Demand Model

Definition of Demand
Law of Demand
Determinants of Demand
Change in Quantity Demanded and Change in
Demand
 Demand
 Definition of Demand
Demand refers to a consumer's desire to
purchase goods and services and
willingness to pay a price for that specific
good or service.
 Quantity Demanded (QD)
QD is the amount of a good that buyers are
willing and able to purchase.
For Example
• A Consumers’ Demand is 2 ice creams if
the price per ice cream is Rs.15, and 4 ice
cream if the price per ice cream is Rs.10.
• Quantity Demanded is 4 ice creams if
price happens to be Rs. 10 per ice cream.
Law of Demand
Law of Demand explains that, Ceteris paribus,
as price rises quantity demanded decreases; as
price falls, quantity demanded increases.
P QD

P QD
This is called the inverse / negative relationship
between price and QD.
 Demand Schedule & Demand Curve

• Demand Schedule is that schedule which

expresses the relation between different
quantities of the commodity demanded at
different price.
• Demand Curve is a graph of the
relationship between the price of a good
and the quantity demanded. QD = F (P)
 Y = F (X)

dependent variable independent variable

QD = F (P)

dependent variable independent variable

• Model
usually a statement shows relationship
between two or more variables.
• Variable
A measure that can change from time to
time or from observation to observation.
• Graph
A two-dimensional representation of a set
of numbers or data.
• X-axis The horizontal line against which a
variable is plotted.
• Y-axis The vertical line against which a
variable is plotted.
• origin The point at which the horizontal and
vertical axes intersect.
Graphical illustration of demand (Straight
Line)
Price (Ice Quantity
cream) Demand
(Cone)
0 12
0.5 10
1 8
1.5 6
2 4
2.5 2
3 0
 Graphical illustration of demand (curve)
Price (per QD
gallon) (gallon per
week)
$8 0
7 2
6 3
5 5
4 7
3 10
2 14
1 20
0 26
Determinants of Demand

1. The price of the product.

2. Prices of related goods.
3. The income of the household.
4. The household’s tastes and preferences.
5. The household’s expectations about
future income, wealth, and prices.
6. Change in Population.
1. The price of the product
2. Price of Related Goods: Demand for a
commodity is also influenced by change in
price of related goods. These are of two
types:
• Substitute Goods
• Complimentary Goods
• Substitute Goods: These are he goods
which can be substituted for each other,
such as tea and coffee, or ball pen and ink
pen.
• In case of substitute goods, increase in
the price of one causes increase in the
demand for the other and vice versa.
• Complementary Goods:
Complementary goods are those which
demanded together.
• For Example Pen and ink, Car and Petrol.
• In case of complementary goods, rise in
the price of one causes decrease in the
demand for other and vice versa.
3. Income of the Consumer: The ability to
buy a commodity depends upon the income
of the consumer.
When the income of the consumer
increases, they buy more and when the
income falls they buy less.
4. Taste and Preferences of consumer
An important factor which determines
demand for a good is taste & preferences of
consumers. A goods for which consumer
taste & preferences are greater, its demand
could be large.
5. Expectations
• If the consumer expects that price in
future will rise, he will buy more quantity
in present, at the existing price.
• If he hopes that price in future will fall,
he will buy less quantity in present, or
may even postpone his demand.
6. Change in Population
Increase in the size of population naturally
leads to increase in demand for goods &
services, Decrease in size of population
leads to decrease in demand.
Market Demand versus Individual
Demand
Individual demand refers to the demand
for a good or a service by an individual (or
a household).
Market demand is the sum of all
individual demands for a particular good or
service.
Table and Graphical explanation of Individual
and Market demand
Price of Ice- Person A Person B Market
cream Demand
0 12 7 19
0.5 10 6 16
1 8 5 13
1.5 6 4 10
2 4 3 7
2.5 2 2 4
3 0 1 1
 Change in Quantity Demanded
(1). Movement along the demand curve
A change in price causes a movement along the
demand curve.
(2) Shift in demand curve
The demand curve could shift for the following
reasons:
• Change in fashion
• Change in the price of a substitute /
complementary goods.
• Change in income
(movements along the demand curve)
Price
An increase in price
P1
causes a decrease in
quantity demanded.
P0

Quantity
Q1 Q0
Price
A decrease in price
causes an increase in
quantity demanded.
P0

P1

Quantity
Q0 Q1
Shift in Demand Curve