Demand

Analysis &
Supply
Analysis
 Contents
Meaning of Demand, Types of Demand, Law of demand,
Determinants of Demand, Demand Function
Elasticity of demand- price elasticity of demand. Income
elasticity of demand, Cross Elasticity of demand
Law of Supply, Supply Schedule, Supply Curve, Price
elasticity of supply
 DEMAND

Desire for Ability to Willingness At given

At given
good buy to pay
price time
Types of Demand
1) Price demand:Demand primarily dependent upon
price is called price demand. This demand is
sensitive or responsive to the change in price. In
case of normal goods, demand increases with fall in
price and vice versa. But in case of giffen goods
demand increases even there is rise in price.
Cont
2) Cross demand:Demand primarily dependent upon
prices of related goods is called cross demand. The
complementary goods and substitutes are called
related goods. In case of complementary goods like pen
and ink demand for good is inversely related to the
prices of other goods but the case in substituting goods
are just opposite. Demand for substituting goods is
directly related to prices.
3) Income demand:Demand primarily dependent
upon income is called income demand. This demand is
sensitive or responsive to the change in income. In case
of normal goods, demand increases with rise in income
and vice versa. But in case of giffen goods demand
decreases when there is increase income.
4) Direct demand: Demand for goods and services made by final consumers to
satisfy their wants or needs is called direct demand. For example guest of hotels make
the demand for food.

5) Derived demand: Demand for goods and services made according to direct
demand is called derived demand. For example demand made by hotels for
vegetable, groceries is called derived demand.

6) Joint demand: Demand made for two or more goods and services to satisfy single
need or want is called joint demand. For example, tea sugar are demand together to
satisfy a single need. The complementary goods are jointly demanded

7) Composite demand: Demand for a single commodity made in order to use for
different purposes is called composite demand. In this case, commodity is one but the
number of uses is multiple. For example, the electricity is used for lighting, heating,
transportation for the use of different electrical device.
Determinants of demand

Price: Demand is inversely related to price. If price increases, demand decreases and vice versa. But in case of Giffen goods (goods that
are inferior and basic like low quality rice and bread for Nepalese), demand is directly related to price.
Price of complementary goods: Demand is inversely related to price of complementary goods. The goods which are consumed together
to fulfill a single need like brick and cement, pen and ink are called complementary goods. If price of complementary goods rises demand
for the commodity decreases and vice versa.
Price of substitutes: Demand is directly related to price of substitutes. The goods among which we choose one to fulfill our need are
called substitutes. They are alternative of and competitive to each other like Coke and Pepsi. If prices of substitutes rise, demand
increases and vice versa.
Income: Demand for normal goods is directly related to income of consumer. If income increases, demand too increases and vice versa.
But demand for inferior goods is inversely related to income.
Population: Demand is directly related to population and number of consumer. If population increases demand too increases and vice
versa.
Taste and preferences: If taste and preference of consumer change in favor of goods, demand increases. If it changes against the goods,
demand decreases.
Tax rates: If government imposes more taxes, the demand decreases and vice versa.
Advertisement: Demand is directly related to expenditure and advertisement expenditure. More advertisement of a good brings more
demand.
Interest rates: Demand is inversely related to interest rate. If interest rate raises people save more, deposit in banks or lend to earn
interest. Due to this reason demand decreases and vice versa.
Nature of commodity: The demand depends upon the nature of commodities too. The demand for basic goods is relatively inelastic. But
demand for luxurious goods usually is elastic.
Law of Demand

The law of demand states that the demand is inversely

related to price other things remaining constant (ceteris
paribus). It means if price raises demand contracts or
decreases and if price diminishes demand expands or
increases. The law of demand operates only if factors
determining demand other than prices are constant. It means
prices of complementary goods, substitutes, income, taste of
consumer, population, advertisement etc should be constant.

Law of demand can be explained with the help of demand

schedule and demand curve as following
Two Content Layout with Table
Let the initial price Rs 10 per kg and Price (in Demand(p
demand be 400 kg per week. If the Rs) er week)
prices raise to Rs 15 the consumer s Class 1 10 400
reduce their demand. In above table
demand is at 300 kg/week when Class 2 15 300
price is Rs 15. If the price further
raises to Rs 20 the demand further Class 3 20 200
decreases to 200kg/week. It shows
that demand changes inversely to
the change in price when other
things remain constant. If we
represent the table in figure then we
obtain a downwardly sloped demand
curve as shown below
Title and Content Layout with Chart
450

400
400 Price Linear (Price) Demand

350

300 300

250
PRICE
200 200

150

100

50
15 20
010 DEMAND
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