DEMAND AND LAW OF DEMAND

Why is that goods command prices and why some goods are
expensive while others are cheaper.
• useful
• scarce in relation to the amount which people would like
to have.

• 'Free goods' are Goods like air, which are the gifts of
nature and are available in unlimited quantity so they
do not command a price.
• Economic goods are scarce and they command a price.
Thus, economic goods like clothes, food, cars, etc. have a
price because they are useful as well as scarce in their
availability.

MEANING OF DEMAND
Demand for a commodity refers to the quantities of a
commodity which consumers are willing and able to purchase
at various possible prices during a particular period of time.
1.'Demand' and Desire is not the same thing as desire for it.
Desire is just a wishful thinking. Demand refers to both the
desire to purchase and the ability to pay for a commodity. It
is only when desire is backed by the willingness and power to
pay that gives rise to demand.
2. Demand in economics is always at a price.
3. Demand is always expressed with reference to a particular
time period.
Types of Demand
1. Individual Demand and Market Demand: Individual
demand refers to the demand for a commodity by a single
consumer. Thus, individual demand refers to the quantities of
a commodity that an individual consumer is willing to
purchase at various prices during a given period of time. An
individual consumer is called a household in economics.
The sum total of demand by all the households or individuals
is known as the market demand. Thus, market demand refers
to the total quantities of a commodity that all the households
are willing to buy at various prices during a given period of
time.

2. Ex ante and Ex post Demand: Ex ante demand refers to the

amount of goods that consumers want to or willing to buy
during a particular time period. It is the planned or desired
amount of demand. Ex post demand refers to the amount of
the goods that the consumers actually purchase during a
specific period. It is the amount of the goods actually bought.

3. Joint Demand: Joint demand refers to the demand for two

or more goods which are used jointly or demanded together.
For example, cars and petrol, butter and bread, milk and
sugar, etc. are the goods which are used together.

4. Derived Demand: The demand for a commodity that arises

because of the demand for some other commodity is called
derived demand. For instance, demand for steel, bricks,
cement, stones, wood, etc. is a derived demand-derived from
the demand for houses and other buildings.
5. Composite Demand: Demand for goods that have multiple
uses is called composite demand. For example, the demand for
steel arises from various uses of steel such as use of steel in
making utensils, bus bodies, room coolers, cars and so on.

DETERMINANTS OF DEMAND/ FACTORS AFFECTING

DEMAND
The factors that influence the decision of households to
purchase a commodity are known as the determinants of
demand.
1. Price of the Commodity: The most important determinant of
the demand for a commodity is the own price of the
commodity. Normally, there is an inverse relationship
between the price of the commodity and its quantity
demanded. It implies that lower the price of the commodity,
the larger is the quantity demanded; and the higher the price,
the lesser is the quantity purchased. Price demand refers to
different quantities of a commodity which are purchased at
different prices.

2. Income of the Consumer: Income of the consumer is the

basic determinant of the quantity demanded of a product as it
determines the purchasing power of the consumer. Generally,
there is a direct relationship between the income of the
consumer and his demand for a product, Le., with an increase
in income, the demand for the commodity increases.
Three types of goods: (i) normal goods, (ii) inferior goods,
(iii) inexpensive necessities of life.
(i) Normal goods (NG): Normal goods are those goods the
demand for which increases with increase in income of the
consumers, and decreases with fall in income. So, there is a
positive relationship between consumer's income and the
quantity demanded. For instance, a consumer may increase
his demand for clothes, refrigerators, television sets and cars
as his income increases.
(ii) Inferior goods (IG): Inferior goods are those goods the
demand for which falls with increase in income of the
consumer and increases with fall in income. So, there is an
inverse relationship between income of the consumer and the
demand for inferior goods. For example, the demand for
coarse cereals like maize or jowar may decrease when income
increases beyond a particular level because the consumers
may substitute it by a superior cereals like wheat or rice.

(iii) Inexpensive necessities (IN): In case of inexpensive

necessities of life such as salt and matchbox, the quantity
purchased increases with increase in income up to a certain
level and thereafter it remains constant irrespective of the
level of income.

This functional relationship between the demand for a

commodity and the level of income is known as income
demand.

3. Consumers' Tastes and Preferences: The level of demand is

influenced also by the tastes and preferences of the
consumers. Tastes and preferences depend on social customs,
habits of the people, fashion, general lifestyle of the people,
advertisement, new inventions, etc. Some of these factors like
fashion keep on changing, leading to change in consumers'
tastes and preferences. Denim Jeans, Going Gym is trending.

4. Prices of Related Goods: there are two categories, namely

(i) substitute or competitive goods and
(ii) complementary goods.

(i) Substitute goods: Substitute goods are those goods which

satisfy the same type of need and hence can be used in place of
one another to satisfy a given want. Tea and coffee, coke and
pepsi are examples of substitute goods.

(ii) Complementary goods: Complementary goods are those

goods which are complementary to one another in the sense
that they are used jointly or consumed together to satisfy a
given want, like car and petrol, gas and gas stoves. There is
an inverse relationship between the demand for a good and
the price of its complement.

The way demand the for one particular product is affected by

a change in the price of another product is known as the
'cross demand' or 'cross price effect'.

5. Consumers' Expectations: Consumers' expectations about

such things as future prices, income, availability of goods,
etc., play an important role in determining the demand for
goods and services in the current period because goods can be
stored or their consumption can be postponed. For instance, if
consumers expect a rise in the price of a commodity in future,
they would demand greater amount of this commodity today
with a view to avoid purchasing it at a higher price in future.

6. Consumer-Credit Facilities: If consumers are able to get

credit facilities or they are able to borrow from the banks,
they would be tempted to purchase certain goods they could
not have purchased otherwise. For instance, the demand for
cars in India has increased partly because people are able to
get loans from the banks to purchase cars.
7. Demonstration Effect: Demonstration effect plays an
important role in affecting the demand for a commodity.
Demonstration effect refers to the tendency of a person to
copy the consumption style of other persons such as his
friends, neighbours, etc. Ex- Iphone And Mercedes
8. Size and Composition of Population:
Market demand for a commodity depends on the size and
composition of the population. The population size of a
country determines the number of consumers. The larger the
population, the larger is likely to be the number of consumers.
Composition of population affects the demand because the
types of goods demanded by different people are different.

9. Distribution of Income: Distribution of income in the

country also affects the demand for goods. If the distribution
of income in a country is unequal, rich people will have lager
purchasing power with them. Therefore, there will be more
demand for luxury goods like cars and LED televisions.
10. Climatic Factors: Demand for different goods depends on
the climatic factors because different goods are needed for
different climates. For instance, the demand for ice, fans, air
conditioners, cold drinks, cotton cloths, etc, increases in
summer.

11. Government Policy: Economic policy of the government

also influences the demand for commodities. If the
government imposes taxes on various commodities in the
form of GST, excise duties, etc., the prices of these
commodities will increase.
Demand Function
A demand function states the relationship between the
demand for a product and its various determinants.
Dn = f(Pn, Y, T, E, H, G……)
This equation is called demand function. It is a shorthand
way of saying that quantity demanded depends on various
determinants.

LAW OF DEMAND
The law of demand shows a functional relationship between
the price and the quantity demanded of a commodity. Law of
demand is one of the best known and most important laws of
economic theory.

Statement of the Law

The law of demand states that, other things remaining equal,
the quantity demanded of a commodity increases when its
price falls and decreases when its price rises.
Assumptions
The law of demand assumes that 'other things remain the
same, i.e., assumption of ceteris paribus order. Law of
demand is based on the following main assumptions:
1. There should be no change in the income of the consumer.
2. There should be no change in the tastes and preferences of
the consumers.
3. Prices of the related commodities should is remain
unchanged.
4. The commodity should be a normal commodity.
5. Size of population and age composition of population
should not change.
6. The distribution of income should not change.
7. There is no expectation of change in prices in future.

Demand Schedule
The demand schedule is a tabular statement that shows
different quantities of a commodity that would be demanded
at different prices during a given period. Demand schedule is
of two types, namely (1) Individual demand schedule, and (2)
Market demand schedule.

1. Individual Demand Schedule: It is the table which shows

various quantities of a commodity that would be purchased at
different prices by an individual household or a consumer
during a given period.
2. Market Demand Schedule: Market demand schedule is a
table which shows various quantities of a commodity that all
the buyers (consumers) are willing to purchase at different
prices during a given period. It shows the aggregate demand
of all the consumers at different prices of a particular
commodity during a given time period.

Demand Curve
Demand curve is a graphic presentation of the law of demand.
The picturisation of the demand schedule is called the
'demand curve'. It is the curve showing different quantities
demanded at various alternative prices during a given period
when all other factors (other than the own price of the
commodity) affecting demand are held constant.
Demand curves are also of two types, namely (1) Individual
demand curve, (2) Market demand curve.
1. Individual Demand Curve: Individual demand curve for a
good is the curve that shows different quantities of the good
which an individual consumer is willing to buy at different
prices during a given period of time.
2. Market Demand Curve and Its Derivation from Individual
Demand Curves: The market demand curve is the graphic
presentation of the market demand schedule. It is a curve that
represents different quantities of goods which all the
consumers in the market are willing to buy at different prices
during a specified period when all other factors affecting
demand remain the same. It shows aggregate demand of all
the consumers in the market at different prices.

Reasons for Downward Slope of the Demand Curve

Inverse relationship between the price and the quantity
demanded can be explained in terms of the following factors:
1. Law of Diminishing Marginal Utility:
The law of diminishing marginal utility states that with an
increase in the units of a commodity consumed, every
additional unit of the commodity gives lesser satisfaction to
the consumer. A consumer will maximise his satisfaction
when he equalises the marginal utility of the commodity with
its price, i.e.,
Marginal utility of a commodity = Price of the commodity

From this equilibrium condition, it follows that a consumer

would purchase a larger quantity of a commodity only when
its price falls because the marginal utility from additional
units 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 a
commodity is known as the income effect. The income effect
occurs when the price change affects consumer purchasing
power and thus leads to a change in the quantity demanded.
When the price of a commodity falls, the consumer can buy a
larger amount of the commodity with his given money income
.A fall in the price of the commodity results in an increase in
real income, i.e., purchasing power of the given money
income increases.

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 a commodity falls and prices of its
substitutes remain unchanged, it becomes relatively cheaper
in comparison to its substitutes. For instance, if price of coffee
falls, the price of tea remaining the same, coffee will become
relatively cheaper. Coffee becomes more attractive to people
in comparison with tea. Consumers would naturally shift
from the consumption of tea to coffee. This increase in
demand on account of a commodity becoming relatively
cheaper is known as the substitution effect.
The sum total of income effect and substitution effect is called
the price effect. In short,

Price Effect = Income Effect + Substitution Effect

4. Increase in Number of Consumers: A fall in the price of a

commodity leads to an increase in the quantity demanded by
the existing consumers due to income and substitution effects.
At the same time, when the price of a commodity falls, many
new consumers will start purchasing this commodity. At a
very high price of a commodity, only a few rich people can
afford to buy that commodity. When the price of this
commodity falls a little, people with moderate income will
also be able to purchase this commodity. At still lower prices,
even the poor persons will be able to afford it and, therefore,
the demand for this commodity will rise.

5. Several Uses of a Commodity: There are some goods which

can be put to a number of uses. Electricity, milk are examples
of such commodities. When the prices of such commodities
are very high, they will be used for more important purposes
only and, therefore, a small quantity will be in demand. But
when the price falls, these commodities will be put to less
important uses also, leading to an increase in their demand.
For example, when the price of electricity is very high, it will
be used mainly for lighting purposes. When its price falls, it
will be used for cooking as well.

Exceptions to the Law of Demand

If more quantity of a commodity is demanded at a higher
price, and less of it is purchased at a lower price. In these
situations, the inverse relationship between price and the
amount purchased does not hold good. These situations are
known as exceptions to the law of demand.
There may be several reasons for an upward sloping demand
curve:
1. Giffen Goods: Giffen goods are 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 jowar are coarse (inferior) food items
for an average Indian consumer. They are consumed largely
by poor people. As the price of 'maize' falls, real income of the
consumer rises. With an increase in real income, a consumer
can afford to purchase superior food items like rice or wheat.
Since there is a limit to the intake of food, an increase in
demand for wheat or rice would lead to a smaller quantity
demanded of maize. Thus, when the price of coarse (inferior)
cereals like maize and jowar falls, the consumers have
tendency to spend less on them and shift over to superior
cereals like wheat and rice.
2. Articles of Snob Appeal: The law of demand does not apply
to the commodities which serve as 'status symbol', increase
social prestige or are a source of display of wealth and
richness. Veblen, who was first to coin the term, has termed
these goods as goods of 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. Diamonds is often
given as an example of this case.

3. 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 and
store it up. They will do this in order to avoid the pinch of
higher price in future.

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

emergencies like war, famines, etc. At such times, consumers
behave in an abnormal way. If they expect shortage of goods,
they would buy and hoard goods even at high prices during
such periods.

5. 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 (after the name of Thorstein
Veblen who indicated this fact).
6. 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. For instance, if the
fashion of some ladies wear changes, ladies will not purchase
it in large quantity even if the price is reduced.

MOVEMENT ALONG THE DEMAND CURVE AND SHIFT OF

THE DEMAND CURVE
Change in Quantity Demanded- Movement along the Demand
Curve
When the amount of a commodity changes (rises or falls) as a
result of change in its own price other factors remain
constant, it is known as change in the quantity demanded.
Change in the quantity demanded may be of two types: (i)
expansion of demand, (ii) contraction of demand.

1. Expansion (Extension) of Demand: When the quantity

demanded of a commodity rises due to fall in its own price,
other things remaining the same, it is called 'rise in quantity
demanded' or 'expansion of demand'.

2. Contraction of Demand: 'Contraction of demand' or 'fall in

the quantity demanded' refers to a decrease in the quantity
demanded of a commodity as a result of rise in its own price,
other things remaining the same.

Change in Demand - Shift in Demand Curve

The amount purchased of a commodity may change not only
because of a change in its own price but also due to change in
the other factors like income, taste, prices of other
commodities, size of population, etc. 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.
Changes in demand may be of two 1. Increase in demand, 2.
Decrease in demand.

1. Increase 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. Increase in
demand may take place due to increase in income, a change in
taste in favour of the commodity, rise in the prices of
substitutes, a fall in prices of complementary goods, increase
in population, redistribution of income, etc.

2. Decrease in Demand: Decrease in demand refers to a

situation when the consumers buy a smaller quantity of the
commodity at the same price. Decrease in demand takes place
as a result of change in factors other than the own price of the
commodity.

Therefore, change in demand refers to a 'shift' in the entire

demand curve.
An increase in demand means that the entire demand curve
shifts to the right, indicating a larger amount purchased at
every price.
A decrease in demand means that the entire demand curve
shifts to the left, indicating a smaller amount purchased at
every price.

Distinction between Expansion of Demand and Increase in

Demand:
1. Expansion of demand refers to the larger quantity being
purchased due to fall in the price of a commodity, while
increase in demand refers to more being purchased at the
same price.
2. Expansion of demand is due to fall in a commodity's own
price, while increase in demand is due to change in 'other
factors' affecting demand.
3. Expansion of demand simply involves a downward
movement along the same demand curve, but increase in
demand results in rightward shift of the entire demand curve.

Distinction between Contraction of Demand and Decrease in

Demand
1. Contraction of demand means a fall in the amount
purchased due to rise in a commodity's own price; decrease in
demand means smaller amount being purchased at the same
price.
2. Contraction of demand is due to a rise in the own price of a
commodity; decrease in demand is due to changes in 'other
factors' affecting demand.
3. Contraction of demand simply means upward movement
along the same demand curve, but decrease in demand results
in the leftward shift of the entire demand curve.