LAW OF DEMAND

By: Dr. Parul Agarwal

What is Law Of Demand
The Demand for a commodity with in price & vice-
versa other factor remain same.
D is directly proportional to 1/P
Assumptions:
Income level should remain same.
Tastes of the buyer should not change.
Price of other goods should remain constant.
No new substitutes for the commodity.
Price rise in future should not be expected.
Rationale For Law Of Demand
Substitution effects.
Income effects.
New consumer creating demand.
Expectation:
Conspicuous goods.
Giffen goods.
Conspicuous necessities.
Future expectations about price.
Impulsive purchases.
Ignorance effect.

Market Demand
Total quantity that all the consumers/users of a commodity
are willing to buy per unit of time at a given price, all other
things remaining the same, is called Market Demand for
that product.
Theory of Demand Provides an Insight into these
problems:-
Business Executives can know-
Factors which determine the size of demand.
Elasticities of demand.
Possibility of sales promotion through manipulation of
prices.
Responsiveness of demand to advertisement expenditure.
Optimum levels of inventories and sales advertisement cost
etc.



Market Demand curve is horizontal
summation of individual Demand Curve
6
9
15
22
34
50
0
0
1
2
4
8
1
2
4
6
10
15
5
7
10
14
20
27
10
8
6
4
2
0
Market
Demand
C B A Price of
X
Quantity of X Demanded By
Derivation of Market Demand Curve
Dm
Da Db
Dc
A
B
C
Price
Quantity Demanded
O
Types Of Demand
Individual and Market Demand
Kinds of the consumers of a product.
Demand for Firms Product and Industrys
Products.
Where market structure is oligopolistic distinction between these is
useful from managerial point of view.
Autonomous and Derived Demand.
Food, cloths, shelter etc. and Land, fertilizers, agro products etc.
Demand for Durable and Nondurable goods.
Short term and long term demand.


Determinants Of Market Demand
Price of the product.
Price of the related goods, substitutes, complements.
Level of consumers income.
Consumers taste and preference.
Advertisement of the product.
Consumers expectations about future price and supply
positions.
Demonstration effect and Band Wagon effect.
Consumer credit facility.
Population of the country (for the goods of mass
consumption).
Distribution pattern of national income.

Demand Function
Dx = f (Px) or Qx = f (Px)
Where, Dx - Demand of Good X
Qx Quantity of Good X
Px Price of Good X
P
r
i
c
e

Quantity
O
Q = bo b1P
Qx = bo b1Px
bo Constant
b1 - Slope

Linear Demand Function Non-Linear Demand Function
P
r
i
c
e

Quantity
O
Q = boP
Q = boP
bo > 0
b1 > 0
-b1
-b1
By substituting numerical values for Px a demand
schedule may be prepared:
Demand Schedule

100
75
50
25
0
Dx = 100 5x0
Dx = 100 5x5
Dx = 100 5x10
Dx = 100 5x15
Dx = 100 5x20
0
5
10
15
20
Dx Dx = bo b1Px
Dx = 100 5.Px
Px
The demand schedule when plotted gives a linear demand
curve which gives constant slope (Px/ Dx)
5
10
15
20
0
25 50 75
100
P
r
i
c
e

Quantity
Dx = 100 5.Px
Shift In Demand Curve
Reasons for shift in Demand
Curve
Change in Consumers
income.
Change in price of the
substitute good.
Change in consumers
taste and preferences
through advt.
Price of complement
changes.
Deterioration in quality
change in consumers
technology, out of
fashion seasonality of the
product.
A B
C
D1
D2
D3
O
Q1 Q2
P1
P2
Quantity of X Demanded (Qx)
Price of
Xp
Multi Variable Demand Function
Long run Demand for a Product
Dx = f ( Px, M, Py, Pc, T, A)

Px - Price of Commodity X
M Consumers Income
Py Price of its Substitute Y
Pc Price of Complementary Goods
T Consumers Taste
A Advertisement Expenditure
P.T.O.
Sheet left to add further
If the relationship between Dx and the
quantifiable indepentent variables Px, M. Py,
Pc, and A is of linear form, the estimable
form of the demand function is :-
Dx = a + bPx + cM + dPy + gPc + jA
Where a is contant term
amd b, c, d, e, f, g & j are the coefficients.
Impact Of Determinants On Demand
Price Effect Substitute Effect
Q Q1 Q2
Quantity
P
r
i
c
e
P
P1
P2
D
Qx 1/Px
D
D
D
O
O
Q Q1 Q2
Py
Py1
Py2
Quantity of Tea
P
r
i
c
e

o
f

C
o
f
f
e
e

Qx Py
Complementary Effect
Pz
Pz1
Pz2
Qx Qx1 Qx2
Quantity of Car
P
r
i
c
e

o
f

P
e
t
r
o
l

Qx 1/Pc
Income Effect
I
n
c
o
m
e

I
n
c
o
m
e

I
n
c
o
m
e

Quantity
Normal Goods
Quantity
Necessity
Quantity
Inferior Goods
Tastes & Preferences of Consumer
Fashion
Advertisement
Change in customs
Habits
Other Factors
Sociological as education background, social status,
marital status, age, place of residence etc.
Weather conditions and climate changes.
Availability of credit.
Distribution of income, population.

Thanks
By: Dr. Parul
Agarwal