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Demand


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In the ordinary parlance demand means desire or willingness for a commodity. But in Economics terminology demand backed up by enough money to pay for the goods demanded. Demand is the Desire or want backed up by money. Therefore, demand means desire backed by the willingness to buy a commodity and the purchasing power to pay. Harvey – demand in economics is the desire to posses something & the willingness & ability to pay a certain price in order to possess it”. Stonier & Hague – demand in economics means demand backed up by enough money to pay for the good demanded”. Benham – “demand for a thing at a given price is the amount of it which will be bought per unit of time at that price”.

1. Demand is a desire or want backed up by

money – desire + purchasing power 2. Demand is always related to price and time – it is an relative concept.  Demand for a commodity should always have a reference to price and time.  Example – demand for grapes by a household at a price of Rs 10/kgs or 20 kgs/ per week. 3. Demand may be viewed Ex-Ante or Ex-post  Ex-ante means intended demand  Ex-post – what is already purchased.

It is not an approximation. There is no need for definite geographical area. It is meaningless to say that the demand for refrigerator in the market is one thousand. Price – demand is always related to price. per month or per year. 4. Amount – demand is always a specific quantity which a consumer is willing to purchase.Demand has the following four characteristics 1. Market here simply refers to the contact between buyers and sellers. Time – demand always means demand per unit of time. but is to be expressed numerically. per week. The person must state the price at which the consumer is prepared to purchase the said quantity of the commodity. 2. per day. 3. . Market – demand is always related to the market.

there is an inverse relationship between the price and quantity of demand. other things remain constant • • • . The law of demand – states.e.Law of Demand • The law of demand is one of the fundamental laws of economics. The law of demand states that the demand for a commodity increases when its price decreases and falls when its price rises. other things remaining constant. The law holds under the condition (based on assumption) i..

7. The demand for the commodity should be continuous.Law of demand is based on certain assumptions 1. Price of other goods should not be change (prices of substitutes and complementary goods) 4. 2. There is no changes in consumers’ taste and preferences. The commodity should not confer any distinction. There should be no substitute for the commodity. No changes in weather condition . 6. Consumer’s Income remain constant 3. 5.

a demand curve and a demand function. It can be illustrated through a demand schedule. .Law of Demand……. • The law of demand is based on the Law of Diminishing Marginal Utility . • These factors remain constant only in the Short Run – in the long run they tend to change.

• Alfred Marshall was the first economist developed the techniques of price theory – it is a list of price and quantities.• Demand Schedule is a table or statement showing how much of a commodity is demanded in a particular market at different prices. Market Demand Schedule . Individual Demand Schedule – 2. • A Demand Schedule may be – 1.

Demand scheduled is a list of quantities of a commodity purchased different prices by a consumer at Demand Schedule Individual Demand Schedule Market Demand Schedule .

• Market demand is an aggregate of the quantities of product demanded by all the individual buyers at a give price. household or person. Market Demand – • Refers to the total demand of all the buyers taken together. • Individual demand is a single consuming entity’s demand D = f (P).Individual Demand – • refers to the demand for a commodity from the individual point of view – a family. .

• Market demand is more important from the business point of view – sales depend on the market demand – business policy and planning are base on the market demand – price are determined on the basis of market demand. U) . M. Dx = f (Px. T. Py. A.• How much quantity the consumers in general would buy at a given period of time.

A. Py. M. T. U) Dx = Quantity demanded for commodity x f = functional relationship Px = Price of commodity x Py = Prices of related commodities M = The money income of the consumer T = the taste of the consumers A = the advertisement effect U = unknown variable .Dx = f (Px.

1 Demand for Oranges by Individual A Price of Oranges (Rs) Quantity demanded of oranges (dozen) 10 1 9 3 8 7 7 11 6 13 .Individual Demand Schedule Table.

Table 2. Market Demand Schedule for orange Price of Oranges (Rs. Per dozen Quantity demanded of Oranges by consumers (dozens) Market Demand or Oranges (dozens) A 1 3 7 B 0 1 2 C 3 6 9 D 0 4 7 10 9 8 4 14 25 7 6 11 13 4 6 12 14 10 12 37 45 .

Horizontal Summation: From Individual to Market Demand .

• But the question is why do people demand more if prices come down ? because of the • This is because of the following reasons - . • This is inverse relationship between the price and quantity demanded.Why does the demand curve slope downwards • Demand curves slope downwards from left to right.

A downward sloping demand curve • A demand curve must look like this.e. price demand quantity demanded . be negatively sloped.. i.

Psychological effects . Reasons for downward sloping demand curve from left right 1. Substitution effect. 2. New consumers enter to market 5. Several uses/multiple uses 6. Income effect 4. The operation of law of diminishing marginal utility. 3.

 The law of demand is based on the law of  If consumer’s uses more and more units of a  commodity the utility derived from each and successive units goes on decreasing. Substitution effect  Substitution effect also leads to the demand  As the price of a commodity falls. It means as the price of the commodity falls consumer purchases more of the commodity and hence his marginal utility will diminishes.1. The operation of law of diminishing marginal utility diminishing marginal utility. . prices of its substitute goods remains the same and consumer will buy more of that commodities. 2. curve to slope downwards from left to right.

 After   falling prices. if the price increases. Income effect  The fall in the price of a commodity is equivalent to an increase in the income of the consumer. the consumer’s income effect reduced and he has to curtail his expenditure on the commodity.3.  For example computer sets. laptops. Similarly. New consumers  When the price of commodities falls new consumer can enter into market. washing machines etc – falling prices even the poor people can also buying these goods. mobile.he has spend less money for purchasing the same amount of commodity as before. . A part of this money can be used for purchasing some more units of that commodity. 4. refrigerators. .

When price falls. When the price of such commodities goes up they will be used for important purposes. Psychological effects which lead to downward slope of the demand curve.5. people  . the demand increases with the fall in prices. Several uses  Some commodities can be put to several uses   6. the commodities will be uses for various purpose – For example electricity/power favour to buy more which is natural & psychological entity. Therefore.  When the price of a commodity falls.

. There are certain peculiar cases – law of demand will not hold good.Exception to the Law of Demand • Law of demand is only a general statement telling • that prices and quantities of a commodities are inversely related. • Certain cases with the increases in price quantity • • demand also increases and with the fall in price quantity demand also falls. which is known as Giffen Paradox. In such a case demand curves slopes upward from left to right. Robert Giffen was the first person to expose this rare occasion.

Y D P2 Prices of Commodities P1 D O Q1 Quantity of Demanded Q2 X .

6. Giffen effects or Paradox. 2. Speculative goods. 5. Ignorance of the people Demand for necessaries War or emergency . Scarcity and Inflation. 4. 3.Factors influences on exception to the law of demand 1. Prestige goods (Veblen effects). 7.

When prices of such goods rise. Veblen in his doctrine of conspicuous consumption and hence this effect is called Veblen Effect. On the other hand. as the price of Veblen goods falls. gold etc. . Prestige Goods • • • rich people – costlier price – diamond. their capacity to perform the function of ostentation diminishes.• Articles of prestige value Snob appeal or articles of conspicous consumption – only by 1. their snob appeal increases and they are purchase in larger quantities.

 in the speculative market, particularly in stocks and

2. Speculative goods

shares, more will be demanded when the prices are rising and less will be demanded when the price declines. People tend to buy more shares, bond & debentures when their prices are rising in the hope that making profits in future and they can reduces buying prices are falling.

 Robert Giffen is an Irish economist of 19th century – 

3. Giffen Effect or Giffen Paradox

discovered Giffen Paradox. People were so poor that they spent a major part of their income on Potatoes and a small part on meat. When the price of potatoes rose, they had to economise on meat even to maintain the same consumption of potatoes.

4. Demand for Necessaries
 The law of demand does not apply in the case of necessaries of life – food, clothing and shelter  Irrespective of price changes, people have to consume the minimum quantities of necessary commodities.

5. Scarcity and Inflation
 The law of demand cannot apply in the case of acute scarcity/shortage of commodities.  People buying more out of panicky when prices are rising.  Even at the time of hyper-inflationary situation people will try to purchase more commodities even there is higher prices of commodities.

6. Consumer’s ignorance

 Sometimes, people buy more of a
commodities at a higher price out of sheer of ignorance.

7. War or emergency

 During the period of war, if there is fear of

shortage, people may start buying for hoarding & building stocks even at higher prices.  On the other hand, if there is depression, they will buy less at low prices.

2. income of consumers.Changes in Demand curve 1. Increase and decrease demand  When demand changes due to changes in other factors such as tastes & preferences. 2. prices of the related good (substitutes and complementary) etc – it is called as increase & decrease demand . Extension and contraction demand  A movement along a demand curve takes place when there is a change in the quantity demanded due to change in the commodity’s own price and not due to any other factor. Changes in demand curve takes place in two ways – Extension and Contraction demand Increase and decrease demand 1.

1. Y D P2 Prices Contraction demand P P1 D O M2 M M1 Quantity Demanded Expansion demand X . Extension and contraction demand  A movement along a demand curve takes place when there is a change in the quantity demanded due to change in the commodity’s own price and not due to any other factor.

 If the price of the good falls from OP to OP1 quantity demanded increases from OM to OM1 is called as expansion demanded. on the other hand. when the price of good rises from OP to OP2 quantity demand decreases from OM to OM2. When the price of the commodity is OP. thus situation is called as contraction demand. . the quantity demanded is OM.  While.

Increased and decreased demand  When demand changes due to changes in other factors such as tastes & preferences. if the consumers buy less goods it is called decreased demand .  On the other hand.  Due to changes in other factors.2. income of consumers. if the consumers buy more goods it is called increased demand. prices of the related good (substitutes and complementary) etc – it is called as increased & decreased demand.

1 Y D D1 D1 A P Price B B A Y D P D D1 D O Q Increased Demand Q1 D1 X O Q1 Q X Quantity of Demanded Decreased Demand .Figure. 2 Figure.

Due to fall in (other factors) quantity demand decreases to OQ1 – this situation is called as decreased demand. Figure 1 – original demand curve is DD. taste & price of substitute & complementary) the quantity demand increases from OQ to OQ1 – this is called as increased demand. Due to change in the conditions of demand (income.Where OP is the original price of OP and the OQ is the quantity demand. . 2 . the   price is OP and quantity demanded is OQ. Figure.

Determinants of demand  Demand may change not only because of a change in price but also due to other factors. .  These factors such as tastes & habits of the people. weather conditions. income of the consumers. size of population & substitution goods etc are leads to changes in demand ( non-price factors) either rightward or leftward directions.

Factors determines the demand for a commodities are – 1. Prices of related goods 5. Prosperity and depression 10.Distribution of income and wealth . Price of the commodity 2. Changes in weather condition 9. Tastes & preferences of the consumers 4. Income of the consumers 3. Advertisement & sales propaganda 6. Consumers expectations 7. Changes in size of population 8.

• There is inverse relationship between the price and quantity demanded. 2. Income of the Consumer • The ability to buy/purchasing power a commodity depends upon the income of the consumer. they buy more and when income falls they buy less. . • Normally a larger quantity is demanded at a lower price and vice-versa. Price of the Commodity • There is a close relationship between the quantity demanded and the price of the product.1. • When the income of the consumers increases.

. Demand for several products like ice-cream. beverages and so on depends on individual’s tastes. People with different tastes and habits have different preferences for different goods. Smokers and Non-smokers. Non-Vegetarian – liking chicken even at high price. chocolates.3. A Strict Vegetarian – no demand for meat at any price. Tastes and Preferences of the Consumers • The demand for a product depends upon tastes and • • • • • preferences of the consumers.

Gun and Bullets etc . Ground nut and Til-oil. Pear and Beans. Pen and Ink. Demand for a commodity depends on the relative price of substitutes. The demand for a product is also influenced by the prices of substitutes and complements. Sarees and Blouse. Tea. Prices of Related Goods Related goods are generally substitutes and complementary goods. Substitute commodities – examples – Tea and Coffee.• • • • • • 4. Shoes and socks. Jower and Bajra. Sugar and Milk. Complementary goods – satisfy one wants – two or three goods are needed in combination – Joint Demand Example Car and Petrol.

Consumer Expectations • Changes in future expectation are also influence to changes in demand. television. • Advertisement are given in various means such as news papers. . the preferences of consumers can be altered by advertisement and sales propaganda. • Advertisement helps in increasing demand by informing the potential consumers.5. • If consumer expects as rise in prices he may buy large quantities of that commodity and vice versa. • Expectation of rising income – tend to increase his current consumption. 6. radio.Advertisement and Sales Propaganda • In modern time.

• Similarly. toys. . feeding bottles will increases. • If the population consists – more of babies – then demand for baby food.7. composition of population of population also brings about change in demand. The Growth of Population • The growth of population is also another important fact that affects the market demand. • When population increases demand also increases irrespective of the price level.

during summer demand for cool drinks.  While. Changes in weather condition  Demand for a commodity may change due to a change in climatic conditions. . Prosperity & depression  Demand for goods increases during the period of prosperity and decreases during depression without any reference to price. rain-coats.8. umbrella increases. 9. during winter and rainy seasons demand for woolen clothes.  For example. cooler etc increases. ice-creams cotton clothes. fan. 10. Distribution of income and wealth  When income wealth is equally distributed the demand will increase more than it is unequally distributed.

“The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in the price & diminishes much or little or a give rise in price.  In other words. The law of demand explains the direction of  Elasticity of demand explains the relationship Elasticity of Demand change in demand due to change in the price.  The concept of elasticity of demand was introduced by Marshall –“Elasticity of demand shows the extent of change in quantity demanded to a change in price”. . between a change in price and consequent change in amount demanded.  But it does not tell us the rate at which demand changes due to changes in price.

Ed = Percentage Change in Quantity Demanded Percentage Change in Price = Change in Quantity Demanded Quantity Demanded Initially = Where ÷ Change in Price Initial Price ∆Qd ∆P * P Qd ∆Qd = Change in Quantity Demanded ∆P = Change in Price .Price Elasticity…….

Elasticity of Demand Price Elasticity Income Elasticity Cross Elasticity of Demand .

 Price Elasticity ____________________________________ Percentage change in price .1.  Price elasticity of demand measures  It is the ratio of percentage change in quantity demanded change in price. Price elasticity of demand  Marshal was the first economist to define price elasticity of demand. to a percentage Percentage change in quantity demand changes in quantity demanded to a change in price.

 Income elasticity of demand may be stated as ratio of change in the quantity demanded of a good due to changes in the income of the country.2. Income elasticity of demand  Income elasticity of demand shows the change in quantity demanded as a result of change in income. Percentage change in quantity demanded _________________________________ Percentage change in income  ey .

Ec – Percentage change in quantity demanded of X ______________________________________________________ Percentage change in price of Y  QX Py  PY Qx Qx = Change in quantity demand for commodity X Py = Change in price of commodity Y Py = Price of commodity Y Qx = Quantity demand for commodity X – .3. This is called as cross elasticity of demand. Cross Elasticity of Demand  A change in the price of one commodity leads to a change in the quantity demanded of another commodity.

developed • • concept of price elasticity of demand. Unit elasticity of demand 4. It may be more for certain goods and less for some other goods.Kinds of price elasticity of demand • Marshal was the first economist. The price elasticity of demand is classified into five kinds. Perfect elastic demand 2. Perfect inelastic demand 3. Price elasticity of demand is not same for all the commodities. Relatively inelastic demand . Relatively elastic demand 5. 1.

ed = ∞ Y Price D D O Quantity Demanded X . while a small fall in price will cause substantial increases in price of commodity.1. Perfectly elastic demand  When a small change in price leads to an infinitely large  change in quantity demanded. For example a small rise in price will cause the quantity demanded of the commodity falling infinitely.

2. Perfectly inelasticity of demand  In this case even a large change in price of commodity leads to no change in quantity demanded. Ed = 0 Y D P1 Price P P2 D O M Quantity of Demand X .

When both are equal the elasticity is said to be unitary.3. Ed = 1 Y D P Prices P1 D O M M1 Quantity of Demand X . Unit elasticity of demand  The change in demand is exactly equal to the  change in price.

In other words. it refers to that situation where a small proportionate fall in price of a commodities is followed by a large proportionate increase in its quantity demanded and vice versa.4. Ed > 1. Y P P1  D D X O Quantity Demand . Relatively more elastic demand  It refers to that situation where a proportionate change in the quantity demanded is much greater than the proportionate change in price.

5. Y D P  Price P1 D O M M1 Quantity Demand X . it refers to that situation where a great proportionate fall in price of a commodities followed by a small proportionate changes in quantity demanded. In other words. Relatively less elastic demand  It refers to that situation where the proportionate change in the quantity demanded is much less than the proportionate change in price. Ed < 1.

3.Types of Price Elasticity of Demand Sl No.Table . 1. 5. Types of PED Perfectly Elastic Perfectly Inelastic Unit Elastic Relatively Elastic Relatively Inelastic Numerical Expression ∞ 0 1 >1 <1 Description Infinite Zero One More than One Less than One Shape of Curves Horizontal Vertical Rectangular Hyperbola Flat Steep . 4. 2.

Types of Price Elasticity of Demand D4 = ∞ D3 = > 1 D D4 D2 = 1 D1 = < 1 D5 = 0 Price D3 D2 D5 D1 Quantity Demand .

Point method 4. Arc method . • Generally four methods are to measure elasticity of demand. it is not enough to know whether the demand is elastic or inelastic. Total outlay method 3. Percentage method 2.Measurement of elasticity of demand • For practical purposes. 1. • It is more useful to find out the extent to which demand is elastic or inelastic.

Percentage method  This measured by dividing the percentage change in quantity demanded in response to percentage change in price.  Percentage method = % Change in Qty Demanded % Change in Price   It is also called as formula method or coefficient of price elasticity of demand.  Percentage method are also called as ratio method.1. . All the five types of price elasticity of demand can be illustrated.

D4 = ∞ D3 = > 1 D D4 D2 = 1 D1 = < 1 D5 = 0 Price D3 D2 D5 D1 Quantity Demanded .

Total expenditure/outlay/revenue method  This method was given by Alfred Marshall. This can know only whether elasticity is equal to one.  Unit elasticity (ep = 1)  Relatively more elasticity (ep = > 1)  Relatively less elasticity ( ep = < 1) . greater than one or less than one.2.  Elasticity of demand can be measured on the basis of change in total outlay/expenditure of a consumer due to change in the price of a commodity.  Total Revenue/total outlay = Price X (Quantity  purchase or sold).

Y P3 P1 Ed = > 1 Price Ed = 1 P2 P4 Ed = < 1 O E3 E4 E2 X Total Outlay .

Ed = < 1 When price decreases from P3 to P1 total outlay increases from E3 to E2 – in this case. Ed = 1 When price falls to P4 total expenditure decreases from E2 to E4. Therefore. elasticity is equal to one. When price falls from P1 to P2. hence elasticity is less than one. total expenditure remains the same. Ed = > 1 This method which is also known as total revenue method simply classifies demand into three types. It does not help us to measure elasticity in numerical terms. • • .• Total outlay is measured in X axis and price is • • shown in Y axis. elasticity is greater than one.

Point-Elasticity Formula   Q1 – Q0 Q0 P1 – P0 P0 or  Q/Q0  P/P0 . In this method. • curve joining the two axes and measure the elasticity between two points. a straight line demand • • Marshall.• 3. consider do not large changes in price or quantities in the calculation of elasticity's of demanded. Point method This method was also suggested by Alfred • According to this method. Point method refers to conditions where the changes in prices as well as changes in quantities demanded are very small.

A ep = ∞ ep > 1 Price ep = 1 ep < 1 ep = 0 0 Quantity Demanded B .

Arc Method • Arc elasticity of demand is the measurement of elasticity of demand when large changes in price or quantities are considered. • Original Quantity – New Quantity Original Quantity + New Quantity Arc elasticity = Original Price – New Quantity Original Price + New Quantity • Arc-Elasticity Formula – Q1 – Q0 Q1 + Q0 2 P1 – P0 P1 + P0 2 . where as arc elasticity is used to calculate elasticity over a substantial range of price changes. • Point elasticity measures only minute changes.4.

AMR and NRB are similar (OB/OA)= (NB/RN) Ep = (NB/RN)*(RN/RM) = NB/RM A M R D Again NB/RM = RB/AR Ep = RB/AR O B N Quantity Demanded Ep = Lower Segment Upper Segment .Price D Draw a tangent AB on the demand curve at point R ep = Lower Segment Upper Segment S Slope of AB = OB/OA Ep = (OB/OA)* (RN/RM) As triangle AOB.

Proportion of income spent 8. Joint Demand 5. Variety of uses 4. Availability of substitutes 3. Level of prices 9. Time factor . Income groups 7.Factors determines elasticity of Demand 1. Nature of the commodities 2. Deferred Consumption 6.

The demand for necessaries like – food. 2. comfort or luxury. Nature of the commodity The elasticity of demand for any commodities depends upon the nature of commodities – necessary. If the commodity has no substitutes than elasticity is inelastic in nature. Availability of substitutes Commodities having substitutes have more elastic in nature. gold. When the change in the price of one commodity. cloths. Luxuries commodities like – diamond. salt. silver more elastic in nature. maches etc – inelastic in nature.• • • • • • 1. . the demand for its substitute is immediately affected.

its demand will increase & which can be uses for various purposes. iron. milk. a rise in its price will result in restricting its consumption to the most essential uses. For example. If there is a slight fall in the price of coal. steel and electricity etc. electricity is a multiple use commodity – a fall in its price will result in a substantial increase in its demand – people may use it for cooking. • • . On the other hand.3. Variety of uses • The demand for a commodity having variety of uses is more elastic in nature– coal. heater etc. For example. people may use it for lighting purposes only.

the demand for petrol will also be less elastic. the demand for jam will also be elastic.4. Joint Demand • There are certain commodities which are jointly demanded – for example petrol & car. pen & ink. . • On the other hand. if the demand for bread is elastic. bread & jam etc. • It the demand for cars is less elastic. • The elasticity of demand of the second commodity depends upon the elasticity of demand of the major commodity.

But the consumption of medicine. wine of a particular brand – demand is generally inelastic. washing machine etc. coffee. cigarette.. What ever the price of particular commodities. salt. people will post-pone their consumption. its • • • • demand is more elastic than that of the commodities which cannot be postponed.V. DVDs. The consumption of T. VCR. Habits of the people People who are habituated to the consumption of a particular commodity like tea. their demand will decrease and vice-versa. 6. If the price of any of these articles rises. can be postponed. . refrigerator. As a result. habitant use of it. Postponement of the consumption • When the demand for a commodity is postponable. sets.5. food etc cannot be postponed even if its price rises. if their price goes up.

8. matchbox etc. T. the demand of persons in lower income groups is generally elastic. refrigerators. their demand for commodities is less elastic. the demand for them will be inelastic. A rise or fall in the price of commodities will reduce or increase the demand on their part.• • • • • • 7. Consumer’s income The elasticity of demand also depends upon the income. . washing machine.V sets. the demand of them is elastic. consumer spends a larger part of his income like. On the other hand. salt. Proportion of income spent If a consumer spends a very small part of his income on goods like newspapers. Persons who belong to the higher income group. On the other hand.

When the price level is high.• • • • • 9. Time factors Time factor plays an important role in influencing the elasticity of demand for commodities. 10. the longer the time which the consumer takes in buying a commodities. the higher will be the elasticity for that product. Level of prices The level of prices also influences the elasticity of demand for commodities. . the demand is less elastic. the demand for commodities is elastic and when the price level is low. On the other hand. The shorter the time in which the consumer buys a commodities the lesser will be the elasticity of demand for that product.