Demand

Demand

 Demand is defined as the quantity of a

good or service that consumers are
willing and able to buy at a given price
in a given time period
Market demand

 Market demand is the sum of the

individual demand for a product from
each consumer in the market
Latent Demand

 Latent demand is probably best

described as the potential demand for a
product. It exists when there is
willingness to buy among people for a
good or service, but where consumers
lack the purchasing power to be able to
afford the product.
Derived demand
 The demand for a product X might be strongly
linked to the demand for a related product Y –
giving rise to the idea of a derived demand

 For example, the demand for steel is strongly

linked to the demand for new vehicles and
other manufactured products. So when
demand for new vehicles rise then demand for
steel increase and vice-versa
The Law of Demand

Other factors remaining constant there is

an inverse relationship between the
price of a good and demand.
 As prices fall, we see an expansion of
demand
 If price rises, there will be a contraction
of demand
Two reasons why more is
demanded as price falls
 The Income Effect
 Earlier 1kg chicken=Rs100. I used to eat
once in a week
 Now chicken became cheaper.
1kg=Rs50. So, with same earlier budget
of Rs100 I am able to eat twice a week
 The Substitution Effect:
Earlier I used to eat more mutton as
mutton was cheaper than chicken.
 But, now chicken has become cheaper
than mutton. So, I prefer to eat more
chicken than mutton
 Demand for chicken is rising
The conditions of demand
 D = f (Pn, Pn…Pn-1, Y, T, P, E)
 Where:
Pn = Price of the good itself
Pn…Pn-1 = Prices of other goods – e.g. prices of
Substitutes and Complements
Y = Consumer incomes – including both the level and
distribution of income
T  = Tastes and preferences of consumers
P = The level and age-structure of the population
E = Price expectations of consumers for future time
periods
Changing prices of a
substitute good
 Substitutes are goods in competitive
demand and act as replacements for
another product.
 E.g. bus, auto, train
 Colgate toothpaste, closeup
Changing price of a
complement
 Two complements are said to be in joint
demand.
 A rise in the price of a complement to Good X
should cause a fall in demand for X
 If price of milk rises then less tea will be
consumed
 If prices of computers fall then demand for
printers will rise
 Pen and ink
Change in the income of
consumers
 Most of the things we buy are normal
goods. When an individual’s income goes
up, their ability to purchase goods and
services increases
 E.g. fruits, mutton, chicken

When incomes fall there will be a
decrease in the demand for most goods
         
Change in tastes and
preferences
 Change in tastes and preferences of
consumers will have huge affect on
demand.
 Advertising plays an imp role in
influencing tastes and preferences of
consumers
 Consumers preference shifted from radio
to TV. Print media to electronic media
Discretionary income
 Discretionary income is disposable income
less essential payments like electricity & gas
and, especially, mortgage repayments
 An increase in interest rates often means an
increase in monthly mortgage payments
reducing demand.
 And during 2005 and 2006 we have seen a
sharp rise in the cost of utility bills with a series
of hikes in the prices of gas and electricity. This
has eaten into the discretionary incomes of
millions of households across the UK.
Interest rates and demand

 Many products are bought on credit using

borrowed money, thus the demand for
them may be sensitive to the rate of
interest charged by the lender.
Exceptions to the law of
demand
 Ostentatious consumption / Veblen
goods
 A higher price may also be regarded as a
reflection of product quality.
 perfumes, designer clothes, and top of
the range cars
 Speculative Demand
 If prices increase u buy more expecting
that the prices will further rise in future
and thus make a good deal
 e.g. housing, shares
 The Giffen Case:
 Giffen found that in the 19th century Ireland, 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 economize (eat
less meat) on meat even to maintain the same
consumption of potatoes. Further, to fill up the resulting
gap in food supply caused by a reduction in meat
consumption, more potatoes had to be purchased
because potatoes were still the cheapest food.
Contd.
 Thus the rise in the price of potatoes led in increased
sales of potatoes. Such cases would occur only when
considerable part of the total income is spent on an
inferior good. Such goods are called Giffen goods
 Consumers Psychological Bias or Illusion:
When the consumer is wrongly biased against
the quality of a commodity with the price
change.
e.g. Some sophisticated consumers do not buy
when there is stock clearance sale at reduced
prices thinking that the goods may be of bad
quality