DEMAND

LAW OF DEMAND
• Law of demand states the inverse relationship between price and quantity demanded,
keeping other factors constant(ceteris paribus).
• It explains the effect of change in price on the quantity demanded
• It states nothing about the effect of change in quantity demanded on the price of the
commodity.
• It explains the direction of change in demand and not the magnitude of change
• Assumptions of the law:
• Price of related goods remain constant
• Income of the consumer remains constant
• There is no expectation of change in price in the future
• Tastes and preferences of the consumer remain the same
Price (Rs) Qty
Demanded(Units)

5 10
4 18
3 28
2 39
1 52
 MOVEMENT ALONG THE DEMAND
CURVE
• When quantity demanded of a commodity changes due to a
change in price, keeping other factors constant, it is known as
change in quantity demanded.
• It is graphically represented as a movement along the demand
curve.
• There can either be a downward movement(Expansion in
demand) and upward Movement (Contraction in demand).
 EXPANSION IN DEMAND

• Refers to a rise in quantity demanded

due to a fall in the price of
commodity, other factors remaining
constant.
• It leads to downward movement
along the same demand curve
• It is also known as ‘Extension in
Demand’ or ‘Increase in Quantity
Demanded’
 CONTRACTION IN DEMAND
• Refers to a fall in the quantity
demanded due to a rise in the price
of commodity, other factors
remaining constant.
• It leads to an upward movement
along the same demand curve
• It is also known as ‘Decrease in
quantity demanded’.
 SHIFT IN DEMAND CURVE
• When the demand for a commodity changes due to a change in any factors other than the
price of the commodity, it is known as change in demand.
• It is expressed as a shift in demand curve
Reasons for shift in Demand curve:
• Change in price of related goods(Substitutes goods and complimentary goods)
• Change in the income of the consumer
• Change in the taste and preference of consumer
• Expectation of change in price in future
• Change in Population
• Change in season and weather
• Change in distribution of income
INCREASE IN
DEMAND
• Refers to rise in the demand of a
commodity caused due to any factor
other than the price of the commodity
• Increase in demand is shown by
rightward shift in demand curve from
DD to D2D2
• Demand rises due to favourable
change in other factors
• Price of the commodity remains
constant.
 DECREASE IN DEMAND
• Refers to a fall in the demand of a commodity due to any other factors other than the price of
the commodity
• Decrease in demand is shown by leftward shift in demand curve.
• Demand falls due to unfavourable changes in other factors
• Price of the commodity remains constant.
 INCOME EFFECT
• Refers to the effect on demand when real income of the consumer changes due to change in
price of the given commodity
• When price of the given commodity falls, it increases the purchasing power(real income) of the
consumer.
• As a result, he can purchase more of the given commodity with the same money income
• Price(falls)-real income(increases)- demand(increases)(POSITIVE)
• Price(Rises)- real income(decreases)- demand (decreases)(NEGATIVE)
• Income effect is positive if more of a commodity is purchased when the real income(purchasing
power) rises due to fall in price of the commodity
• Income effect is negative if less is purchased when real income falls due to rise in price of the
commodity
 SUBSTITUTION EFFECT
• Refers to substituting one commodity in place of other when it becomes relatively cheaper
• When price of a given commodity falls, it becomes relatively cheaper as compared to its
substitute(assuming no change in the price of the substitute)
• As a result demand for the given commodity rises
• Substitution effect is always positive
• Consumer always attempts to substitute a relatively cheaper good to a relatively expensive
good.
 NORMAL GOOD
• Refers to those goods whose demand increases with an increase in income
• Income effect is positive in case of normal goods.
• Direct relationship between income and demand
• Inverse relationship between quantity demanded and price
• Substitution effect is positive
• Demand curve for normal goods slope downwards
 INFERIOR GOOD
• Refer to those goods whose demand decreases with an increase in income
• Inverse relationship between income and demand
• Income effect is negative: A fall in price of inferior goods increases the real income of the
consumer, which reduces demand for inferior goods as consumer prefer to shift to superior
commodities. So income effect is negative as it discourages consumption with fall in price.
• Substitution effect is positive
• Positive substitution effect is stronger than negative income effect
• Demand curve slopes downwards
 GIFFEN GOODS
• Giffen goods are special kind of inferior goods in which negative income effect is stronger
than positive substitution effect
• Substitution effect is positive
• Income effect is negative: A fall in price of giffen goods increases the real income of the
consumer, which reduces the demand for giffen goods as the consumer prefer to shift to
superior commodities
• Negative income effect is stronger than positive substitution effect
• Demand varies directly with price
• Giffen goods violate the law of demand
• Demand curve for giffen goods slopes upwards
 Reasons For Downward Sloping
Demand Curve
• 1.Law of Diminishing Utility:
• The law of demand is based on the law of Diminishing Marginal Utility. According to this
law, when a consumer buys more units of a commodity, the marginal utility of that
commodity continues to decline. Therefore, the consumer will buy more units of that
commodity only when its price falls.
• When less units are available, utility will be high, and the consumer will be prepared to pay
more for the commodity. This proves that the demand will be more at a lower price and it
will be less at a higher price. That is why the demand curve is downward sloping.
• 2. Price Effect:
• Every commodity has certain consumers but when its price falls, new consumers start
consuming it, as a result demand increases. On the contrary, with the increase in the price of
the product, many consumers will either reduce or stop its consumption and the demand will
be reduced. Thus, due to the price effect when consumers consume more or less of the
commodity, the demand curve slopes downward.
3. Income Effect:
When the price of a commodity falls, the real income of the consumer increases because he
has to spend less in order to buy the same quantity. On the contrary, with the rise in the price
of the commodity, the real income of the consumer falls.
Under the influence of this effect, with the fall in the price of the commodity the consumer
buys more of it and also spends a portion of the increased income in buying other
commodities.
• 4.Substitution Effect:
• The other effect of change of the price of the commodity is the substitution effect. With the
fall in the price of a commodity, the prices of its substitutes remaining the same, consumers
will buy more of this commodity rather than the substitutes.

• As a result, its demand will increase. On the contrary, with the rise in the price of the
commodity (under consideration) its demand will fall, given the prices of the substitutes.
• 5. Low Income Group:
• There are persons in different income groups in every society but the majority is in low
income group. The downward sloping demand curve depends upon this group. Ordinary
people buy more when price falls and less when price rises. The rich do not have any effect
on the demand curve because they are capable of buying the same quantity even at a higher
price.
• 6. Alternative Uses:
• There are different uses of certain commodities and services that are responsible for the
negative slope of the demand curve. With the increase in the price of such products, they
will be used only for more important uses and their demand will fall. On the contrary, with
the fall in price, they will be put to various uses and their demand will rise.
• 7. There is a tendency to satisfy unsatisfied wants. Each person has some unsatisfied wants.
When the price of a good such as apple falls, he wants to satisfy his unsatisfied wants which
leads him to increase its demand. Because of this tendency of human beings, the demand
curve slopes downwards to the right.