Chapter-2

Demand

In economics, effective demand means there should be desire to own the good, sufficient money to buy it
and willingness to spend the money.
Demand for a commodity is defined as the quantity of that commodity which a consumer is willing to
buy at a particular price during a particular period of time.

Types Of Demand

Consumer goods and Producer goods

Perishable goods and Durable goods
Direct and Derived demand
Individual and Market demand
Firm and Industry demand

Demand function

Demand function is a functional relationship between quantity demanded of a commodity and factors
affecting it.

Determinants Of Demand
1)
2)
3)
4)
5)
6)
7)

Price of the product

Price of related products
Income of the consumer
Taste and preferences
Consumers expectation of future income and price
Advertising
Sociological factors- no. of old people and children in the family, place of residence, weather conditions,
etc.

Law of demand

Other things remaining the same, if the price of a good rises, the quantity demanded of that good
decreases and if the price of a good falls, the quantity demanded of that good increases.
Characteristics Of The Law Of Demand
1) Inverse relationship
2) Price, an independent variable and demand a dependent variable
3) Other things remain same (no change in income, substitutes price, consumers taste and preferences,
advertising outlay etc)
Demand Schedule

A list of the quantities demanded at each different price when all the other influences on buying plans
remain the same.
The numerical tabulation of the law of demand is called demand schedule.
The demand schedule clearly shows the inverse relation between price and the quantity demanded.

Demand Curve

The graphical representation of the demand schedule gives a demand curve.

Demand curve gives the relationship between the quantity of a good that consumers are willing to buy
and the price of the good.

The demand curve slopes downward to the right indicating that the quantity demanded is inversely
related to the price of the good.
Slope of demand curve = P2 P1 / Q2 Q1
= P / Q
= - Q / P
Reasons behind downward slope of the demand curve

Law of diminishing marginal utility

Substitution effect
Income effect
New consumers creating demand
Principle of different uses

Exceptions To the Law Of Demand

Giffen goods
Goods of status (Veblen goods)
Goods with no substitutes
Expectations of a price rise in future
Bandwagon effect/ demonstration effect
Emergency
Good with uncertain product quality
Snob appeal
Brand loyalty

Demand and prices of other goods

When X and Y are substitutes

When X and Z are compliments

Demand and income of the consumer

Normal good
Inferior good

Demand and consumer tastes

Individual Demand vs. Market Demand

Individual Demand:- An individual demand means quantity demanded of a good by an individual

consumer at various prices per time period.
Market Demand:- It is the aggregate of the quantity demanded by all consumers in the market at
different prices per time period.
Factors Affecting Individual and market demand

Individual Demand
1) Price of the product
2) Price of related products
3) Income of the consumer
4) Taste and preferences

Market Demand
1) Price of the product
2) Price of related products
3) Income of the consumer
4) Taste and preferences
5) Number of consumers in the market
6) Distribution of Income
7) Age and sex composition of Population

Change in quantity demanded v/s change in demand

Change in quantity demanded
Caused by a change in the price of the good only,
other things remaining constant.

Change in demand
Caused by changes in factors other than price of the
good.
The factors are:1) Price of other goods
2) Consumers income
3) Consumers Taste and preferences

Movement is always along the same demand curve,

no new demand curve is drawn.
Movement along a demand curve can be of two
types:
1) Expansion of demand
2) Contraction of demand
Expansion of demand
Contraction
of
demand
Rise in demand due to fall Fall in demand due to
in the price of the goods.
rise in the price of the
goods.

In a shift, a new demand curve is drawn.

Downward movement

Upward movement

A shift of the demand curve can be of two types:

1) Increase in demand
2) Decrease in demand
Increase in demand

Decrease in demand

It refers to more demand

at a given price or same
demand at a higher price.

It refers to less demand

at a given price or same
demand at a lesser price.

Causes of Increase in
demand:
1) Increase
in
the
income
of
the
consumers.
2) Increase in the price
of substitutes goods.
3) Fall in the price of
complementary
goods.
4) Consumers
taste
becoming stronger in
favor of the good.

Causes of Decrease in
demand:
1) Fall in the income of
the consumers.
2) Fall in the price of
substitutes goods.
3) Rise in the price of
complementary
goods.
4) Consumers
taste
becoming
unfavorable towards
the good.

Rightward shift

Leftward shift