Demand

 Demand is the quantity of a commodity

that a consumer is willing and able to buy

at each possible price during a given

period of time.

It can be of two types :

Individual Demand : It is the quantity of a commodity that a consumer is willing and able to buy, at each possible price during a given period of time.

Market Demand : It is the quantity of a commodity which all the consumers are willing and able to buy at each possible price during a given period of time.

Factors Affecting Demand are 

1) Price of the Given Commodity :

• The most important factor affecting demand is the price of the given commodity.

• Generally, there exists an inverse relationship between price and quantity demanded.

• It implies as price increases quantity demanded falls and vice-versa.

• For example : If the price of tea increases, its quantity demanded will fall as satisfaction with

the tea will fall due to the rise in its price

2) Price of the Related Goods :

• Demand for a commodity is also affected by changes in the price of related goods.

• Related goods are of two types:

i. Substitute goods

• These are those goods which can be used in place of each other for the satisfaction of a particular want.

• An increase in the price of substitute goods leads to an increase in the demand for a given commodity and vice-versa.

• For example : If the price of a substitute good (coke) increases then demand the given good (Pepsi) will rise as it becomes relatively cheaper in comparison to Coke.

• Therefore, demand for a given commodity is directly affected by changes in the price of substitute goods

ii. Complementary goods

• These are those goods which are used together to satisfy a particular want like cars and petrol.

• An increase in the price of complementary goods leads to a decrease in demand for the given good and vice versa.

• For Example : If the price of petrol increases then the demand for cars falls as it becomes relatively costlier to use both goods together.

• Therefore, demand for a given commodity is inversely affected by the changes in the price of the complementary goods

3) Income of the Consumer :

• Demand for a commodity is also affected by the income of the consumer.

• However, the effect of change in income on demand depends on the nature of the commodity.

a) If the given good is a normal good, then an increase in income leads to a rise in its demand whereas a decrease in income reduces its demand.

b) If the given commodity is an inferior good then an increase in income reduces the demand while a decrease in income leads to a rise in demand

5) Expectation of Change in Price in Future :

• If the price of a certain commodity is expected to increase in near future then

people will buy more of that commodity than what they normally buy.

• There exists a direct relationship between the expectation of change in prices in future and change in demand in the current period.

• For example : If the price of petrol is expected to rise in future, its present demand will increase.

 6) Size and composition of population :

• Market demand for a commodity is affected by the size of the population in the country.

• Increase in population raises the market demand and vice versa.

• For example : If a market has a larger population of women, then there will be more

demand for articles of their use such as lipstick, sarees etc.

7) Season and Weather :

• Seasonal and weather conditions also affect the market demand for a commodity.

• For example : During winter, demand for woolen clothes and jackets increases.

8) Distribution of Income :

• If income in the country is equitably distributed, then market demand

for commodities will be more.

• However, if income distribution is uneven, i.e. people are either very

rich or very poor, then market demand will remain at a lower level.

Demand Schedule

It is a tabular statement showing various

quantities of a commodity being demanded at various levels of price,during a given period of time.

It can be of two types :

Individual Demand Schedule

Market Demand Schedule

Demand Curve

 Demand Curve is a graphical representation of the demand schedule.

 It shows the inverse relationship between price and quantity demanded, keeping other factors constant.

It can be of two types :

Individual Demand Curve

Market Demand Curve

Slope of a Demand Curve

Slope of the demand curve equals the change in price divided by the change in quantity.

 Due to the inverse relationship between price and demand, the demand curve slopes

downwards and therefore the slope is negative.

 Slope of the demand curve measures the flatness or steepness of the demand curve therefore it

is based on the absolute change in price and quantity.

Law of Demand 

Law of Demand states the inverse relationship between price and quantity demanded, keeping other factors constant (ceteris paribus).

Assumption of Law Demand

Price of substitute goods does not change.

 Price of complementary goods does not change.

 Income of the consumer remains the same.

 Taste and preferences of the consumer remains the same.

 There is no expectation of a change in price in future.

Reasons for Operation of Law of Demand are :

1) Law of Diminishing Marginal Utility :

• Law of DMU states that as we consume more and more units of a commodity the utility derived from each successive unit goes on

diminishing.

• Demand for a commodity depends on utility and if the consumer is getting the same satisfaction, he will not be ready to pay

more.

• The consumer will buy more units only when the price falls.

2) Substitution Effect :

• It refers to substituting one commodity in place of other when it becomes relatively cheaper.

• When the price of a given commodity falls (coke) it becomes relatively cheaper as compared to its substitute (thumbs up).

• As a result, demand for a given commodity rises

3) Income Effect :

• It refers to the effect on demand when the real income of the consumer changes due to a change in the price of the given

commodity.

• When the price of the given commodity falls, it increases the real income of the consumer.

• As a result, the consumer can purchase more of the given commodity with the same money income.

4) Additional Customers :

• When the price of a commodity falls many new customers, who were not in a position to buy it earlier start purchasing it as it

comes into the budget of the customer.

• In addition to new customer old customers of the commodity starts demanding more due to its reduced price.

• As a result, the total demand increases.

5) Different Uses :

• Some commodities like milk, electricity etc. have different uses.

• When the price of a such commodity increases its use gets restricted to the most important uses.

• However, when the price of such a commodity decreases, the commodity is put to all its uses.

Exceptions of the Law of Demand are :

1) Giffen goods :

• These are special kinds of inferior goods on which a consumer spends a large

part of his income and their demand rises with an increase in price whereas

demand falls with the decrease in price.

2) Status symbol goods :

• These are certain prestige goods which are used as status

symbols, for example: diamonds, gold, antique articles etc.

• These goods are wanted by rich persons for prestige and distinction.

• Higher the price, the higher will be the demand for such goods.

3) Fear of shortage :

• If a consumer expects a shortage of any commodity in the near future then

they would start buying more and more commodities even if the prices are rising.

• The consumer demands the goods due to fear of a further rise in prices.

4) Fashion Related Goods :

• Goods related to fashion do not follow the Law of Demand

and their demand increases even with a rise in their prices.

• For example : If a particular dress is in fashion, then demand

for a such dress will increase even if its price is rising.

5) Necessities of life :

• The necessities are the exception to the Law of Demand due to their

constant use.

• For example : Commodities like wheat, rice, salt etc. are purchased even

if the prices increased.

6) Change in Weather :

• With weather changes, demand for certain commodities also changes,

irrespective of any change in their prices.

• For example : Demand for umbrellas increases in the rainy season even

with an increase in their prices.

7) Ignorance :

• Customers may buy more of a commodity at a higher price when they are

ignorant of the prevailing prices of the commodity in the market.

Change in Demand

When the demand changes due to a change in any factor other than the price of the commodity, it is termed as a change in demand.

For Example : If demand for Pepsi changes due to a change in the price of Coke

Change in Quantity Demand

Whenever demands for the given commodity change due to a change in price,keeping other factors constant, then it is known as a change in quantity

demanded.

For Example : If demand for Pepsi changes due to a change in its own price, then such change in demand for Pepsi is known as a change in quantity demanded.

Substitute Goods

These are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee.

 Demand for a given commodity varies directly with the price of a substitute good.

 For Example : If price of a substitute good (say, coffee) increases, then demand for given

commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee.

Complementary Goods

Complementary goods refer to those goods which are used together to satisfy a particular

want.

• Demand for a given commodity varies inversely with the price of a complementary good.

• For Example : If price of a complementary good 9say, sugar) increases, then demand for given

commodity (say, tea) will fall as it will be relatively costlier to use both the goods together

The differences between normal goods and inferior goods are :