Chapter- 3

DEMAND
2014

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 Desire: A mere wish to have a commodity.
 Want: A desire becomes a want if it is supported by the ability to pay
and willingness to spend.
 Demand: It is the quantity of a commodity that a consumer is willing
and able to buy at a particular price during a given period of time.
 Elements of Demand:
 Quantity of the commodity
 Price of the commodity
 Willingness to buy
 Period of time
 Types of Demand:
 Individual demand: Refers to the quantity of a commodity that

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a consumer is willing and able to buy, at each possible price during a
given period of time.
 Market demand: Refers the quantity of a commodity that all
consumers are willing and able to buy, at each possible price during
a given period of time.

 Types of Goods:
 Substitute Goods: Refers to those goods which can be used in
place of one another to satisfy a particular want.
 It has competitive demand.
 Price of one substitute good has positive relationship with quantity
demanded of another substitute good.
 Examples: Tea and coffee; Coke and Pepsi.
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 Complementary Goods: Refers to those goods which are used
together to satisfy a particular want.
 It has joint demand.
 Price of a complementary good has negative relationship with
quantity demanded of another complementary good
 Example: Tea and Sugar ; Car and petrol
 Normal Goods: Refers to those goods whose demand increase with
an increase in income.
 There is a direct relation between income and demand for normal
goods
 Example: Full cream milk
 Inferior Goods: Refers to those goods whose demand decreases with
an increase in income.
 There is an inverse relation between income and demand for
Inferior goods.
 Example: Toned milk
 Necessity Goods: Refers to those goods for which there is no change in demand
with a change in the income of consumer.
 These goods are essential for human existence and, therefore they occupy a higher
place in the consumer’s order of preference.
 Example: Salt, wheat flour, medicines.

 Factors affecting demand/ Determinants of Demand: Demand for a commodity

increases or decreases due to the following factors:
 Price of the given commodity: Price of the given commodity is inversely related
to the quantity demanded. If price increase, demand decreases. If price
decrease, demand increases.
 Price of Related Goods:
• Substitute Goods: Demand for a given commodity is directly affected by the
price of substitute goods. Price ↑ Demand ↑ and vice versa. Eg; Tea and coffee.

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• Complementary Goods: Demand for a given commodity is inversely affected by
the price of complementary goods. Price ↑ Demand ↓ and vice versa. E.g.; Tea
and Sugar.
 Income of the Consumer: Demand for a given commodity is directly affected by
the income of the consumer. However it depends upon the nature of the
commodity.
• Normal good: Income ↑ Demand ↑ and vice versa.
 Inferior good: Income ↑ Demand ↓ and vice versa.
Tastes & Preferences: Demand is directly influenced by the tastes & preferences
of the consumer. Tastes & Preferences ↑ Demand ↑ and vice versa.
 Expectation of change in the price in future: There exists a direct relationship
between expectation of change in the prices in future & change in demand in the
current period. If price is expected to ↑ Demand ↑ and vice versa.

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Factors affecting market demand:
 Size and composition of population: Increase in population raises the market
demand while decrease in population reduces the market demand.
 Season and weather: Seasonal products demand will be more during the season
and demand will be less during offseason.
 Distribution of income: If income distribution is even, then market demand for
commodities will be more and if income distribution is uneven, the demand will be
lower.

 Change in Quantity Demanded Vs Change in Demand:

 Change in Quantity Demanded: Whenever demand for the given commodity
changes due to change in its own price, then such change in demand is known as
Change in quantity demanded.
 Change in Demand: Whenever demand for the given commodity changes due to
factors other than price, then such change in demand is known as Change in
Demand.
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 Demand Function: Refers to the functional relationship between
quantity demanded for a particular commodity and the factors
influencing it.
 Individual Demand Function: Refers to the functional relationship
between individual demand and the factors affecting individual
demand.
 Market Demand Function: Refers to the functional relationship
between market demand and the factors affecting market demand.
 Demand Schedule: Refers to the tabular representation of various
quantities of a commodity being demanded at various levels of price,
during a given period of time.

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 Individual Demand Schedule: Refers to a tabular representation of various
quantities of a commodity that a consumer is willing to buy at various levels of
price, during a given period of time.
 Market Demand Schedule: Refers to a tabular representation of various
quantities of commodity that all the consumers are willing to buy at various levels
of price, during a given period of time.

Individual Demand Schedule Market Demand Schedule

Price Qty demanded (in Mkt

Price (Rs) Qty
(Rs) units) demand
demanded (in
(in units)
units) Household Household
(DA + DB)
A (DA) B (DB)
5 1
4 2
5 1 2 1+2=3
3 3
4 2 3 2+3=5
2 4
3 3 4 3+4=7
1 5
2 4 5 4+5=9 9

1 5 6 5+6=11
 * Demand Curve: It’s a graphical representation of demand schedule which shows
the inverse relationship between quantity demanded of a commodity with its price
keeping other factors constant.
*Individual Demand Curve: Graphical representation of individual demand schedule.
*Market Demand Curve: Graphical representation of market demand schedule.

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  Slope of Demand Curve : Due to inverse relationship between price & demand,
the demand curve slopes downwards. i.e. Negative.
Change in Price (∆P) / Change in Quantity (∆Q)

 Law of Demand: It states the inverse relationship between the price &
quantity demanded keeping other factors constant.

 The law states that when there is an increase in the price of the given
commodity there will be a decrease in its demand and vice versa.

Also referred as the ‘First Law of Purchase’.

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 Price (Rs) Quantity
demanded (in
Assumptions: units)
• Prices of related goods
5 20
do not change.
4 40
• Income of the consumer
remains the same. 3 60
• There is no expectation 2 80
of change in price in the 1 100
future.
• Tastes and preferences of
the consumer remain the
same.

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 Exceptions to Law of Demand:
In certain special circumstances, a rise in price may increase the demand which
leads to exceptions to law of demand.
● Giffen Goods: These are special kind of inferior goods on which the consumer
spends large amount of his income & their demand rises with an increase in price
& demand falls with decrease in price. A fall in price in giffen goods increase the
purchasing power, which reduces the demand for giffen goods as consumer prefer
to sift to superior commodities. Ex: Jowar & Bajra.
● Status Symbol Goods or Goods of Ostentation: Certain prestige goods which are
used as status symbols. These are demanded by rich people for their prestige and
distinction. The higher the price the higher will be the demand. Ex: Diamonds,
Antique paintings, etc.
● Fear of Shortage: If the consumers expect a shortage or scarcity of a particular
commodity in the near future, they tend to buy more & more of that commodity
even if the prices are rising. Ex: During emergencies like war, famines, etc.

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● Ignorance: Consumers may buy more of a commodity at a higher price when they
are ignorant about the prevailing price.
● Fashion related Goods: Demand for fashion related goods increases even with the
rise in their prices.
● Necessities of Life: Demand for the goods which are of constant use will increase
even with the increase in price.
● Change in Weather: Demand for commodities related to season/weather will
change irrespective of any change in their prices.

 Reasons for operation of Law of Demand:

• LDMU: According to this law, as consumption of a commodity increases, MU
derived from each successive unit goes on decreasing . Accordingly, for every
additional unit ,the consumer will be not ready to pay the same price. He will buy
more only when price reduces.
• Substitution Effect: When price of the given commodity falls, it becomes
cheaper compared to its substitute, hence the demand of the given commodity
increases. 14
• Income Effect: When price of the given commodity falls, it
increases the purchasing power of the consumer. As a result, he can
purchase more of the given commodity with the same income.
• Additional Customers: When price of a commodity falls, many
more buyers can afford to buy it along with the old customers. This
leads to increase in the demand for the commodity.
• Different Uses: Commodities which have several uses, reduces its
demand to the most important purpose when its price increases.
However, when the price of such commodities decreases, the
commodity will be in demand for all its uses.

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 Change in Quantity Demanded Vs Change in Demand:
 Change in Quantity Demanded:
• When the quantity demanded changes due to a change in the price,
keeping other factors constant, it is known as change in quantity
demanded.
• It leads to a movement along the demand curve.
• Movement will be either a Downward Movement or an Upward
Movement.
• Downward Movement is known as Expansion in Demand (rise in
quantity demand) which is due to a decrease in price.
• Upward Movement is known as Contraction in Demand (fall in
quantity demanded) which is due to an increase in
price.

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 Change in Demand:
• When the demand changes due to change in any factor other than the
own price of the commodity, it is termed as change in demand.
• It leads to a shift in the demand curve.
• Shift will be either a Rightward shift or a Leftward shift.
• Rightward shift is known as Increase in Demand (rise in demand)
which occurs due to Favourable changes in the other factors at the
same price.
• Leftward shift is known as Decrease in Demand (fall in demand)
which occurs due to Unfavourable change in other factors at the
same price.

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 Rightward and Leftward Shift in Demand Curve:
 Demand curve shifts towards right because of :
• Increase in price of Substitute Goods
• Decrease in price of Complementary Goods
• Increase in income (Normal Goods)
• Decrease in income (Inferior Goods)
• Increase in population
• Tastes in favour of commodity
• Expectation of future increase in price
 Demand curve shifts towards left because of :
• Decrease in price of Substitute Goods
• Decrease in price of Complementary Goods
• Decrease in income (Normal Goods)
• Increase in income (Inferior Goods)
• Decrease in population
• Tastes not in favour of commodity
• Expectation of future decrease in price
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