5

Theory of Demand

Chapter Outline
5.1 Introduction
5.2 Meaning of Demand
5.3 Price Demand Relationship
5.3.1 Individual Demand Schedule
5.3.2 Individual Demand Curve
5.3.3 Market Demand Schedule and Market Demand Curve
5.3.4 Demand Function (Determin ants of Demand)
5.5 Law of Demand
5.5.1 Why Demand Curve Slopes Downward ?
5.5.2 Exception s to Law of Demand
5.6 Movement Along Demand Curve
5.7 Shift in Demand Curve (Increase and Decrease in Demand)

5.1 INTRODUCTION
Demand is a crucial economic decision variable for the functionin g of a business enterprise. It
constitutes one side of the product market, since, price of any commodit y or economic service is
determine d by the interaction of demand and supply. A study of demand is imperative for decision
taker, as it has bearings on production as well as profit. Even if the firm pursues objectives other
than profit maximisat ion, demand concepts remain relevant. For example, discharging of'social
responsibility of business' requires the evaluation of tastes, preferences and choices of the consumers.
All these concepts are built into the economic concepts of demand.
Demand reflects the size as well as pattern of market and the market determines the magnitude of
business activities. Investmen t decisions of business firms are limited by the size of the market. If

R ,
 Economics _1
5.2
raise produc tion. Inform ation about size
. . d emand' the fiirms A b
the market conditio ns re fl ect nsmg . ·rments ofvarious inputs. su stantial and
meet the
and type ofdemand helps manage ment to plan its req:e the firm to install a new plant to
sustaine d increase in long-te rm demand may pe~~; the demand for the firm's produc t is falling
demand on a perman ent basis. On the
0th 1
er ~an ' . has to underta ke aggressive advertising
s
b;
by the
while that ofrival is rising, the firm under con i~eration In this way, demand can be created
plannin g its sales tactics to fill demand -produc tiontogap. orary busines s recessio n, the firm may
. d t · subiet temp
firm.Fu rther, 1f the demand for pro uc is ' Th demand is one of the major factors for
h k f old product s. us,
h ave top1an to p1·1e up t e stoc O uns . . no demand , the output become s unwarranted.
. . .
the survival of any business. Furthermore, 1fthere IS . The
. . ics that has been used most extensi vely m busmess
1s one area of Econ om . . t · produc tion plannin g inventor y
Deman d analysis h fi _ manpow er ut111sa 10n, '
. b
wh ole range of p1annmg Y t e Irm . h 1 market research pricing decision
of
manag~1?ent, investment decisio~s, cost budgetmg, pure ~:~pa~:j sis of demand : The decision
advert1smg budget, profit plannm g, et~., call for a deta1 n s
respect to any funct10n al area always hu
:ng
an anal sis of demand
. Y d d,
. In this
manage ment with for mput, eman 1or output
. d t 1·ke
1 demand .
chapter, we have explained var10us deman concep s regard to demand analysis has
• · Id J ts with
etc. Besides this, an overview of the theoretICa eve op men
also been provided.

5.2 MEANI NG OF DEMAN D

that
Goods are demand ed, because they have utility. A good is demand ed by everyon e, who thinks
it is useful in satisfying his want. Alcohol, though actually harmfu l to a person, is demand
ed by
have a
one whose want it satisfies. A teetotallar may not have any demand for it, since, he does not
in the
desire for its consum ption. But, every want of a consum er cannot be express ed as demand
,a
economic sense ·of the term. Demand does not mean mere desire for a commo dity. For example
willing
miser's desire and his ability to pay rent for a room of an hotel is not 'deman d: as he is not
affect its
to pay for it. Similarly, a beggar may desire to have a car, but this desire is not going to
which
market price as he is not having the necessary purchasing power to buy a car. Such a desire,
never
is not backed by the necessary purchasing power to fulfill it, will remain a desire and will
capacity
become the demand. To become demand, a desire, (i) must be backed by the ability or the
er to
to pay for the good, and (ii) the willingness and readiness to pay on the part of the consum
be met
spend for the good. A demand is, thus, an effective desire. Further, a demand which can not
due to shortage of commo dity is called an unsatiable demand .
Demand is always defined with reference to price and a time per·10d . It 1s · · 1 "fy
• h ti . meanm g ess to spec1
demand Wit out re erence to pnce and time period The stateme t th t d d fi ·1 · 2000
kg. is meaningless. The price at which these apples ·are dem d nd . a beman . or app es 1_sh h
· · h · • an ed .1s to e mentio ned' as wit t e
ch ange m pnce, t e quantity demanded may also change D
to time Even at the same ·price demand h · eman is also express ed with reference
nd under
consid~ration. Thus, at t Io per kg deman~ ~: c alnge, depe ing upon the time period d · a
· app es may be diffe t d ·a ·
particular period. Demand for a good may be defined as the " ~en at Iuerent times u~ng
bought at a particular price and during a given p . d pomt ' . quantity of a commo dity that Will be
eno or off1me."
5.3 PRICE DEMAN D RELATIONSHIP .

Demand for a commo dity during a given period Of . . g

· f th d"ty D time depend
th e pnce o e commo 1 · emand schedulesan d d emandc s upon so many factors includm .
_ urves are the techniq ues to descnbe
Theory of Demand
5.3
the .price-demand
. relationship · Both the demand schedules ·
and demand curves can be for an
ind1V1dual or for a market as whole.

S,3.1 Individual Demand Schedule

The demand of an ~dividual consumer for a commodity is called individual demand. An individual
demand sch~dule is a tabular statement of prices and quantities showing how much an individual
cons~e~ will ~uy ?fa commo~ity at each of the given prices. It does not say anything about what
th~ price 1s_. It is a hs~ of th~ va:1?us quantities that the individual consumer will buy at different
pnces. While prepar~ng an mdiVIdual demand schedule, it is assumed that other factors like prices
of the related goods, ~come of the consumer, etc., do not change. A hypothetical demand schedule
of a consumer, showmg the quantities demanded of apples at different prices is shown in Table 5.1.
Table 5.1: Demand Schedule for Apples
Price of Apples Quantities of Apples Demanded
(per kg.) by Consumer (in kg.)
12 1
11 2
10 3
9 4
8 5
7 6

We can see from the table that when the price of apples is~ 12 per kg., only one kg. of apples is
demanded. When the price comes down to~ 8 per kg., the consumer buys 5kg. ofit. Hence, we see
an inverse relationship between the price and the quantity demanded. This inverse relationship
between the price and quantity demanded of a commodity is known as 'the law of demand: which
is explained later in this chapter in Section 5.5.

5.3.2 Individual Demand Curve

The combinations of the prices and the quantities for an individual consumer is shown in the
demand schedule, when plotted on a graph, become the individual demand curve. This is a graphical
representation of the combinations of the prices and the quantities of the commodity under
consideration. While economists do use arithmetical demand schedule, the demand schedule for a
commodity is more usually shown graphically by drawing the demand curve for the commodity
in question.
In Fig. 5.1, various market prices are measured along the vertical axis. Quantities demanded of the
commodity are measured along the horizontal axis. Now, the demand schedule of Table 5.1 is
plotted as a series of points in Fig. 5.1. The information presented in this figure is exactly the same
as in Table 5.1 But, the form of presentation is different. Now, we have it in the form of a curve.
At point 'Pl. (Fig. 5.1), the consumer is buying 1 kg. of apples, when the price of apples is~ 12 per
kg. Point 'B' represents the purchase of2 kg. of apples at the reduced price on' 11 per kg.
Similarly, 'c: 'E" and 'F' represent other combinations of prices and quantities. By joining these
5.4 Econom/cs • I
th
points, we have a smooth curve DD, called the demand curve for apples. It shows e quantities of 1
apples that the consume r would buy at each of the prices. The deman~ curv~ s~ows the relation
between the price of the commod ity and the quantity demande d. That is why, it is also called Price
. . quant'ty
. correspo nding demande d can be•read out from the
.
curv
e and
d emand curve. Given pnce, 1 . • •
th th
vice-versa. The demand curve is downwa rd sloping indicatin g at wit~ e tall !n pnce, quantity
demande d increases . It is drawn on the assumpti on that other fac~ors mfluenc mg demand, viz,,
• f ers etc remam unchang ed.
·
pnces o f related goods, mcome·s and tastes o consum • ·
y

D
12
11
10
~ 9
-~ 8
~ 7
6 D
5
4
3
2
I L--- X
+---+-- +---+-- +--- + - - --
O 2 3 4 5 6
Quantity
Fig. 5.1 : Individual Demand Curve

5.3.3 Market Demand Schedule and Market Demand Curve

So far we have consider ed the case of a single consume r buying a good. But, in the market, there are
a large number of consume rs. Market demand means the deman d of all the consume rs in the
market for a good at a particula r price. Market demand schedule shows the total demand of all the
consume rs in the market at various prices. It can be construc ted by the summati on of the individual
demand schedule s of all the individuals in the market. Let us take the case of two individuals in the
market. The analysis can be extended to any number ofbuyers . The individu al demand schedules
ofboth the individua l buyers, W.. and 'B' and the m arket demand schedule is shown in the Table 5.2.
Market demand has been found out by adding the individual demands of W.. and 'B' at corresponding
prices.
Table 5.2:. Market Demand Schedule for Apples

p QA QB Q
A+B

12 2 3
11 2 3 5
10 3 4 7
9 4 5 9
8 5 6 11
Theory of Demand
5.5
In Table 5.2, QA is the demand of½: Q is the demand of'B' and Q represents the combined
d,emand of'X and 'B' (or the market de~and) at each price, A+B

At. the price oft 12 per kg, 'X demands I kg. of apples and 'B' demands 2 kg. of apples. The total
demand at~ 12 per kg. is 3 kg. At price on' 11 per kg, 'X demands 2 kg. of apples and 'B' demands
3kg of apples. The total demand at this price is 5 kg of apples, which is also the market demand for
apples at that price on the assumption that there are only two buyers in the market. Similarly, the
total demand of apples at every other price can be found out.
The same relation between price and quantity that has been shown with numbers is dis-
played graphically in Fig. 5.2. The market demand schedule has now been transformed into a
market demand curve. The market demand curve has been found by the horizontal summation of
individual demand curves of 'X and 'B: Note again that the market demand curve is downward
sloping, showing the inverse relationship between price and quantity demanded. Some people
who bought some of the commodity before its price fell may buy more now, because it is cheaper.
Further, when price of a commodity falls, new buyers will enter the market and will further raise
the demand of the commodity. This is another reason for downward slope of the market demand
curve.
y Demand Curve of y Demand Curve of Y Market Demand Curve
DA Individual 'A' D8 Individual 'B'
12 D

8 ------------- -----------
l1J l1J
u {J l1J D
·.: ·;: ·;:
{J

i:i. DA 0... Du 0...

I
X X X
0 I 2 3 4 5 6 7 8 0 I 2 3 4 5 6 7 8 0 I 2 3 4 5 6 7 8 9 10 11
Quantity Quantity Quantity
Fig. 5.2 : Derivation of Market Demand Curve

5.3.4 Demand Function (Demand Determinants)

• exp lams· t herelat·ionsh'1P between two or more. variables. If two. or more variables
Afunction · blare)
· • h
related m such a way t at ior eachsetofvaluesofsomevanables(calledthemdependentvana
c
h h d d es
there corresponds a value of So me other variables ( the dependent variable),
. t enbt e ffepent· ent
• • d h f
variable 1s calle t e unc iont· °
f the independent variable.
.· pro duction function ' cost function,
In Economics, a num
etc., are d1scusse
• er o unc
d Th h ionsd
such as deman d function, . d . us, t e wor
'function' refers to the factors on which demand, production or cost depen s. .
The demand function • fior a goo d is· the relation between the various amounts k ofdthe · commodity
· · that
d ,r
. d the determinants of those amounts in a given mar et an in a given peno . O;
~zght be bought an_
time. As stated earlier, to const·t
1 ute demand' desire· must be backed. by the necessary purchasmg
d c
power to purchase the commad1·ty•While the desire to purchase 1s revealed by tastes an pre1erences,
 5.6 ~ -,
income reveals the capability to purchase. Further, since ho~o ld spends this ~ t o Purn..
a numbe r of commodities, demand for a particu lar co~mo dity depeo upon •ts f>¾ ~
ds
prices of other commo dities Thus the factors on which demao<l for a commo dity ~
(determ inants of demand ) ~e: (i) the price of the commodity, ~ii) ththe prices of related
(substitutes or compliments), (iii) the income of the consu~ ers, (iv) e tastes a_nd pref
~
th
the consumers, and (v) the expectations about the future pnces of e commodity.
These determ inants of demand provide analysis of consume_r behavio~r. T~ey affect both~
direction and proport ion ofchange in demand. Deman d analysis seeks to id~ntify and Dleasure
~
forces (size as well as intensity) that determine demand. For demand analysis, referenc.e shouJdht
st
made to sources of demand , uses of the items demanded, the ructure of the market, where
tbt
firm is located.
The demand functio n may be expressed symbolically as Q = f (P, Pr,Y, T, E,0)
com-
Where 'Q' stands for the quantity demanded of the commo dity, 'P' for the price of the
modity, 'P ' for prices of the related goods, 'Y' for income of the consum er, 'T' for tastes
and
prefer- en~es of the consumer, 'E' for the expectations about the future prices and 'O' stands
for
other factors. Now, we explain , how demand for the commo dity is affected by each of
these
determinants.
1. Price of Commodity
Price of the commo dity is the most importa nt determ inant of deman d. Generally, it is expected
that with the fall in the price, the quantity demanded of the commo dity increases and with
the in-
crease in the price, the quantit y demanded of the commo dity decreases. Thus, there is an invme
>O.
relation ship between the price of a commodity and its quantit y deman ded. That is, oQ!oP
ly
The inverse relationship between price and quantit y demand ed of a commo dity is common
ity
known as the 'law ofdemand'. The relation between price and quantit y demand ed of a commod
is also called the price demand or simply demand.
2. Prices ofRelated Goods
The demand for a commo dity also depends upon the prices of the goods related to it. The relation
between the price ofone commodity and demand for another commo dity is called the cross demand.
and
In Economics, two types of relations between goods are discussed. These are complementary
ity
substitu tab_ility o_f goods. How the prices of the related goods affect the price of the commod
es. If
under consideration depend s upon whether the related goods are compli mentar y or substitut
the two goods are used togethe r to satisfy a given want, they are said to be complementary
goods.
s~ch as tea and su~ar, ball p_en and refill, car and petrol, etc. When two or more goods
are
s1multaneou~ly re~mred to satisfy a w~nt, their demand is called as joint demand. A fall in the
price
raises the demand for its complementary goods. That 1s, • v;¥"\ a'P < O, 1·fcommodities
d , , dity I
,of, a commo • f
'< 1
d d c car will
x an y ·areh comp ementa ry. For example.' with the fall in the pnce o petro1, eman 1or
b . . d d · reases.
go up. This appensf ecause, •
with the fall m the price ofpet ro1, its
· I b quantit y deman e me
Increased quantitc.y o petro can . e used with more cars • s·1m1-1ar 1s . th .
e relation between t e P0
h ·ceof
tea and deman d 1or sugar. A .fall m the price of tea causes mcreas• .
e m the deman d for sugar.
On the other hand, those goods which can be used · 1
·wtes.
5ft L_
For exampl e tea and coffee scooter and t m P ace of one anothe r are called sub
' , mo or cycle etc Ex· t f I . ods (su..,..
stitutes ) to satisfy a given demand divides the tot 1d ' . IS ence o a ternat1v e go the
.a emand among differe nt goods. The larger
Theory of Demand 5.7
will bed d
number of substitutes, the smaller ther, the level of prices
goods inf lue nce the dem a d fi e~a_n for ~ny one of them. Fur
of different
eir sub st ~tutes. A fall in the price of a good results in
and for its su~ f ~rt
the decrease in the dem 1
an increase in the price of goo d results in the
and for its sub t·ts uteTshan ~ d' . ' , d' '
increase in the dem s I .utes.f frat is , 8Q z!8Px > 0, 1'f commo 1ties x an z are
substitutes. With the increase in th e pnce o co 1ee' demand£or tea ·increases, because people start
h
using more of tea and less of coffi I ot_ er words, tea is substituted for coffee. Further, a rise in
-~
the price of cars by Maruti Ud oee~ o Motors,
demand of rival producers like Daewofor tea will
O etc O th y g I ra~s e the
H ndai TELC rease in the price of coffee ' demand
yu d ' Th ' we· can n e contrary, wit1ht·the dec ·
come. own. us, see a direct re a ion etween the pnce of a good and demand for its
b
su bstitute.
3. Income of Consumer
management has no
and for g?o ds als~ dep e~1 ds upo n income of the consumer, on which n to
The dem sin g power increases and he is in a positio
se m the mc om e, his pur cha
control. With the mcrea goods increases. Thus, increase in inc
ome has a
ds. Co nse que ntly , the dem and for
afford more goo en income and
ct on the dem and for goo ds. Th at is, 8Q/8Y > O. The relation betwe
positive effe to their demand.
call ed inc om e dem and . Ge ner ally income of the people is directly related
demand is which
and cur ve is upw ard slop ing . Suc h goods are called normal goods for
So, the income dem up and when
is pos itiv e, i.e., wh en inc om e goe s up, demand for such goods also goes
income effect is not related
s, dem and also fall s. Ho wev er, for certain goods called necessities, demand
income fall
at is, oQ / oY < 1. He re an exa mp le of salt may be given. The demand for
to income either way. Th
1
rease
se mu ch wit h the inc rea se in inc om e and it does not decrease with the dec
salt does not increa in the quantity
It is also pos sib le tha t a rise in inc ome of the consumer may lead to a fall
in income. ds. A good is said to
ed of the goo d, Th at is, oQ / oY < 0. This is the case ·with inferior goo is an
dem and in the income of the consumer. There
if its dem and fall s wit h the inc rea se
be an inferior good, of inferior goods, i.e., income effect is
negative.
shi p bet we en inc om e and dem and
inverse relation etc. It may happen
les of inf erio r goo ds are veg etab le ghee, gur, coarse grain such as bajra, ains
Examp
mo dity inc rea se init ially . But , afte r a certain level of income, demand rem
that demand of a com ive studies on
n falls. (Fig . 5.3 ). Sin ce a fam ous German Statistician Engel made extens
same or eve wing such relationship
rela tion shi p bet we en inc om e and consumption (demand), the curve sho ve we
the
ve. Fur the r, if we rela te inc om e to expenditure on the commodity, the cur
is called as Engel cur
get is called Engel expenditure curve.
y
D

Y2
Q)

E
Y, -------------
0
u
C:
......

D
X
0 02 01
Demand
Fig. 5.3 : Engel Curve
 r
__ J

5.8 Econo~,·
.,, cs. I
D • .. b h ges in current income, but also byd·iscounted
emand 1s pos1hvely influenced not on1Y Yc an
value of accumulated income of the preceding periods from work or pr_ope~ (weal_th, W). That is
nd
oQ.IOW>O. This is regarded as the real wealth effect _on dema · If margm~ propens~~ to consu111~
by the consumer is high (i.e., low marginal propensity to save),_a large portl~n ofaddi~ional income
earned will be used to buy goods and little will be saved and vice-versa. This change m propensity
nd th
to consume (or save) brings about a change in the dema fo~ good~. Fu~ er, s~metimes the
demand may be influenced by the income of the household relative to his n~ighb?ur s income and
his purchase pattern. Thus, the household may spend more, when his neighbour inccurs
expenditure. This is called demonstration effect.
4. Tastes and Preferences of Consumer
Another important factor which affects the level of demand of a commodity in the market is the
t
tastes and preferences (both rational as well as irratiorn11) of the consumer. TaS es and preferences
often change, which affect the level of demand for various goods. The demand for a good is more,
which is liked by consumers and for which they have a preference. Consumers tastes and preferences
may change because of a change in the fashion or ·as a result of the advertisemen t for various
products. This is the only determinant of demand, on which management can exercise some control
through advertisemen t, product quality, service, etc. It is advertisemen t that to a large ex tent has
affected the demand for Babool tooth paste. Many a times, films are responsible for the creation of
fashion, which affect the demand of the various existing products. Sometimes, consumers become
habitual or accustomed to the use of certain goods and they may not change the use of such goods,
unless suifficient impetus is applied. Conswner preferences are also moulded by changes in customs,
conventions and habits. These socio-psychological determinant s. of demand often defy any
theoretical construction. On the contrary, when some goods go out of fashion or tastes and
preferences of people no longer remain favourable to them, the demand for them falls.
5. Expectation s about Future Prices and Incomes

Consumers' expectations about the future prices of the goods also affect their demand par- ticularly
for consumer durable goods, since purchases of durables can be postponed and preponed more
easily than those of non-durables. If for some reason, consumers expect prices of certain goods to
rise in the near ~uture, they tend to d_e mand more in the present. Consequentl y, demand for these
goods whose pnces are expected to nse goes up. We often experience a rise in the demand forT.V.,
refrigerators,. air conditioners in the month of February due to 1ce1 ar o f nse • m • th etr ·
• pnces, when
new budget
. 1s announced.
· . .On the other hand• if they expect th e pnces · to 1a
c II m t e near 1uture,
· h '-
h h . h c. h w·JJ
they will demand
. . Further, if consu mers ope t at mt e 1uture t ey 1
less of 1t. m. the present.
have good mcome, they will mcrease their purchases· in the •Dresen t . The present deman d 1or c ds
• · I h goo
will nse as a resu t. On t e other hand, retiring people cut . faff g
expected future income. on non-essentia l expenses due to IIl

6. Other Factors
Educational background, social status marital stat
some of the sociological factors, which 'affect us, age, place of residence ( urban or rural) are
consumer demand Ch . . d ther
conditions also influence consumer's demand Ad t· · anges m climate an wea
· ver isement' sa1es promotion • measures, availability
of credit also affect consumets demand. Them k d
ar et emand f◄or a good 1s • dd' up
obtained by a ing
the individual demands at various prices It is 1- fl . .
· n uenced by +-h• ree add·1tional factors. These are.
Theory of Demand 5.9

(a) Size and Regional ~istribution of Population: The greater is the number of consumers
of
· ·
a good, the greater 1s the market demand 1or c ·
1t. Th us the demand for a commodity 1s
· determm · and death rates. Population
' birth
· ed by ·
directly related with the population , wh'1ch 1s
is also affected by migration and imm·1grat·10n. Reg1ona · 1d'1stnbut · also
· ·ion of the populat10n
affects the demand.
(b) Demograp~tic ~omposition of Population: If there are more children, demand for baby
es,
foo_d, t?ys, biscmt~, sweets, etc. will be more. Similarly, if there are more old people, spectacl
artific1~l teeth, stick~, ton~cs, fruits etc. will be more in demand. Predominance of young
y,
people m th~ ~opulatton will raise the demand for cosmetics, sport goods, jeans, etc. Similarl
sex composition also affects the demand for a number of commodities.
different
{c) Economic Distribution of Income: If income is equally distributed among the
be
sections of the society, all of them will be in a position to demand good. But, there will
more demand for goods purchased by relatively poorer people, like wheat, rice, fans,
etc.
portion of
But, if the income is unevenly distributed, majority of the people will get small
the national income and so ~he demand for commodity will be limited. Most of the demand
in this case will come from rich people for luxuries. Further, in this case, relatively greater
portion of the income will be saved (by rich people).

5.5 LAW OF DEMAND

theory. It
Law of demand is one of the best known and the most important laws of economic
and less of
explains the general tendency of the consumers to buy more of a good at a lower price
ers who
it at a higher price. Lower price attracts consumers to buy more. Besides, some consum
uently,
were not buying the good at a higher price can also afford to buy it at a lower price. Conseq
of demand
with the fall in the price of the good, demand for it generally increases. Thus, the law
dity,
expresses the inverse relationship between the price and the quantity demanded of a commo
when the
other things being equal. In other words, when the price of a good rises, demand falls and
is based
price falls, demand rises, provided factors other than the price remain unchanged. The law
tastes and
on the assumption that the other determinants of demand, viz. income of the consumer,
ition
preferences of the consumer, prices of the related goods, future expectations, size and compos
of population, distribution of income, etc. do not change during the operatio n of the law. If they
the good,
do change, the law may fail to operate. For example, if with the fall in the price of
consumer develops disliking for it or his income declines, he may not buy more of it.
a change
The law of demand indicates only the direction of the change of demand corresponding to
ed. For
in price. It does not say anything about the magnitude of change in the quantity demand
tells us that
example, if price of apples comes down from ~ 12 per kg. to ~ 10 per kg., the law
quantity
quantity demanded for apples will increase. But, it does not tell the amount by which the
demanded for apples will increase as a result of a fall in price.
ed along
The law of demand can be illustrated through a demand curve. In Fig. 5.4, price is measur
of the
the Y-axis and quantity demanded is measured along the X-axis. DD is the demand curve
of the
good under consideration. At the price OP 1 , the quantity demanded is OQ 1 • If the price
ard
good falls to OP 2 , the quantity demanded increases to OQr The demand curve is downw
that while
sloping, which is in accordance with the law of demand . It should be rememb ered
in question)
drawing the demand curve, all the determinants of demand (except price of the good
 5.10
Eco11% .
IC,1 ' /
are assumed to remain constant Only the relationship between price and quantity d
·
· effect of a change mot ·
her determmants O f demand ernand
· d' ed of
the commodity is described • The
. IS IScu
later in this chapter. ssed

y
D

II)
P1
u I
·;:: I
0... I
I
I
P2 -----t--
I
lI
I D
I
I
I
I
X
0 0 1 02
Quantity

Fig. 5.4: Demand Curve

The functional relationship between demand and price can be expressed as: Qx= f(Px)
Where QX is demand and P X is the own price of good 'X:
The above expression shows that price is the cause variable and demand is effect variable.
Alternatively, price is the independent variable, while demand is dependent variable. In technical
terms, independent variable (here, price) is also called exogenous variable, while dependent variable
(here, demand) is called endogenous variable.
When the demand curve for a good is a straight line, the corresponding demand function will have
a linear equation of the form Qx= a-bP x
Here, 'a' is the quantity intercept and 'b' is the slope. dQ/ dPx expresses the rate at which quantity
demanded changes, with change in the price. Negative sign in the equation shows inverseprice-
demand relationship. For plotting the demand curve, we normally use the inverse demand curve
P x = a-f3Qx Here, a= a/bis the price intercept and f3 = 1/b is the slope of inverse demand curve
and equals dP/ dQx. This inverse form of the demand curve indicates each given quantity demanded,
the maximum price a consumer (or consumers) would be willing to pay rather than doing without
that quantity. The normal form of the demand curve can also be similarly defined.

5.5.1 Why Demand Curve Slopes Downward ?

Law of demand states the inverse relationship between price of a commodity and its quantity
demanded, o~her thi~gs remai?ing the same. The demand of a commodity is more at a lower price
and less at a higher ?n~e. That 1s why, the demand curve slopes downward. But, a question arise~as
to why more quantity 1s demanded at a lower price and less quantity is demanded at a higher pnce.
The following factors explain the operation of the law ofdemand:
( 1) Law of Diminis~ing Marginal U~ility: The law of diminishing marginal utility states that
as the consumption of a commodity ' c. t·10n obtained by
by a consumer 1·ncreases, th e sat 1s1ac
..
the consumer from each additional unit (i.e., marginal utility) of the commodity goes on
fhtOTY of Demand .t II

diminishing. A thirsty man gets too much satisia.ction by Jr inking,, glM~ of w,1tcr. Rut , the
se.cond glass of water wiU not be as much satisfying to him, .,s the first gl.1ss of water. The
satisfaction derived from the third glass will even be le~ cr. The price tlHlt ., (OllliUlller Is
willing to pay for a commodity is directly related to the :;,11isfaftio11 thut heda1vt·s from
that commodity. As we have seen, the consumer geti nhlre s,11 isf.lction from the inltiol
units of a commodity. He is ready to pay n high price for it. Furthl•r, the , ,1ti~f.Kli@ th,11 lw
gets from the successive units diminishes, he will purchase .,dditiorul unit~ l)f th~ com111oJ11y
only at a lower price. Thus, more quantity is hough I at a lower IHll.'.c .111d lei,:, quantity 111
bought at a higher price.
(2) Income Effect: A fall in the price of a commodit y inac.,:.l':, the purd1a1,111g power (or tile
real income) of the consumer. 1n other words. the com11r11a ha:, 10 :,p,·11d lcs~lo buy the
same quantity of the commodity as hrfort-. The molll'Y M> ,.ived bc1.,111~c of a f.ill in the prkc
of the commodity can bt spent h)' the \·o ni-1111\l'f 111.111 y w,1y he like!.. He will spend II port of
this money on buying snnw nwn· unit:. nt lhl· ~.11ne w 111111t><lily, who'ie price ha~ fallen .
Thus, a fall in the price of 1lm \ n111mod 11 y Ill\ rc.,~n 1l\ demand . Thi~ i~c.allcd 111c,1111e <'!feet.
Same explanation c.111 he.· F,l\'l'll lci1 .1 ri:-c 111 111 1i.c. I11 1hiH ·"c, demand (or the (O llllllUllit y
under consider.it ion will de(rt·.,,r d11r lo l.111111 p11rd1,l\ill!,\ power of the c.onsu111cr.
(3) Substitution Effect: Thi$ is .1nothrr 1mport,1nt rc.·,1:-011 (or i1H.rc,1,c in demand a!> a result o(
a fall in the price of the (Om111mli ty ,111d I'll c-1·ma. When the pric.c o( a cmnrnodity falls , ii
becomes relatiwl\' d1e.1per thJn other ..:0111modit il'<;, who~c.• priLe~ have not fallen. So, the
consumer subst itutes this ..:0111modity for othc.:r rnm111oditic:.. , which arc now relati vely
dearer. This is known .1s rn/Jj/1/11r w 11 or , 0111plo1101t,mt y effect. 13ccausc o( thi!> ,;uhst itution
effect, demand for the com mod it y 111 qt11:st1011 mn. 1n most of the cases, substitution effect
is stronger than the mcome effect. .\ f(I/ s/1al/ cxpla111ed the downward slope of the demand
curve with the hdp of substitution effect , ignoring the income effect. Later on, income
effect was also consid~red by Hicks and Allen (under the indifference curve analysis)' to
explain the downward slope of the demand curve. The sum of income effect and substitution
effect is called price: effect. The demand curve slopes downward, as a fall in price of a
commodity causes more of it to be demanded and vice-versa.
(4) Changes in the Number of Consumers: Many people can not affo rd to buy a commodity
at a high price. When the price of the commodity falls, a number of persons who could nol
afford it at a higher price, can purchase it at the reduced priced 1. This increases the number
of consumers of the commodity. Thus, at a lower price, the quantity demanded of the
commodity increases because of the increase in then umber of consumers of the commodity
and vice-versa.
(5) Diverse Uses of a Commodity: Many commodities can be put to several uses. A commodity
having several uses is said to have a composite demand. For example, electricity can be used
for lighting, cooking, heating, cooling and so on. At a higher price, electricity may not be

l. An alternative theory of demand to explain consumer's behaviour.

2. Such marginal consumers start the consumption, when price falls and stop consumption, when orice rises. These
consumers are different from intra-marginal consumers, who merely increase or decrease their ~nsumption of a
product, but do not give up or start consumption in the face of price variation. The law of demand is applicable to
these both types of consumers.
 Econ01>1ics
.
•
5.12 1

used for all of these purposes, i.e., the use of electricity ~ay be restricted to lighting on]
'f . f .. !ls people may afford to use 1t for other purposes also · ThUsY-But,
t . ·ty 1a th
1 pnce o e1ec nc1 ,
• •u ·ncrease ·
1 f
I

demand of electricity at a lower pnce w1

5.5.2 Exceptions to Law of Demand

Law of demand expressm . g the inverse relationship between price . . . demandedof
and quantity
th
commodity is generally valid in most of the situations. B~t, ere are some situations underwhic;
nd
there may be direct relationship between price and quantity derna ed of a commodity. These~
known as exceptions to the law of demand .
(1) Giffen Goods: The most important exception to_ the law of demand is associated With
th,
name of Robert Giffen ( 1837- 1910). Early in the n_metee1~th centu_ry•. he o?served rise in the
demand for bread by low paid British workers with the increase m its price. Bread Was the
staple food for the British workers. When the price of bread rose, they were compelled to
spend more on the same quantity of bread. With little money income left with them, the
could not afford to buy as much meat as before. To maintain their ~otal int~ke of good, the;
substituted bread (still being cheaper food) for meat even at a higher pnce of it. Thus,a
direct relationship is established between price and quantity. After the name of Robert Giffen,
these goods for which there is a direct price-demand relationship are called Giffen goods.
Such basic food items (like potato, bajra, barley, gram, etc.) consumed by poor families are
some other examples of Giffen goods on which large part of the total income is spent by the
consumers, i.e., it must have strong income effect. In the case of Giffen good, demand curve
slopes upward and the law of demand does not operate.
(2) Conspicuous Consumption : Another exception is associated with name of Thorstein
Veblen
( 1857-1929). He was a social critic and propounded the doctrine of conspicuous consumptio
n.
According to him, if consumers measure the desirability or the utility of a commodity
solely by its price and nothing else, they tend to buy more of the commodity at a higher
price and less of it at a lower price. In this case, the relationship between price and quantity
demanded of the commodity becomes direct, leading to an exception to the law of demand.
Diamonds are often cited as an example . Commodities like diamond, precious stones, rare
paintings, etc., have a status or prestige value (rather than intrinsic value) for the rich section
of the society. In this type of situation, prestige is directly associated with the price of the
go~d. Higher .the price of the good, greater will be the status or prestige of the buyer in t~e
society and vice-versa .. Such Ve~len goods (after the name of the propounder) lose their
sn~b appe_al or ost~ntation funct~on, when the price falls. That is why, rich people buy more
of It at_ a higher pnce and_l~ss of1t at a lower price. Therefore, the law of demand does not
apply m case of commodities which are used as status symbols.
(3) Emergency: The law of demand does not hold inf1mes of emergency l'k fl d drought,
I e oo ,
famine or. war, as househo lds do not behave in normal way m .
. such penods. f hortage
fu . . Fear o s
o.f goo ds m ture m such periods increases th . h ·cesare
. elf present demand ' although t e pn
nsmg.
(4) Ignorance: Further, an ignorant buyer m b . ·ce iJJ
fact goes up. He may also be haunted by th? hO u~ _more o~ a com~odity, when _,ts ~r~etter
15
in quality and vice-versa. P Ia that higher pnced commodity
 5.1 3
Theory of Demand
vrli1,e/Jare only
(5) Other Exceptiom: There are so111e ntlif'r t''lrt:'l'lli'!I~ 111 ti,µlfl ¥/ ri f /jti,-p,anrL
apparent and not real. Over the cdutse 11 rl,uiiil!ti qq I Yl j~, ii 1~ fn,w~ //,a/ rjuri ng
period .o f
prosperity larger amounts or goods ore putl llfillt1d Al l,1~1,.c 1 1,11:.1ts rin!I !,1uring deprtss
ion
periods of business cyde, snrnller qun,ltlllr-;, 01t1 i•lJ ll•l,~qp1 j il l luN~r pri,ces.
ff pr.operJy
interpreted, this is also not an e,xceplhm lu tl,e lf1w 11 1tlr-1 ,rnn rj . 'I his 11n)y ~hows
that.dema.nd
for many goods increases Jurlng p1111,~Jtl l·lll' liPt AIP:!1 11/ lll/: fPd1:>t 111 lh.tt incom
e llf p.eople
, demand
and not because of decrease in prh.:e.g 111 gt miIii. t,1111 1lit1I),, d1-1i 111 g rll!1,1ession perind
for goods increa ses because of lhl'.' dc\·llnl" 111 i IIP Im 1,uir- nf I/1e 1u::nple an(J n.ot
because of
the decrease in the prices of g1 It ids. Thu ~. il dt1£io ,tt 11 t t1 11I1;1d11 t )~YI nf r/.em
and .
is sold
Another apparent exception lo the lnw 111 dr 111 n11 d it: 1,1qwl when ., con,,nJJ~3ity
under differe nt brand l\amcs .11diffcrr111 1•• il ('h Al 11 111bl 1dfl1J1jra f 'L11x' and
'Supreme Lux'
are sold at different prices, Htghn 111 n l ·~1q11'rt llr l.11 ( i:i b1Jld 11,rlfl~ihan ihe1ow
1 er priced
to the law
'Lux: even though both .m· al 11111sl thn,111 11·. 11111, 1I,ih lti ,1l1i1J 1101 a o~:il i:x.c.ep1ion
brands
of demand. This is so h(\ ',111sr lhl1sr 11'1111 IHl)' ld1-tl1c·1pi ,, ,..,1 l,raud, think that the two
thissltuation.
are differe nt. Hen(t'. 1,,\1 br.11hls sh, 11ild Ii,· ,111,dy·,r-d a:; ditfert 11t co,n,Hodifies in
1 1( deman d is un -
Not withstanding tlwst· l'X,·t'pti,1ns, th(· 1111iv('rs.tl ap11liubili ty of lht law
ce point of view.
doubted. Even the dem.Hhl t~,r l; ift~·n g,H>ds is to lie co11~id crt:d from exi~len
more amount of
Bread is bare ne(e:-.,ity fo r t':--.istctll,\'. Tht· wage tiarner s purcha se the sam~or
e. Further, the
bread despite the prkf ri:-t' ,,:: it is d lt'aµ and people are habi tuated to consum
from economic
demand for !tL'l:uriou:: go~1d:: is considered from social point o( view and not
consideration .

5.6 MOVEMENT ALONG DEMAND CURVE

(EXTENSION AND CONTRACTION IN DEMAND)
same, if price of a
We have studied under the law of demand that other things remaining the
demand increases.
commodity rises, its demand decreases and if price of the commodity falls, its
the price, it is calJ ed
When quantity demanded of a commodity increases as a result of the fall in
v,-hen the quantity
extension (or expansion) in demand (a movement down the demand cun·e) and
is called contraction
demanded decreases as a result of an increase in the price of the commodit,·, it
n in deman d imply
in demand (a movement up the demand curve). Thus, extension and l Ontr.1dio
thin~·s remain ing
change in quantity demanded due to change in the price of Ilw (()ll\l\W dity. 1)thc'r
the same.
tlw -:omm odity is
Extension in demand is shown in Fig. 5.5. /\I prin· OP 1 • <.)l) , qn.1ntity ,,(
,':- t..) 0Q 1• Q 1Q?
demanded. If the price falls to OP2, quantity de1nandt·d oflltc ,·111l\111, di1,· i1hT(',\S
1

it Y t'rn m OP I to
is the extension in demand, which results from a fall in the 1 1i, (' ,,i' the ,, 1111,h),l .
1 1

,k rn,mded of the
OP2 .Contraction in demand is shown in Fig. 5.6. Al 111I, 1· 1 ll\ . t lie ,111,1nt 1tY
com- modity is OQ 1. When the price of the cummndil)' 1i::cs 11, l 'l\, 11tc ,111.111
tit '. ,kman ~ied of
;\I\ llh TC.~se in the
the commodity falls to OQ 2. Q 2Q, is the con I raclin n In d,·111,11" I 1r'~1dt 1111-: t'1, ,11,
price from OP 1 to OP 2
 Econon,·tcs •
1
5.1 4

y D
y
D

Q)
P2 I
P2 -~... I

~
a,
0
·.::
t
I
I
I
I
il. t I
I
I'
I
I P, -----1-
I'
---
P, -----1-I ---
I
' D ''
I'
D
I' I
I'
X ' X
' 0 Qz -Q ,
0 Qz -Q , Quantity
Quantity

Fig. 5 ·6 : Co ntr act ion in Demand

Fig. 5.5 : Extension in Demand
ng down and up
and con tra ctio n in dem and are rep res ent ed by a mo vem ent (movi
Bo th ext ens ion ft in the dem and
ly) alo ng the sam e dem and cur ve. In these cases, the re is no shi
respective
DEMAND)
(INCREASE AND DECREASE IN
5.7 SHIFT IN DEMAND CURVE
t
of dem and oth er tha n the price ofgoo ds are ass um ed to be constan
Th e fac tor s or det erm ina nts As lon g as the se fac tor s rem ain unc
hanged,
the dem and cur ve is pre par ed.
for the per iod for which at lower prices,
con stru cte d on the bas is of the se ass um pti ons hol d go od, i.e.,
the dem and cur ve ve will come and cur
wil l be dem and ed. Wh ene ver these factors change, a new dem
lar ger qua nti ties eth er the se factors have
ste nce , eith er at a low er leve l or a higher level, depending up on wh
int o exi
cha nge d for the bet ter or worse. and other than
a goo d cha nge s due to the cha nge in the det erm ina nts of dem
Wh en dem and of as the case may be.
que stio n, it is cal led cha nge (in crease or dec rea se) in dem and ,
pri ce ofgoo d in . Increase in demand
of cha nge in qua ntit y dem and ed dep end s on the nat ure ofcha nge
Th e direct ion anded at a
e pri ce mo re qua nti ty is dem and ed (or sam e qu ant ity is dem
me ans tha t eve n at the sam e ofthe people, inc rea se in the populat
ion,
y be due to the inc rea se in the inc om
hig her price). This ma complementary
ces of the sub stit ute s of the goo d in question, a fall in the pri ces of
increase in the pri gro ups who favour
~s of rise in pri ce i~ fut ure , red istr ibu tio n of income· tow ard
goods, expec_ t atio sum ers for the commodity
mo dity , a fav our abl e cha nge m tastes and preferences of the con At
the com
se in dem and is sho wn in Fig . s. 7. DD is the ini tia l dem and curve.
in the que stio n . Th e inc rea ent ion ed cha nge s in the det erm
ina nts of
s dem and ed. Du e to the afo rem
pri ce OP, OQ quantity_i the rig ht. D'D ' is the new dem
and curve.
e, the dem a~d cur ve shi fts to
dem and oth er tha n_pnc dh • d c.rom
the sam e pn ce OP , the qua nti ty dem and ed is OQ 1• Th us, th e d em an as mc rea se 11
Now,· at · h • .
m dem and .
OQ to OQ1• QQ 1 1s t e mc rea se • d d
, wh en the dem a d cur ve sh"f t De cre ase m eman
re is dec rea se in dem and s to the lef t nded
Similarly, the . n I
• .
h eve n at t h e sam e pnc e, sm all qua ntity is dem and ed O old am ou nt 1s dem a
me ans t at . r the sam e
to th d e in the
at a low er pri ce. This ma y be due e ecrease m the inc om ~ o f th e peo p le, d ecreas
of sub stit ute d .
pop ula tio n, dec rea se in the prices ~~o ~• m_c rea se m the pri ces of com
plementary
fall in pri ce in fut u
goo ds, exp ect atio ns of ay fro m gro ups who
re, re i stnb uti on of inc om e aw
fhtory of Demand 5.15

favour the commodity or a decline in the tastes and preferences of the consumers for the commodity.
The decrease in the demand is shown in Fig. 5.8. DD is the initial demand curve. At price OP,OQ
quantity is demanded. Due to the changes in the determinants of demand other than price, the
demand curve shifts to the left. D'D' is the new demand curve. Now, at the same price OP, the
quantity demanded is OQI' The quantity demanded has decreased from QQ to QQr QQ 1 is the
decrease in demand. It can also be shown that in case of decrease in demand, same quantity may be
demanded, but at a lower price. Thus, in Fig. 5.8, after a leftward shift in the demand curve, the
same old quantity OQ may be demanded at a lower price OP 1•
y y
D' D' D
D I I
I I
I I
I I
I I
I I
I I
I
tP -~I \
: ,,
\
·.:::
Q.
~ p
~
t----'--,
1'
I ,, •;: I\
Q. I '
I ------- D'
P, -----i----
I
1
"

D I D
I
.___.__._______ x I
I
O Q Q1 I
I
I
Quantity X
Q
Quantity

Fig. 5.7 : Increase in Demand Fig. 5.8 : Decrease in Demand

The causes of change in demand ( upward or downward shift in demand can be summarised as in
Table 5.3
Table 5.3
Increase in Demand Decrease in Demand
(Upward or Rightward Sl1if1 in Demand) (Downward or Leftward Shift in Demand)

l. Increase in income and wealth of the l. Decre<1se in inco me or wealth of the

people. people.
2. Increase in the population. 2. Decrease in the population.
3. Increase 111 the prices of substitute goods. 3. Decrease in the prices of substitute goods.
4. Decrease in th e prices nf complement<1ry -L Increase in the prices of complementary
goods. goods.
S. Expectation, c,t n~e 111 pnLt'S 111 future' 5. Expellations of fall 111 pn-:t's in future.
6. Changc5 111 t,15lC5, p1efe1t' ll le~ . l,1sl11ons, b. Ch.mges in tastes, preferences, fashions
cu~tom ~. hah,t ~. etc Ill f,l\'011 1 () ( ,I customs. habits, rte. ,1~.1inst ., 1.:t1mmodity.
commod1t y.

To sum up, a chan~l: Ill q11an111 )' dem:111dcd (cx tcllSIOll or t·v 11l r,1d iv11 ) i1nplies .1 movt>1llt'tll along
the demand c11rvc, ,,,hilt a< h,111~r ill drnialld (ll ll rl',,~e 01 1kne,1st·) 11\1.\ 111 s .1 shift in tht· dem.md
 jj
5.16 Economics - I
curve. Movement alon g a dem and curve is diffe rent from the mov eme nt of the curv
e. A mov eme nt
along a demand curv e indi cate s that a diffe rent quan tity w ill be dem and ed beca use
the price has
changed. If we mov e alon g a dem and curv e to the righ t (whe n the p rice of the com mod
ity falls), it
is a case of exte nsio n in dem and. If the mov eme nt is to the left of the give 1
n poin t on the dem and
curve (whe n the price of the com mod ity rises) , we get cont ract ion of d ema nd. On
the othe r hand,
whe n the dem and curv e mov es to the right , it is calle d incr ease in dem and
, sinc e at each possible
price, mor e is dem anded. Similarly, a mov eme nt of the dem and curv e to the left impl
ies that there
is decrease in dem and. Incr ease or decrease (cha nge) in dem and take s plac e due
to chan ge in factors
other than the pric e of the com mod ity in ques tion .
POINTS TO REMEMBER
5.1 Intro duc tion
1. The decision of firm with resp ect to any func tiona l area - man pow
er utili satio n, production
plan ning , inve ntor y man agem ent, inve stme nt deci sion , cost bud geti
ng, purc hase plan,
market resea rch, pric ing deci sion , adve rtisi ng budg et, prof it max imis atio n, etc requires
detailed analysis of dem and.
5.2 Meaning of Dem antf