The Economics of

Demand

 The Demand Curve

 Changes in Demand
 Elasticity of Demand

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 Demand
 Why are newspapers sold in vending
machines that allow you to take more than
one copy?
 How much do you eat when you can eat all
you want?

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 Objectives
The Demand Curve
 Explain the law of demand
 Interpret a demand schedule and
demand curve

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 Key Terms
The Demand Curve
 demand
 law of demand
 marginal utility
 law of diminishing marginal utility
 demand curve
 quantity demanded
 individual demand
 market demand
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 Demand
 Demand indicates how much of a
product consumers are both willing
and able to buy at each possible price
during a given period, other things
remaining constant.

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 Demand Definition

 “A desire for a commodity backed by

willingness to pay a price”

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 Law of Demand
 The law of demand says that quantity
demanded varies inversely with price, other
things constant. Thus, the higher the price,
the smaller the quantity demanded.

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 Assumptions of Law of Demand

 There should not be any change in the

taste of the consumers
 The purchasing power of consumer
remain constant
 The price of all commodities should not
vary

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 Demand Schedule
and Demand Curve
 Demand versus quantity demanded

 Individual demand

 Market demand

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 Demand Schedule
Price Quantity Demanded
per Pizza(Rs) per Week (millions)

a 15 8
b 12 14
c 9 20
d 6 26
e 3 32

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 Demand Curve for Pizza
a
$15
b
Price per pizza

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c
9
d
6
e
3
D
0
8 14 20 26 32
Millions of pizzas per week
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 Individual Demand for Pizzas
(a) A (b) B (c) C

12 12 12
8 8 8
Price

4 4 4
dH dB dC
1 2 3 Pizzas 1 2 1
(per week)

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 Market Demand for Pizzas
(d) Market demand for pizzas

dH + dB + dC = D

$12
8
Price

1 2 3 6 Pizzas
(per week)

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 Determinants of Demand
 Change in Income level
 A rise in a person’s income - increase in demand
 Fall in income – decrease in demand
 Change in consumer preference
 Favorable change – Increase in Demand
 Unfavorable change – decrease in Demand
 No of buyers
 More buyers – Increase in Demand
 Fewer buyers – decrease in demand

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 Determinants of Demand
 Price of related goods
 Substitute goods – Price of Coffee and demand for Tea
 Complement goods – Those that can be used together
 Expectation of future
 Future Price – Higher future price – Rise in Current demand
 Future Income – Higher future income – Rise in current demand
 Population growth
 Technical development
 Invention of New technology
 Advertising campaign
 Change in taste and fashion

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 Different types of demand.
 1. Joint demand:
When two or more commodities are jointly
demanded at the same time to satisfy a particular want, it
is called joint or complimentary demand. (Demand for
milk, sugar, tea for making tea).
 2. Composite demand:
The demand for a commodity which can be put for
several uses (Demand for electricity)

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 Different types of demand.
 3.Direct and Derived demand:
Demand for a commodity which is for a direct
consumption is called direct demand (food, cloth).
When the commodity is demanded as the result of
the demand of another commodity, it is called derived
demand (Demand for tyres depends on demand of vehicles).
 4.Industry demand and company demand:
Demand for the product of particular company is
company demand ( Maruti car)
Total demand for the products of particular industry
which includes number of companies is called industry
demand.( Demand for car)

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  5.Individual and Market Demand:
 6.Short-term and Long-term Demand:
 Short-term demand refers to the demand for products that are
used for a shorter duration of time or for current period. This
demand depends on the current tastes and preferences of
consumers. For example, demand for umbrellas, raincoats,
sweaters, long boots is short term and seasonal in nature.
 On the other hand, long-term demand refers to the demand for
products over a longer period of time.
 7.Demand for Perishable and Durable Goods:
 Perishable or non-durable goods refer to the goods that have a
single use. For example, cement, coal, fuel, and eatables.
 durable goods refer to goods that can be used repeatedly. For
example, clothes, shoes, machines, and buildings.

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 Exceptions to the Law of Demand.
1) Giffen paradox
 The Giffen goods are inferior goods is an exception to the law of demand. When
the price of inferior good falls, the poor will buy less and vice versa. When the
price of maize falls, the poor will not buy it more but they are willing to spend
more on superior goods than on maize. Thus fall in price will result into
reduction in quantity. This paradox is first explained by Sir Robert Giffen.
1) Veblen or Demonstration effect.
 According to Veblen, rich people buy certain goods because of its social
distinction or prestige. Diamonds and other luxurious article are purchased by
rich people due to its high prestige value. Hence higher the price of these
articles, higher will be the demand.
  
1) Ignorance.
 Sometimes consumers think that the product is superior or quality is high if the
price of that product is high. As such they buy more at high price.

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 Speculative Effect.
When the price of commodity is increasing, then the consumer buy more of it
because of the fear that it will increase still further.
Fear of Shortage.
During the time of emergency or war, people may expect shortage of commodity
and buy more at higher price to keep stock for future.

Necessaries
In the case of necessaries like rice, vegetables etc., People buy more even at a
higher price.
Brand Loyalty
When consumer is brand loyal to particular product or psychological attachment to
particular product, they will continue to buy such products even at a higher price.

Festival, Marriage etc.

In certain occasions like festivals, marriage etc. people will buy more even at high
price.

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