DEMAND

INTRODUCTION
DEMAND IN NORMAL LANGUAGE

WE OFTEN COME WITH A SENTENCE THAT “

MARKET MEIN MARUTI CARS KI BHAUT
DEMAND HAI OR SAMSUNG CELL PHONE KI
DEMAND HAI “

DEMAND IS DIFFERENT FROM DESIRE

 MEANING
In economics

Effective demand = Desire + Ability to pay +

Willingness to purchase

A person’s desire, ability and willingness keeps

changing as price of the product changes and also
with change in time . Therefore, reference of price
and time is necessary for demand.
 Cont…
Quantity demanded

It is always expressed in
given PRICE It is flow (time period)

Example
a) 10 kg of Sugar
b) 10 kg of sugar per month
c) 10 kg of sugar per month at Rs
30 per kg
 MARKET DEMAND AND MANAGERIAL
ECONOMICS
The analysis of market demand for a firms product plays a
crucial role in business decision making.
The market demand or size of market at a point of time at
different prices gives the overall scope of business; it gives
prospects for expanding business; and it plays crucial role
in planning for future production, inventories of raw
materials, advertisement and setting up sales outlets.
Therefore information regarding the magnitude of current
and future demand for the product is indispensable.
THEROY OF DEMAND provides an insights helps in
analyzing these problem
 Individual Demand
Individual demand is the amount of goods
demanded by an individual (single) buyer at
different prices in a given period of time
Individual demand schedule
It is a tabular representation of a commodity
that is purchased by an individual at various
prices in a given period of time.
Following in individual demand schedule
Prices of mangoes Demand for a month
( per dozen) (quantity in dozen)
150 5
200 4
250 3
300 2

It can be observed that less quantity of

mangoes are demanded at high prices
and vice versa.
 D

300

250
Prices
of 200
mango
es in 150 D
RS
100

50

1 2 3 4 5 6

Quantity of mangoes (in dozen)

 Market demand
Market demand is aggregate (total) amount of goods
demanded by all individual buyers at different prices
in a given period of time
Market demand schedule : It is a tabular
representation of quantities of a commodity
demanded or purchased at varying (changing)
prices by all the consumers in the market at a given
period of time.
It is obtained by horizontal summation of demand of
all individuals at various prices.
Price of Individual Individual Individual C Market
mangoes A(demand in B( demand (demand in demand
(per dozen) in dozen) dozen) (A+B+C)
dozen)
150 5 8 9 22

200 4 6 8 18
250 3 5 6 14
300 2 3 4 9
Derivation of Market Demand Curve
If individual demand schedule is known, the
market demand schedule and market demand
curve can be easily derived.
Derivation of Market Demand Curve
Suppose there are three consumers (A ,B and C)
and product is mango
So with the help of this schedule we can derive
market demand curve
 Prices of Quantity
mangoes
D
150 22
Price 300
of 200 18
mang 250 250 14
oes
300 9
in RS 200
D
150

100

50

10 15 20 25 30 35 40 45

Quantity of mangoes (in dozen)

TYPES OF DEMAND
 1) INDIVIDUAL DEMAND AND MARKET
DEMAND
Individual demand refers to the quantity of product demanded
by an individual at a point in time or a over of period of time,
given
Price of product, income , price of other goods, consumers taste
and preference, price expectations and external influences.
Market demand refers to the quantity that all the consumers of
a commodity are purchasing at a given price and time and also
other factors are constant
In other words market demand is sum of all individuals demand
, by all the consumer of the commodity , over a period of time
and at given price and other things remaining same
 2) Demand for Firms Product and Industry's
product
Demand for Firms Product: the quantity that a
firm disposes of at a given price over a time
period connotes the demand for the firms
product .
Demand for Industry Product: the aggregate
demand for the product of all the firms of an
industry is known as the market demand or
demand for industry’s product.
 3) AUTONOMOUS DEMAND AND DERIVED
DEMAND
Autonomous demand : it is also known as Direct
Demand, the demand for this commodity arises
on its own or due to natural desire of consumer.
Example: consider the demand for commodities
which arises directly from biological or physical
needs of human beings.
Like in case of food, clothing, shelter or any other
product which feels like he wants to possess it.
 Cont..
Derived demand: the demand for a commodity
that arises because of the demand for some other
commodity (parent commodity) is called derived
demand.
Example: demand for land, fertilizers, agricultural
tools is derived because these goods are
demanded for FOOD
Similarly demand for needles, sewing machines,
thread , raw cloth is demanded for stitching clothes
 Cont..
Generally demand for producer goods or industrial goods is derived
demand
Also demand for complementary and supplementary goods is derived
demand
Petrol for car
Chair for table
Butter for bread
Sugar for tea
Demand for petrol, chair, sugar can be considered as derived demand.
The conceptual distinction between these two demand would be
useful from a businessman's point of view to the extent that the
former can serve as an indicator for later.
 4) DEMAND FOR DURABLE AND NON
DURABLE GOODS
a) Durable goods: there are those goods whose total
utility or usefulness is not exhausted in a single use.
These goods are used repeatedly over a period of time.
Example: clothes, shoes, electronic goods etc.
b) Non durable goods: these are those goods which can be
consumed only once or for short term.
Nondurable consumer goods: drinks, milk, soaps, cooking
fuel, food items
Non durable producers goods: raw material, fuel, packing
items
 Cont.
Demand for non durable goods is subject to
current price, fashion, income of consumers and
frequent changes are observed
Demand for nondurable goods is influenced by
expected prices ,income, change in technology.
Here demand changes over a relatively longer
period.
 5) Short term demand and Long term
demand
Shot term demand refers to This refers to the demand which exits over
demand for goods that are required long period of time
for SHORT PERIOD OF TIME The change in long term demand is
perceptible only after long period.
EXAMPLE :
Consumer goods
Seasonal goods
Determinants of Market Demand
1) Price of the product
2) Price of related goods – substitute and
complementary
3) Level of consumers income
4) Consumers taste and preferences
5) Advertisement of the product
6) Consumers expectations about future price
and supply position
7) Demonstration effect
8) Consumer credit facility
9) Population of the country
10)Distribution of NI
 1) Price of product
a) It is important determinant of its demand in
LONG TERM and only determinant in SHORT
TERM
b) PRICE AND QUANTITY are inversely related –
LAW OF DEMAND
 2) Price of Related Goods
a) Substitute goods:
These are those goods,
which satisfy same of
consumer.
Change in price of
commodity affects
demand of other
commodity .
Example
b) Complementary goods:
Here , the use of two goods
go together.
In economics sense two
goods are termed as
complementary to one
another if an increase in the
price of one causes a
decrease in demand for
another
By definition there is
inverse relationship
between demand for good
and price of its
complements
 3) Consumers income
Income is the basic determinant of quantity of a product demanded
as it determines PURCHASING POWER of the consumer.
Higher disposable income spends more
Before we proceed to discuss income-demand relationships, it will be
useful to note that consumer goods of different nature have different
relationships with income of different categories of consumers.
For the purpose of income demand analysis, consumer goods and
services may be grouped under four broad categories.
a) Essential consumer goods
b) Normal goods
c) Luxury goods
d) Inferior goods
a) Normal goods:
Normal goods are those goods whose demand increases with
increase in income
And they are demanded to live life comfortably
Example
DEMAND INCREASES WITH INCREASE IN INCOME, BUT SLOWS
DOWN FURTHER

b) Essential consumer goods:

 basic need goods
 if other factors are same
Then there will be increase in demand of this goods with in income – certain
point
Total expenditure will increase , if quality goods are consumed
c) Luxury goods:
What is and what is not a luxury good is a matter of
consumers perception of the need of a commodity.
Conceptually, however, all such goods that add to the
pleasure and prestige of the consumer without enhancing
his earning capacity or efficiency fall under this category
Example :
Demand for such goods arises beyond to certain level of
consumers income.
Producers of such items, while assessing the demand for
their product, should consider income change in the
richer section of the society.
d) Inferior goods:
Inferior goods and superior goods are widely known to
both sellers and buyers
Like every consumer knows
Millet is inferior than wheat and rice
Bidi is inferior than cigarette
Cotton clothes are inferior than silk clothes
Kerosene is inferior than LPG
However , in economics sense commodity is deemed
to be inferior if its demand decreases with the increase
in consumers income beyond certain level of income
 4) Consumers taste and preferences

Taste and preference generally depends upon life

style ,social customs, religious values, habit, level
of living etc.
Change in this factors customers demand also
changes
People switch their consumption pattern from
traditional way to modern way , and sometimes
they are prepared to pay high even though utility
is same
This piece of information is useful for the
manufacturers of goods and services subject to
frequent changes in fashion and style, at least in
two ways:
a) They can make quick profits by designing new
models of their product and popularizing
them through advertisement and
b) They can plan production better and can
even avoid over production if they keep eye
on the changing fashions.
 5) Advertisement Expenditure
Objective ?
Advertising helps in increasing demand in at least four
ways:
a) Providing information
b) Showing superiority over the rival product
c) Influencing consumer
d) Setting new fashion and style
Mainly there direct relation between sales and
advertisement expenditure
 6) Consumer Expectations
a) If consumers expect high rise in the future ,
then ?
b) Similarly consumer expect rise in income -
increase in demand
C) Scarcity of goods – examples and their effect.
 7) Demonstration and Snob effect
When new commodities or new models of existing ones appear in the market,
rich people buy them first.
Example
Some people buy them because they need them, and some just they want to
exhibit their affluence
According to one Social Philosopher
“ too many people spend money they haven't earned, to buy things they don’t
need, to impress people they don’t like.”
Once new commodities are vogue, many households buy them – not because
they have genuine need- but because their neighbors bought these goods.
This known as “DEMONSTRATION EFFECT or BANDWAGON EFFECT”
These factors have positive effect on demand , but when these products are
thing of common, mainly rich people decrease or give up the consumption of
such goods. This is known as “SNOB EFFECT”
It has negative effect on the demand for the related goods.
 8. CONSUMER CREDIT FACILITY
Availability of credit to the consumers from the
sellers, banks, relations and friends, or from
other sources enduces the consumer to buy
more than those who cannot borrow
Credit facility mainly affects demand for durable
goods.
9) POPULATION OF THE COUNTRY
The total domestic demand for a product of
mass consumption depends also on size of
population
10) DISTRIBUTION OF NATIONAL INCOME

Level of NI – determines the market demand

But along with that , distribution pattern of NI is
also important determinant of the overall
demand for a product.
If NI – unevenly distributed ?
 DEMAND CURVE THROUGH CARDINAL
APPROACH
The final outcome of analyzing consumer behaviour is
the formulation of the “LAW OF DEMAND”
Here we will illustrate the derivation of demand curve
and the basis of the formulation of the law of demand.
In fact, the basis of consumer equilibrium itself provides
the basis of derivation of demand curve of commodity.
Prof. Alfred Marshall who provides the logical basis for
derivation of the demand curve and formulated the law
of demand by using consumer utility function.
Units Price MU MU in terms of
consumed money

1 5 10 10 More

2 5 8 8 More

3 5 5 5 Equal

4 5 4 4 Less

5 5 3 3 Less
 E1 P3(MUm)
P3
PRICE E2
P2 P2 (MUm)
P1 E3
P1 (MUm)
MUx

Q1 Q2 Q3 QUANTIY

D
PRICE
P3 J
P2 K

P1 L
D

Q1 Q2 Q3 QUANTIY
Law of demand
According to Law of Demand, other things being equal, if
the price of the commodity falls, the quantity demanded
of it will rise and if the price of a commodity rises, its
quantity demanded will decline. Thus there is inverse
relationship between price and quantity demanded,
other things being same
Definition
Prof. Alfred Marshall defined this law as “ The greater the
amount to be sold, the smaller must be the price at
which it is offered in order that it may find purchasers or
in other words the amount demanded increases with a
fall in price and diminishes with a rise in price.
The law of demand may be illustrated with the help of
demand schedule and a demand curve
Conditions / Assumptions of Law of demand

1) No change Price of related goods –

substitute and complementary
2) No change Level of consumers income
3) No change Consumers taste and preferences
4) No change Advertisement of the product
5) No change Consumers expectations about
future price and supply position
6) No change Demonstration effect
7) No change Consumer credit facility
8) No change Population of the country
9) No change Distribution of NI
Prices of mangoes Demand for a month
( per dozen) (quantity in dozen)
150 5
200 4
250 3
300 2

It can be observed that less quantity of

mangoes are demanded at high prices
and vice versa.
 FACTS OF LAW OF DEMAND
1) INVERSE RELATIONSHIP
2) QUALITATIVE-NOT QUANTITATIVE
3) NO PROPORTIONAL RELATIONSHIP
4) ONE SIDED
INCOME EFFECT AND SUBSTITUTION EFFECT
(PRICE EFFECT)
 PRICE EFFECT
PRODUCT QUANTITY
PRICE DEMANDED
INCREASE DECREASES

PRODUCT QUANTITY
PRICE DEMANDED
DECREASES INCREASES
 PRICE EFFECT

Total change in quantity demanded due to change in price

INCOME EFFECT
SUBSTITUTION EFFECT

It refers to effect on
demand , where real
Substituting one income/PP of the
commodity for other consumer changes due to
when it becomes change in price of given
relatively cheaper v commodity
Example
LEMON JUICE
APPLE JUICE

Rs 30 Rs 30

Rs 25
Example

Rs 30 Rs 30

Rs 25
SUBSITUTION
EFFECT
Example

Rs 30 *7 = 210 Rs 30 *7 = 210
Example INCOME EFFECT

Rs 30 *7 = 210 420 Rs 30 *7 = 210

Rs 25 * 10 = 250 370 Rs 30 *4 = 120

SUBSTITUION EFFECT 3 UNITS

INCOME EFFECT 2 UNITS

PRICE EFFECT= SUBSTITUTION EFFECT + INCOME

EFFECT
 GIFFEN GOODS
INFERIOR GOODS = Inverse relation between
income and demand
Example

If any commodity is purchased/consumed by

consumer just because of his low level of
income is known as inferior goods for that
consumer
 GIFFEN GOODS

GIFFEN GOODS INFERIOR GOODS

THIS GOODS ARE PURCHASED BY CONSUMER

BECAUSE OF HIS LOW INCOME

THERE POSITIVE RELATIONSHIP

BETWEEN PRICE and QUANTITY
P Q
DEMANDED
P Q
 Background of Giffen Goods

WAS ANALYSING BEHAVIOUR OF

SIR ROBERT GIFFEN LABOURS IN A FACOTRY IN UK

LABOUR HAD VERY LOW WAGES

AND hence due to low wages they used to consume only two good
a) Bread (inferior)
b) Meat (superior)

Demand of
Now, price of bread
increased
BREAD ?
increased
1) Why even price of Bread has
no close substitute/ no
increase ,why are they other option cheaper than
consuming more? Bread

2) Why did you kept the same
quantity?
Because , previously we
used to keep some amount
for MEAT, now no money is
left to buy meat, hence
now to survive we have
consumer more BREAD
 TYPE OF INFERIOR GOODS

DEFINITION OF
GIFFEN GOODS NO CLOSE SUBSTITUTE

MAJOR PORTION OF INCOME IS

SPENT ON IT

Giffen goods are those inferior goods which have no close

substitutes and consumer spends major portion of his
income on this goods. And most important that there is
positive relationship between Price and Quantity
demanded
 Other cases where Law of demand is not
applicable
1) Veblen goods/conspicuous goods
This is a exceptional case and it given by economist
Thorstein Veblen. According to him there are certain
group of people who measure utility of the
commodity purely by its price.
It means??
2) Ignorance
3) Future expectations
4) Emergencies