Macroeconomics Theory and Practices

TOPICS
•Defining Demand
• Law of Demand
•Demand Schedule/Demand Curve/Demand Function
• Factors affecting Demand
• Change/Shift in the Demand

What is Demand?
A relation showing the quantities of a good that consumers are willing and able to buy at
various prices per period, other things constant.
Demand for commodity implies:
 Desire to acquire it
 Willingness to pay for it
 Ability to pay for it

Types of Demand:
 The quantity of a commodity an individual is willing and able to purchase at a particular
price, during a specific time period, given his/her money income, his/her taste, and
prices of other commodities, such as substitutes and complements, is referred to as the
individual demand for the commodity.

 The total quantity which all the consumers of the commodity are willing and able to
purchase at a given price per time unit, given their money incomes, their tastes, and
prices of other commodities, is referred to as the market demand for the commodity.

 The quantity of a firm’s product that can be sold at a given price over time is known as
the demand for the firm’s product.

 The sum of demand for the products of all firms in the industry is referred to as the
market demand or industry demand for the product.

 An autonomous demand or direct demand for a commodity is one that arises on its own
out of a natural desire to consume or possess a commodity. This type of demand is
independent of the demand for other commodities

 The demand for a commodity which arises from the demand for other commodities,
called ‘parent products’ is called derived demand. Demand for land, fertilizers and
agricultural tools, is a derived demand because these commodities are demanded due
to demand for food.
  Durable goods are those goods for which the total utility or usefulness is not
exhaustible in the short-run use. Such goods can be used repeatedly over a period of
time.
 The demand for non-durable goods depends largely on their current prices, consumers’
income, and fashion. It is also subject to frequent changes.

 Short-term demand refers to the demand for goods over a short period.

 The long-term demand refers to the demand which exists over a long period of time.

Law of Demand - Relationship between Price and quantity demanded is an economic law. The
quantity of a good demanded per period relates inversely to its price, other things constant.

Exception to Law of Demand: Giffen Goods

A Giffen good is one which people paradoxically consume more of as the price rises,
violating the law of demand. During the Irish Potato Famine of the 19 th century, potatoes were
considered a Giffen good. Potatoes were the largest staple in the Irish diet, so as the price rose
it had a large impact on income. People responded by cutting out on luxury goods such as meat
and vegetables, and instead bought more potatoes. Therefore, as the price of potatoes
increased, so did the demand.

Exception to Law of Demand: Veblen Effect

Concepts of conspicuous consumption and status-seeking. The more expensive these
commodities become, the higher their value as a status symbol and hence, the greater the
demand for them. The amount demanded of these commodities increase with an increase in
their price and decrease with a decrease in their price.

Demand Schedule and Demand Curve

–The demand schedule is a table that shows the relationship between the price of the good and
the quantity demanded.
–The demand curve is a graph of the relationship between the price of a good and the quantity
demanded.

Price (in pesos) Quantity Demanded (per

week)
A 15 425
B 12 440
C 9 455
D 6 470
E 3 485

Individual point on demand curve / schedule shows quantity demanded and entire demand
curve/schedule
Demand function shows relation between P & Qd when all other variables are held constant.

 Qd = f(P)
 ΔQd/ΔP must be negative

 Qd = 500 – 5P
 At zero price, demand is equal to 500 units.
 (- ) shows inverse relationship between price and demand .
 (5) Implies that for each one peso change is price demand changes by 5 units

Factors Influencing Demand

•Price of good or service (P) - Affects the demand of a product to a large extent. There is an
inverse relationship between the price of a product and quantity demanded. The demand for a
product decreases with increase in its price, while other factors are constant, and vice versa.
•Incomes of consumers (M) - Constitutes one of the important determinants of demand. The
income of a consumer affects his/her purchasing power, which, in turn, influences the demand
for a product. Increase in the income of a consumer would automatically increase the demand
for products by him/her, while other factors are at constant, and vice versa.
•Prices of related goods & services (PR) - Refer to the fact that the demand for a specific
product is influenced by the price of related goods to a greater extent.
Related goods can be of two types, namely, substitutes and complementary goods, which are
explained as follows:
a. Substitutes:
Refer to goods that satisfy the same need of consumers but at a different price. For
example, tea and coffee, jowar and bajra, and groundnut oil and sunflower oil are substitute to
each other. The increase in the price of a good results in increase in the demand of its
substitute with low price. Therefore, consumers usually prefer to purchase a substitute, if the
price of a particular good gets increased
b. Complementary Goods:
Refer to goods that are consumed simultaneously or in combination. In other words,
complementary goods are consumed together. For example, pen and ink, car and petrol, and
tea and sugar are used together. Therefore, the demand for complementary goods changes
simultaneously. The complementary goods are inversely related to each other. For example,
increase in the prices of petrol would decrease the demand of cars.
•Taste patterns of the consumer (T) - Play a major role in influencing the individual and market
demand of a product. The tastes and preferences of consumers are affected due to various
factors, such as life styles, customs, common habits, and change in fashion, standard of living,
religious values, age, and sex.
A change in any of these factors leads to change in the tastes and preferences of
consumers. Consequently, consumers reduce the consumption of old products and add new
products for their consumption. For example, if there is change in fashion, consumers would
prefer new and advanced products over old- fashioned products, provided differences in prices
are proportionate to their income.
Apart from this, demand is also influenced by the habits of consumers. For instance, most of
the South Indians are non-vegetarian; therefore, the demand for non- vegetarian products is
higher in Southern India. In addition, sex ratio has a relative impact on the demand for many
products.
For instance, if females are large in number as compared to males in a particular area, then the
demand for feminine products, such as make-up kits and cosmetics, would be high in that area.

•Expected future price of product (Pe) - Imply that expectations of consumers about future
changes in the price of a product affect the demand for that product in the short run. For
example, if consumers expect that the prices of petrol would rise in the next week, then the
demand of petrol would increase in the present.

On the other hand, consumers would delay the purchase of products whose prices are
expected to be decreased in future, especially in case of non-essential products. Apart from
this, if consumers anticipate an increase in their income, this would result in increase in
demand for certain products. Moreover, the scarcity of specific products in future would also
lead to increase in their demand in present.

•Number of consumers in market (N) - The market demand for a good is obtained by adding
up the individual demands of the present as well as prospective consumers of a good at various
possible prices. The greater the number of consumers of a good, the greater the market
demand for it.

Now, the question arises on what factors the number of consumers for a good depends. If the
consumers substitute one good for another, then the number of consumers for the good which
has been substituted by the other will decline and for the good which has been used in place of
the others, the number of consumers will increase.

Besides, when the seller of a good succeeds in finding out new markets for his good and as a
result the market for his good expands the number of consumers for that good will increase.
Another important cause for the increase in the number of consumers is the growth in
population. For instance, in India the demand for many essential goods, especially food grains,
has increased because of the increase in the population of the country and the resultant
increase in the number of consumers for them.