSUMPTIONS:
1. Their should be no change in the income of the
consumer.
2. Their should be no change on the taste and
preferences of the consumers.
3. Prices of the related commodities should remains
unchanged.
4. The commodity should be normal commodity.
5. Size of population and age composition of
population should not change.
6. The distribution of income should not change.

3. EXCEPTIONS OF THE LAW:

a. GIFFEN GOODS: Those inferior goods on which the

consumer spends a large part of his income and the demand
for which falls with a fall in their price.

For example: maize and coarse {inferior food items}.

[Link] OF SNOB APPEAL: Expenditure on or

consumption of luxuries on a lavish scale in an attempt to
enhance one's prestige is called as conspicuous
consumption.
These goods are demanded because of the enjoyment they
give to their possessor from the feeling that other people envy
him for possessing these high-priced items.

Example- Diamond.

c. Emergencies: Law of demand may not hold good during

emergencies like war, famines, etc. At such times,
consumers behave in an abnormal way. In this case they can
even buy products at high prices.

d. Expectations About Future Prices: If price of a

commodity is rising today and it is likely to rise more in the
future, people
will buy more even at the existing higher price in future.

e. Quality-Price Relationship: Sometimes consumers

assume that high priced goods are of higher quality than the
low-priced goods. They take price as an index of quality. In
such cases, more of the goods may be demanded at a
higher price. This is known as Veblen effect.

f. Change in Fashion: When a commodity goes out of

fashion, consumers will not purchase a larger quantity of this
commodity even when its price is reduced.

4. Demand schedule and demand curve

 A demand schedule is a table that shows the quantity demanded
at each price.
 A demand curve is a graph that shows the quantity demanded
at each price. OR The Graphical representation of demand
schedule is called as Demand Curve.
Price (per gallon) Quantity demanded (millions of gallons)
$1.00 800
$1.20 700
$1.40 600
$1.60 550
$1.80 500
$2.00 460
$2.20 420
 MOVEMENT ALONG THE DEMAND
CURVE AND SHIFT OF THE DEMAND
CURVE

1. Change in Quantity Demanded

Movement Along the Demand Curve:
When the amount of a commodity changes as a
result of change in its own price, while other
determinants of demand remain constant, it is
known as change in the quantity demanded.

Change in quantity demand are of two types:

I. Expansion of demand
II. Contraction of demand

Expansion (Extension) of Demand: When

the quantity demanded of a commodity rises
due to fall in its own price, other things
remaining the same, is called as
Expansion/Extension of Demand.
It is indicated by downward movement along
the demand curve.
Contraction of Demand: When the quantity
demanded of a commodity fall due to rise in
its own price, other things remaining the
same, is called as Contraction of Demand.
It is indicated by Upward movement along the
demand curve.
2. Change in Demand – Shift in Demand
Curve
When the amount purchased of a commodity rises or
falls because of change in factors other than the own
price of the commodity, it is called change in Demand.

Change in Demand may be of two types:

I. Increase in Demand
II. Decrease in Demand

Increase in Demand: refers to a

situation when a consumer buys a larger
amount of a commodity at the same
price because of change in factors other
than the own price of the commodity.
In this case entire demand curve shift to the right.

Decrease in demand: refers to

a situation when a consumer buys
a smaller amount of a commodity
at the same price because of
change in factors other than the
own price of the commodity.
In this case entire demand curve
shift to the left.
Difference Between Increase in demand and expansion in Demand
 REASONS FOR DOWNWARD
SLOPE OF THE DEMAND CURVE

1. Law of Diminishing Marginal Utility:

We consume goods and services because they
give us utility. According to the law Marginal utility
falls with increase in consumption.
Marginal utility=Price
From this equilibrium condition, it follows that a
consumer would purchase a larger quantity of a
commodity only when its price falls.

2. Income Effect:
A change in demand on account of a change in
the real income resulting from a change in the
price of the commodity is known as the income
effect.
When the price of the commodity falls, the
consumer can buy a larger amount of
commodity with his given money income. In
other words a fall in price leads to an increase in
real income.
3. Substitution Effect:
The substitution effect is the effect that a change
in relative prices of substitute goods has on the
quantity demanded.
When the price of commodity falls and price of
substitute remains unchanged, it become relatively
cheaper in comparison to its substitutes.
So Demand of relatively cheaper good Will
increase due to increase in the number of
consumers.

[Link] in Number of Consumers:

A fall in the price of commodity leads to an
increase in the quantity demanded by the existing
consumers due to income and substitution effects.
When the price falls new consumers will start
purchasing this commodity.
When the prices are high only rich people can
afford but by fall in price now moderate income
consumers and poor persons will able to afford it.
Thus, when the price of the commodity falls, the
number of consumers increases and this tends to
raise the demand for the commodity.
Words that Matter

1. Demand: Demand is a quantity of a commodity which a

consumer wishes to purchase at a given level of price and
during a specified period of time.

2. Substitute goods: Substitute goods are those goods which

can be used in place of another goods and give the same
satisfaction to a consumer.

3. Complementary Goods: Complementary goods are those

which are useless in the absence of other good and which are
demanded jointly.

4. Normal goods: For normal commodity, with a rise in

income, the demand of the commodity also rises and vice-
versa.

5. Inferior Goods: For inferior goods, with a rise in income, the

demand of the commodity falls and vice-versa.

6. Market demand: Market demand refers to the quantity of a

commodity that all the consumers are willing and able to buy, at
a particular price during a given period of time.

7. Demand function: It shows the relationship between

quantity demanded for a particular commodity and the factors
that are influencing it.

8. Cross Price effect: When demand for one commodity is

affected by the change in the price of another commodity it is
known as Cross Price Effect.

9. Law of Demand: It states that price of the commodity and

quantity demanded are inversely related to each other when
other factors remain constant (ceteris Paribus).

10. Movement along the demand curve: The change in

quantity demanded due to the change in price of the commodity
is known as movement along the demand curve.

11. Expansion in demand: The rise in quantity demanded due

to the fall in price of the commodity, is known as expansion in
demand.

12. Contraction in demand: The fall in quantity demanded

due to the rise in price of the commodity is known as
contraction in demand.

13. Shift in demand: If demand changes due to the change in

factors other than price, it is known as shift in demand curve.

14. Increase in demand: An increase in demand means that

consumers now demand more at a given price of a commodity.

15. Decrease in demand: A decrease in demand means that

consumers now demand less at a given price of a commodity.

16. Income Effect: Quantity demanded of a commodity

changes due to change in purchasing power (real income),
caused by change in price of a commodity is called Income
Effect.

17. Substitution Effect: It refers to substitution of one

commodity in place of another commodity when it becomes
relatively cheaper.
18. Law of Diminishing Marginal Utility: This law states that
when a consumer consumes more and more units of a
commodity, every additional unit of a commodity gives lesser
and lesser satisfaction and marginal utility decreases.

19. Giffen goods: Giffen goods are a special category of

inferior goods in which demand for a commodity falls with a fall
in its price. In case of certain inferior goods when their prices
fall, their demand may not rise because extra purchasing power
(caused by fall in prices) is diverted on purchase of superior
goods.

20. Price Effect: The sum total of income effect and

substitution effect is called the price effect.

 The difference between demand and quantity demanded

In economic terminology, demand is not the same as quantity demanded.

When economists talk about demand, they mean the relationship between
a range of prices and the quantities demanded at those prices, as illustrated
by a demand curve or a demand schedule. When economists talk about
quantity demanded, they mean only a certain point on the demand curve or
one quantity on the demand schedule. In short, demand refers to the curve,
and quantity demanded refers to a specific point on the curve.