Demand

Learning Outcomes
• Conceptual Understanding of Demand,
Demand Curve and Law of Demand.
• To Understand effects of determinants of
demand on Demand Function.
• To Understand causes of change in Demand.
 Demand: effective desire

 Demand is that desire which backed

by willingness and ability to buy a
particular commodity
 WHAT IS DEMAND?

The quantity of a product consumers are

willing and able to buy at different prices
in a specified time period.
 Types of Demand

 Direct and Derived Demand

 Recurring and Replacement
Demand
 Complementary and Competing
Demand
 Classification of Goods and Services
• Free Goods
• Public Goods
• Private goods and services
 News
• Agri commodities: Upsurge in
demand lifts mentha, crude palm
oil; cardamom falls
 News!
Apple iPhone may still come at a
discount on e-commerce sites

• Online discounting will remain a pivotal strategy for

Apple in India
• It leads to an instant surge in sales and clears stuck
inventory.
• Apple will be part of all online discounting promotions
 Demand for Big MacDonalds

• Leader in fast food chain business with 31000

restaurants in 118 countries.
• Closest competitor Burger King had 12000
restaurants in 61 countries.
• In US, Mc Donalds has 14000 outlets compared with
Burger King’s 7000.
• Burger market share is 47% compared to Burger
King’s 14% and Wendy’s 13%.

After three decades of double digit gains, domestic

sales at Mc Donald’s have grown slowly since 1980s
• Higher prices
• Changing tastes
• Increased competition from other fast food chains
• Obesity issues in the US
Strategies adopted to increase demand
• Introduced new items on it’s menu
• Cutting prices
• In 1990, introduced value menu with small hamburgers
selling for as little as 59 cents( down from 89 cents) and a
combination of burger, french fries and soft-drinks for as
much as half off
Indian strategies to increase demand
• Efforts to position as affordable by
introducing low priced products as ice cream
cone at Rs7 and Econo-meals at low prices.

• Gradually launched Mc Swirl vanilla ice-

cream in cones, topped with cadbury
chocolate at Rs 12 and cone sales increased
by 15%

• Happy price menu

• Customized Indian menu with no
pork products.
• Reformulated products giving spices
favoured by Indians.
• Maharaja Mac favoured by middle
and rich class consumers.
 Determinants of Demand

 Price of the product

 Income of the consumer
 Price of related goods
 Tastes and preferences
 Expectation of future price changes
 Population
 Advertising
 Fashion effect
 Demonstration effect
 Visible consumption
 Snob appeal (Namedropper)
 Demand Function

 Interdependence between demand

for a product and its determinants
can be shown in a mathematical
functional form

 Df = f(Px, Y, Py, T, A, N)
 Cont…
• Dx represents quantity demand for X
commodities
• F represents Functions
• Px represents Price of X commodities
• Y represents Income of Consumers
• Py represents Price of Y commodities
(Complimentary & Substitute Goods)
• T represents Tastes
• A represents Advertisements
• N represents another factors or goods and
commodities
 Demand Schedule and Individual Demand
Curve

Point e
on Demand 35
Demand Price (Rs (‘000 d
Curve per cup) cups)
30
a 15 50 c
b 20 40 25
b
c 25 30 20
d 30 20 a
15
e 35 10
O
10 20 30 40 50
Quantity of coffee
 Law of Demand
 A special case of demand function
which shows relation between price
and demand of the commodity
Dx = f(Px)
 Reasons
 Substitution Effect
 Income Effect
 Law of Diminishing Marginal
Utility
 Assumptions

• Constant income
• Constant tastes and preferences
• Price of related good unchanged
• Constant expectations
EXCEPTIONS TO THE LAW OF DEMAND

• Gifted Goods
• Snob Appeal (appealing for using
commodities)
• Demonstration Effect
• Future Expectation of Prices
• Insignificant proportion of income spent
• Goods with no Substitutes
 News
• The Modi Government announces a price
hike in petrol (Rs. 80) and diesel (Rs. 72) / ltr.

• Resultantly, the cost of transportation of

vegetables rises leading to a rise in price of
vegetables and fruits, and other
essential/basic commodities.

• Draw a diagram showing the impact of these

changes on demand for vegetables.
 Change in Demand

 Shift in demand curve from D0 to D1

Price
D1  More is demanded at same price
D0 (Q1>Q)
D2  Increase in demand caused by:
 A rise in the price of a substitute
 A fall in the price of a complement
 A rise in income
 A redistribution of income towards
P those who favour the commodity
 A change in tastes that favours the
commodity
 Shift in demand curve from D0 to D2
 Less is demanded at each price
0 (Q2<Q)
Q2 Q Q1 Quantity
 Supply

• Indicates the quantities of a good or service that the seller is

willing and able to provide at a price, at a given point of time,
other things remaining the same.
• Supply of a product X (Sx) depends upon:
– Price of the product (Px)
– Cost of production (C)
– State of technology (T)
– Government policy regarding taxes and subsidies (G)
– Other factors like number of firms (N)
• Hence the supply function is given as:
Sx = (Px, C, T, G, N)
 Law of Supply
 Law of Supply states that other things remaining the same, the higher the
price of a commodity the greater is the quantity supplied.

Supply Schedule Supply Curve

Point on Supply (‘000 35
Supply Price (Rs. cups per e
Curve Per cup) month) 30
a 15 10 25 d
c
b 20 20 20
b
c 25 30 15 a
d 30 45
e 35 60 0
10 20 30 40 50 60
Quantity of Coffee
 Market Equilibrium
 Equilibrium occurs at the price where the quantity demanded and the
quantity supplied are equal to each other.
 At point E demand is equal to supply hence 25 is equilibrium price

Price Demand
Supply (‘000 cups/
Price (‘000 cups/ month)
S (Rs) month)

15 10 50

E 20 15 40
25
25 30 30
30 45 15

D 35 70 10
O 30 Quantity
Elasticity of Demand
 Elasticity of Demand

• “Elasticity” is a standard measure of the degree of

responsiveness (or sensitivity) of one variable to changes in
another variable.
• Elasticity of Demand measures the degree of responsiveness
of demand for a commodity to a given change in any of the
independent variables that influence demand for that
commodity, such as price of the commodity, price of the other
commodities, income, taste, preferences of the consumer and
other factors.
 Degrees of Price Elasticity
Slope of demand curve is used to display price Price
elasticity of demand
Perfectly elastic demand
• ep=∞ (infinity) in absolute terms). P D
• Horizontal represents demand curve
• Unlimited quantities of the commodity can
be sold at the prevailing price
O
• A negligible increase in price would result in Q1 Q2 Quantity
zero quantity demanded

• Perfectly inelastic demand D

• The other extreme of the elasticity range Price
• ep=0 (in absolute terms)
• Vertical demand curve P1
• Quantity demanded of a commodity remains
the same, irrespective of any change in the P2
price
• Such goods are termed neutral.
O
Q1 Quantity
 Degrees of Price Elasticity
Contd.
Highly elastic demand
• Proportionate change in quantity demanded Price
D
is more than a given change in price
• ep >1 (in absolute terms) P1
P2
• Demand curve is flatter D

Unitary elastic demand

• Proportionate change in price brings about O
Q1 Q2 Quantity
an equal proportionate change in quantity
Price D
demanded
• ep =1 (in absolute terms). P1
• Demand curves are shaped like a rectangular P2
hyperbola, asymptotic to the axes
D
Relatively inelastic demand
• Proportionate change in quantity demanded O
Q1 Q2 Quantity
is less than a proportionate change in price Price
• ep <1 (in absolute terms) D
• Demand curve is steep P1
P2

O D
Q1 Q2 Quantity
 Income Elasticity of Demand (ey)

• ey measures the degree of responsiveness of demand for a

good to a given change in income, ceteris paribus.

Proportion ate change in quantity demanded of commodity X

ey =
Proportion ate change in income of consumer
 Cross Elasticity of Demand

• ec measures the responsiveness of demand of one

good to changes in the price of a related good

Proportion ate change in quantity demanded of commodity X

ec =
Proportion ate change in price of commodity Y

• Degrees
– Negative Cross Elasticity
• Complementary goods
– Positive Cross Elasticity
• Substitute goods
 Factors affecting Elasticity
• Existence of substitutes
• Proportion of expenditure
• Nature of goods
• Income levels
• Time
• Habits
• Complementary goods
• Frequently purchased demand