Theory of Demand

Chapter Outline
5.1 Introduction
5.2 Meaning of Demand
5.3 Price Demand Relationship
5.3.1 Individual Demand Schedule
5.3.2 Individual Demand Curve
5.3.3 Market Demand Schedule and Market Demand Curve
5.3.4 Demand Function (Determinants of Demand)
5.5 Lawof Demand
5,5.1 Why Demand Curve Slopes Downward ?
5.5.2 Exceptions to Law of Demand
5.6 Movement Along Demand Curve
5.7 Shift in Demand Curve (Increase and Decrease in Demand)

5.1 INTRODUCTION
Demand is a crucial economic decision variable for the functioning of a business enterprise. It
constitutes one side of the product market, since, price of any commodity or economic service is
determined by the interaction of demand and supply. A study ofdemand is imperative for decision
taker, as it has bearings on production as well as profit. Even if the firm pursues objectives other
than profit maximisation, demand concepts remain relevant. For example, discharging of 'social
responsibility ofbusiness' requires the evaluation of tastes, preferences and choices of the consumers.
All these concepts are built into the economic concepts of demand.
Demand reflects the size as well as pattern of market and the market determines the magnitude of
business activities. Investment decisions of business firms are limited by the size of the market. If
 Ec
Ohontiq
production. Information
the firms raise about
demand, ofvarious inputs. A substantial
reflect rising its requirments
conditions management to plan persuade the firm to install a new plant to meet
the market helps may for the firm's product is
a•n2dtype ofdemand long-term demand hand, if the demand the
increase in the other to undertake aggressive
sustained on has
permanent basis. under consideration demand can be
demand on a
rising, the firm gap. In this way, created
ofrival is demand-production business recession,
whilethat subjet to temporary
the firm
its sales tactics to fill is is one ofthe
planning product demand major factorsmay
demand for products. Thus,
firm.Further, if the stock of unsold demand, the output becomes unwarrantq
to plan to pile up the ifthere is no
have Furthermore, most extensively in business.
business. used
the survivalofany Economics that has been production
one area of planning,
Demand analysisis firm - manpower utilisation,
planningby the purchase plan, market research, pricing
whole rangeof decisions, cost budgeting, of demand.
management,investment detailed analysis The decisionof
planning, etc., call for a an analysis of demand. In this
advertisingbudget,
profit always hungs on
to any functional area for input,
management with respect demand concepts like
demand demand for output
explained various with regard to demand analysis has
chapter,we have theoretical developments
an overview of the
etc. Besidesthis,
also been provided.

5.2 MEANINGOFDEMAND
by everyone, who thinks that
have utility. A good is demanded
Goods are demanded, because they
though actually harmful to a person, is demanded by
it is useful in satisfyinghis want. Alcohol,
not have any demand for it, since, he does not havea
one whosewant it satisfies.A teetotallar may
consumer cannot be expressed as demand in the
desire for its consumption. But, every want of a
for a commodity. For example,a
economic senseofthe term. Demand does not mean mere desire
miser's desire and his ability to pay rent for a room of an hotel is not 'demand', as he is not willing
to pay for it. Similarly,a beggar may desire to have a car, but this desire is not going to affect its
market price as he is not having the necessary purchasing power to buy a car. Such a desire, which
is not backedby the necessarypurchasing power to fulfill it, will remain a desire and will never
become the demand. To become demand, a desire, (i) must be backed by the ability or the capacity
to pay for the good, and (ii) the willingness and readiness to pay on the part of the consumer to
spend for the good. A demand is, thus, an effective desire. Further, a demand which can not be met
due to shortage ofcommodity is called an unsatiable demand.
Demand is always defined with reference to price
and a time period. It is meaningless to specify
demand without reference to price and time
period. The statement that demand for apples is 2000
kg. is meaningless. The price at which
these apples are demanded is to be mentioned, as with the
change in price, the quantity demanded
may also change. Demand is
to time. Even at the same price, also expressed with reference
demand may change,
consideration.Thus, at t 10per kg. depending upon the time period under
demand for apples may be
particular period. Demand for different at different times duringa
a good may be defined
bought at a particular price as the, "quantity of a commodity that willbe
and during a given
period or point of time."
5.3 PRICE DEMAND
RELATIONSHIP
Demand for a commodity
during a given
the price ofthe period of time
commodity. Demand depends upon so many factors including
schedules and
demand curves are
the techniques to describe
The demand of an
individual consumer for a commodity
demand schedule is a is called individual demand. An individual
tabular statelnent ofprices and
consumer will buy of a quantities showing how much an individual
commodity at each of the given prices. It does
the price is. It is a list of the not say anything about what
various quantities that the individual consumer will buy at different
prices, While preparing an
individual detnand schedule, it is assumed that other factors like prices
of the related goods, income
of the consumer, etc„ do not change. A hypothetical demand schedule
ofa consumer, showing the
quantities demanded of apples at different prices is shown in Table 5. l.
5.1: Demand Schedule for Apples
Price of Apples Quantities of Apples Demanded
(per kg.) by Consumer (in kg.)
12 1
11 2
10 3
9 4
8 5
7 6

We can see from the table that when the price of apples is 12 per kg., only one kg. of apples is
demanded. When the price comes down to R'8 per kg., the consumer buys 5kg. of it. Hence, we see
an inverse relationship between the price and the quantity demanded. This inverse relationship
between the price and quantity deinanded of a conunodity is known as 'the law of demand; which
is explained later in this chapter in Section 5.5.

5.3.2 Individual Demand Curve

The combinations of the prices and the quantities for an individual consumer is shown in the
demand schedule, when plotted on a graph, becolne the individual demand curve. This is a graphical
representation of the cotnbinations of the prices and the quantities of the commodity under
consideration. While econoniists do use aritlunet ical (lenmnd schedule, the demand schedule for a
commodity is more usually shown graphically by drawing the demand curve for the commodity
in question.
the vertical axis. Quantities demanded of the
In Fig. 5. l, various market prices are measured along
commodity are measured along the horizontal axis. Now, the demand schedule of Table 5.1 is
presented in this figure is exactly the same
plotted as a series of points in Fig. 5.1. The infornmtion
is different. Now, we have it in the form of a curve.
as in Table 5.1 But, the form of presentation
buying I kg. of apples, when the price of apples is 12 per
At point 'A' (Fig. 5.1), the consumer is
of 2 kg. of apples at the reduced price oft I I per kg.
kg. Point 'B' represents the purchase
combinations of prices and quantities. By joining these
Similarly, C', 'E" and •F' represent other
5.4 Economics I

points, we have a smooth curve DD, called the demand curve for apples. It shows the quantities of
apples that the consumer would buy at each of the prices. The demand curve shows the relation
between the price of the commodity and the quantity demanded. That is why, it is also called price
dernand curve. Given price, corresponding quantity demanded can be read out from the curve and
vice-versa,The demand curve is downward sloping indicating that with the fall in price, quantity
demanded increases. It is drawn on the assumption that other factors influencing demand, viz.,
prices ofrelated goods, incomes and tastes ofconsumers, etc. remain unchanged.

12
Il c
10
9 D

6
5
4
3
2

123456
1

o x
Quantity
Fig. 5.1 : Individual Demand Curve
5.3.3 Market Demand Schedule and Market Demand Curve
So far we have considered the case ofa single consumer buying a good. But, in the market, there are
a large number of consumers. Market demand means the demand of all the consumers in the
market for a good at a particular price. Market demand schedule shows ihe total demand of all the
consumers in the market at various prices. It can be constructed by the summation of the individual
demand schedules of all the individuals in the market. Let us take the case oftwo individuals in the
market. The analysis can be extended to any number of buyers. The individual demand schedules
of both the individual buyers, C
A' and 'B' and the market demand schedule is shown in the Table 5.2.
Market demand has been found out by adding the individual demands of 'A'and 'B' at corresponding
prices.
Table 5.2: Market Demand Schedulefor Apples
QA+B

12 1 3
2
2 3 5
10 3 4 7
9 4 5 9

8 5 6 11
Theory of Demand
s.s
In Table 5.2, QA is
the demand of 'A:QBis
demand of 'A' and 'B' (or the the demand of 'B' and QA.D represents the combined
market demand) at each price,
At the price oft 12 per
kg, 'A' demands I kg.
demand at 12 ofapples and 'B' demands 2 kg. ofapples. The total
per kg. is 3 kg. At price
3 kg of apples. The of e I I per kg, 'A'demands 2 kg, ofapples and 'B' demands
total demand at this price
apples at that price on the is 5 kg ofapples, which is also the market demand for
assumption that there are only two buyers in
total demand ofapples the market, Similarly, the
at every other price can be found
out,
The same relation between
price and quantity that has been shown with numbers is dis-
played graphically in Fig. 5.2.
The market demand schedule has now been transformed into a
market demand curve. The market demand curve has been found by the horizontal summation of
individual demand curves of 'A' and
'B'. Note again that the market demand curve is downward
sloping, showing the inverse
relationship betweenprice and quantity demanded, Some people
who bought some ofthe
commodity before its price fell may buy more now, because it is
Further, when price ofa commodity cheaper.
falls, new buyers will enter the market and will further raise
the demand of the commodity. This is
another reason for downward slope ofthe market demand
curve.
Demand Curve of Y Demand Curve of Y Market Demand Curve
DA Individual'A' DB Individual'B'
12 D

•z D

o x o x o
12345678 12345678 12345678910 x
Quantity Quantity Quantity
Fig. 5.2 : Derivation of Market Demand Curve
5.3.4 Demand Function (Demand Determinants)
A function explains the relationship between two or more variables. If two or more variables are
related in such a way that for each set ofvalues ofsome variables (called the independent variables)
there corresponds a value of some other variables (the dependent variable), then the dependent
variable is called the function ofthe independent variable. In Economics, a number of functions
such as demand function, production function, cost function, etc., are discussed. Thus, the word
'function' refers to the factors on which demand, production or cost depends.
The demandfrnctionfor agood is the relation betweenthe various amounts of the commodity that
might be bought and the determinants of those amounts in a given market and in a given period of
time. As stated earlier, to constitute demand, desire must be backed by the necessary purchasing
power to purchase the commodity. While the desire to purchase is revealed by tastes and preferences,
 5.6 Economics -
I
income revealsthe capabilityto purchase Further, since household spends this income to purchase
a number of commodities, demand for a particular commodity depends upon its price and
prices of other commodities. Thus, the factors on which demand for a commodity depends
(determinants of demand) are: (i) the price of the commodity, (ii) the prices of related goods
(substitutes or compliments), (iii) the income ofthe consumers, (iv) the tastes and preference of
the consumers, and (v) the expectations about the future prices ofthe commodity.
These determinants of demand provide analysis of consumer behaviour. They affect both the
direction and proportion ofchange in demand. Demand analysisseeks to identify and measure the
forces (size as well as intensity) that determine demand. For demand analysis, reference should be
made to sources of demand, uses of the items demanded, the structure of the market, where the
firm is located.
The demand function may be expressed symbolically as Q = f (P, PRY,T, E,O)
Where Q' stands for the quantity demanded of the commodity, 'P' for.the price of the com-
modity, CPr for prices of the related goods, 'Y' for income of the consumer, 'T' for tastes and
prefer- ences of the consumer, 'E' for the expectations about the future prices and 'O' stands for
other factors. Now, we explain, how demand for the commodity is affected by each of these
determinants.
1. Price ofCommodity
Price of the commodity is the most important determinant of demand. Generally, it is expected
that with the fall in the price, the quantity demanded of the commodity increases and with the in-
crease in the price, the quantity demanded of the commodity decreases. Thus, there is an inverse
relationship between the price of a commodity and its quantity demanded. That is, Q/öP > O.
The inverse relationship between price and quantity demanded of a commodity is commonly
known as the 'law of demand'. The relation between price and quantity demanded ofa commodity
is also called the price demand or simply demand.
2. Prices of Related Goods
The demand for a commodity also depends upon the prices of the goods related to it. The relation
between the price ofone commodity and demand for another commodity is called the crossdemand.
In Economics, two types of relations between goods are discussed.These are complementary and
substitutability of goods. How the prices of the related goods affect the price of the commodity
under consideration depends upon whether the relatedgoods are complimentary or If
the two goods are used together to satisfy a given want, they are said to be complementarygoods,
such as tea and sugar, ball pen and refill, car and petrol, etc. When two or more goods are
simultaneously required to satisfy a want, their demand is called asjoint demand. A fall in the price
ofa commodity raises the demand for its complementary goods. That is, / öP < O, ifcommodities
'x' and eyiare complementary. For example,with the fall in the price of petrol, demand for car will
go up. This happens because, with the fall in the price of petrol, its quantity demanded increases.
Increased quantity of petrol can be used with more cars. Similaris the relation between the price of
tea and demand for sugar. A fall in the price of tea causes increase in the demand for sugar.
On the other hand, those goods which can be used in place ofone another are called substitutes.
For example, tea and coffee, scooter and motor cycle, etc. Existence of alternative goods (sub-
stitutes) to satisfr a given demand divides the total demand among different goods. The larger the
 Dæand
number ofsubstitutes the smaller
will be demand for any one ofthem. Further, the level of prices
ofdifferent goods influence the
detuand their substitutes. A fall in the price of" good results in
the decrease in the denund for its
substitutes and an increase in the price ot'good result8 In the
increase in the dennnd for its substitutes,
That is, (AQ/öPx > if conunodities 'x' and Iz' are
IVith the increase in the price
ofcoffee»denmnd for tea increases, becauw people start
using oftea and less Qtseoffee.In other
the price ofcurs by Maruti Udyog
WOftis,tea is substituted coffee. Furt her, riae In
will ruise the detnand of rival pmducers like Daewoo Motorm
Hyundai. TELCO, etc, On the eontrar)'i
with the decrease in the price ot'eotTee, denmnd for tea will
come down. Thus, we can see a direct
relation between the price of n good and detnand for Its
substitute.
3. Income ofConsumer
The demand for goods also depends upon income
ofthe consumer. on which management has no
control, With the increase in the incotne, his
purchasing power increases and he is in position to
afford more goods. Consequently, the detuand for goods increases,
Thus, inctense in incotne has a
pmitive effect on the demand for goods. That is, (X2/öY> 0. The
relation between income and
demand is called income demand. Generally income ofthe people is directly related to their demand.
So, the income demand curve is upward sloping. Such goods are called nonnal goods for which
income is positive, i.e., when incotne goes up, demand for such goods also goes up and when
income falls, demand also falls. However. for certain goods called necesities, denmnd is not related
to income either way. That is, öQ/öY < l. Here, an example ofsalt may be given. The demand for
saltdoes not increase much with the increase in income and it does not decrease with the decrease
in income. It is also possible that a rise in income of the consutner may lead to a fall in the quantity
demanded of the good, That is, cX2/öY< 0. This is the case with inferior goods. A good is snid to
be an inferiorgood, if its demand falls with the increase in the income ofthe constuner. There is an
inverse relationship between incolne and denumd of inferior goods, i.e., incorne effect is negative.
Examples ofinferior goods are vegetable ghee, gur, coarse grain such as bn)ra, etc. It Inny happen
that demand Qfa conunodity increase initially.But, after a certain level of incolne, dernand retnains
same or even Falls.(Fig. 5.3). Since a täunousGerman Statistician Engel made extensive studies on
the relationship between income and consumption (delnand). the curve showing such relationship
is called as Engel curve. Further, ifwe relate inconle to expendituue on the cotnmodity. the curve we
get is called Engel expenditure curve,

o x
Demand
Fig. 5.3 : Engel Curve
 Economic:
5.8
changes jn current income, but also by discounted
Demand is positively influenced not only by
from work or property (wealth,W). That is
value ofaccumulated income ofthe preceding periods
Ifmarginal propensity to
öQ/öW>O,This is regarded as the real wealth effecton demand.
a large portion ofadditiona) income
by the consumer is high (i.e„ low marginal propensity to save),
This change in Propensity
earned will be used to buy goods and little will be saved and vice-versa,
Further, sometimes the
to consume (or save) brings about achange in the demand for goods.
neighbouds income and
demand may be influenced by the income ofthe household relative to his
his purchase pattern. Thus, the household may spend more, when his neighbour incurs
expenditure. This is called demonstration effect,
4. Tastes and Preferences ofConsumer
Another important factor which affects the level ofdernand ofa commodity in the market is the
tastes and preferences (both rational as well ag irrational) of the constwner, Tastes and prefer ences
often change, which affect the level ofdemand for various goods, The demand for a good is more,
which is liked by consumers and for which they have a preference. Consumers tastes and preferences
may change because of a change in the fashion or as a result of the advertisement for various
products. This is the only determinant ofdemand, on which managemr-,c '-an exercise some control
through advertisement, product quality, service, etc.It is advert:ucment that to a large ex tent has
affected the demand for Babool tooth paste, Many a times, films are responsible for the creation of
fashion, which affect the demand of the various existing products, Sometimes, consumers become
habitual or accustomed to the use ofcertain goods and they may not change the use ofsuch goods,
unless suifficient impetus is applied. Consumer preferences are also moulded by changes in customs,
conventions and habits. These socio-psychologicaldeterminants of demand often defy any
theoretical construction. On the contrary, when some goods go out of fashion or tastes and
preferences of people no longer remain favourableto them, the demand for them falls.
5. Expectations about Future Prices and Incomes
Consumers' expectations about the future prices ofthe goods also affect their demand par- ticularly
for consumer durable goods, since purchases of durables can be postponed and preponed more
easily than those of non-durables. If for some reason,consumers expect prices ofcertain goods to
rise in the near future, they tend to demand more in the present. Consequently, demand for these
goods whose prices are expected to rise goes up. We often experience a rise in the demand for T.V.,
refrigerators, air conditioners in the month of February due to fear of rise in their prices, when
new budget is announced. On the other hand, if they expect the prices to fall in the near future,
they will demand less of it in the present. Further, ifconsumers hope that in the future they will
have good income, they will increase their purchases in the present. The present demand for goods
will rise as a result. On the other hand, retiring people cut on non-essential expenses due to falling
expected future income.
6. Other Factors
Educational background, social status, marital status, age, place of residence (urban or rural) are
some of the sociological factors, which affect consumer demand. Changes in climate and weather
conditions also influence consumeds demand. Advertisement, sales promotion measures, availability
ofcredit also affect consumer's demand. The market demand for a good is obtained by adding up
the individual demands at various prices. It is influenced by three additional factors. These are:
Theory of Demand
5.9
(a) Size and Regional Distribution
a good, the greater is the ofPopulation:The greater is the numberofconsumersof
market demand for it. Thus, the demand for a commodity is
directly related with the
population, which is determined by birth
is also affected by migration arid death rates. Population
and immigration. Regional distribution ofthe population also
affects the demand.
(b) Demographic Composition
of Population: If there are more children, demand for baby
food, toys, biscuits, sweets, etc. will be
more. Similarly, if there are more old people, spectacles,
artificial teeth, sticks, tonics,
fruits etc. will be more in demand. Predominance of young
people in the population will raise
the demand for cosmetics, sport goods, jeans, etc. Similarly,
sex composition also affects the demand
for a number of commodities.
(c) Economic Distribution of Income:
If income is equally distributed among the different
sections of the society, all of thein will be in
a position to demand good. But, there will be
more demand for goods purchased by
relatively poorer people, like wheat, rice, fans, etc.
But, if the income is unevenly distributed, majority of the
people will get small portion of
the national income and so the demand for commodity will be limited. Most ofthe demand
in this case will come from rich people for luxuries. Further, in this case, relatively greater
portion of the income will be saved (by rich people).

5.5 LAW OF DEMAND

Law of demand is one of the best known and the most important laws of economic theory. It
explains the general tendency of the consumers to buy more of a good at a lower price and less of
it at a higher price. Lower price attracts consumers to buy more. Besides,some consumers who
were notbuying the good at a higher price can also afford to buy it at a lower price. Consequently,
with the fall in the price of the good, demand for it generally increases. Thus, the law of demand
expresseSthe inverse relationship between the price and the quantity demanded of a commodity,
other things being equal. In other words, when the price ofa good rises, demand falls and when the
price falls, demand rises, provided factors other than the price remain unchanged. The law is based
on the assumption that the other determinants ofdemand, viz.income ofthe consumer, tastes and
preferences of the consumer, prices of the related goods, future expectations, size and composition
of population, distribution of income, etc. do not change during the operation of the law. If they
do change, the law may fail to operate. For example, if with the fall in the price of the good,
consumer develops disliking for it or his income declines, he may not buy more of it.
to a change
The law of demand indicates only the direction of the change of demand corresponding
demanded. For
in price. It does not say anything about the magnitude of change in the quantity
10 per kg., the law tells us that
example, if price of apples comes down from 12 per kg. to
not tell the amount by which the quantity
quantity demanded for apples will increase. But, it does
fall in price.
demanded for apples will increase as a result of a
a demand curve. In Fig. 5.4, price is measured along
The law ofdemand can be illustrated through
along the X-axis. DD is the demand curve of the
the Y-axis and quantity demanded is measured
, the quantity demanded is OQI . If the price of the
good under consideration. At the price OPI
increases to OQ2. The demand curve is downward
good falls to OP2, the quantity demanded
the law of demand. It should be remembered that while
sloping, which is in accordance with
determinants of demand (except price of the good in question)
drawing the demand curve, all the
are assumed to remain Economiq
constant. Only the relationship
between price and
quantity demand
q of

o x
Quantity
Fig. 5.4 : Demand Curve
The functional relationship
between demand and price can be
Where Q x is demand and expressed as: )
PXis the own price of good 'X'.
The above expression shows
that price is the cause variable and
Alternatively, price is the independent demand is effect variable.
variable, while demand is dependent
terms, independent variable variable. In technical
(here, price) is also called exogenous
(here, demand) is called endogenous variable, while dependent variable
variable.
When the demand curve for a good
is a straight line, the corresponding demand
a linear equation of the form function will have
a-bP
Here, 'a' is the quantity intercept and Cb'
is the slope. dQ /dPx expresses the rate at which
demanded changes, with change in the price. quantity
Negative sign in the equation shows inverse price-
demand relationship. For plotting the demand curve,
we normally use the inverse demand curve
PX= 01—ßQxHere, cc= a/b is the price intercept and
ß = l/b is the slope of inverse demand curve
and equals dP /dQx. This inverse form ofthe demand curve indicates each
given quantity demanded,
the maximum price a consumer (or consumers) would be willing to pay rather
than doing without
that quantity. The normal form of the demand curve can also be similarly defined.

5.5.1 Why Demand Curve Slopes Downward?

Law of demand states the inverse relationship between price of a commodity and its quantity
demanded, other things remaining the same. The demand of a commodity is more at a lower price
and less at a higher price. That is why, the demand curve slopes downward. But, a question arisesas
to why more quantity is demanded at a lower price and less quantity is demanded at a higher price.
The following factors explain the operation of the law of demand:
(I) Law of Diminishing Marginal Utility: The law ofdiminishing marginal utilitystatesthat
as the consumption ofa commodity by a consumer increases, the satisfaction obtainedby
the consumer from each additional unit (i.e., marginal utility) of the commodity goeson
 Dnnd 5.11

dirnin"'ine A tYßty mm too drinkinga 4ag ofwder. But,

second glass of water wal not as
rmzchsatiåying to him, as the first glass of water.The
satisfætion derived frmn the third
glass win even be Esser. TIE prøe that a conqurner is
willing to pay for a cornmodity is
direaly relad to dr satisfætion that he derives from
that commodity. As we have sæn, the initial
cmquner Fts satidætion from
units of a cmnmodity. He is rady to a hiÅ) price it Further, the satisfaction that he
gas from strcessive units dirninishz, he win purchæe units ofbe commodity
only at a lower price. Thus, more quantity quanüty is
is bouÖt at a Lwer prZe and
bought at a higher price
(2) A fall in the prZeofacom1Mdityincræathepurchasingpower (or tir
real income) of the consumer. In other words, the consumer has to qend less to lily the
same quantity ofthe commodity as before. so savd becauseofa fan in the prZe
ofthe commodity can be Qent by the consumer in any way he likß. He will qend a part of
this money on buying some more units of the same commodity, whose price has fallen.
Thus, a fall in price ofthis incræs its demand. This is called income effect.
Same explanation can be given for a rise in price. In this case, demand for the commodity
under consideration will decrease due to fall in purchasing power ofthe consumer.
(3) Substitution Effect: This is another important rea.sonfor increa.seindemand asa resultof
a fall in the price of the commodity and vice-versa.When the price ofa commodity falls, it
becomes relatively cheaper than other commodities, whose prices have not fallen. So, the
consumer substitutes this commodity for other commodities, which are now relatively
dearer. This is known as substitution or complementarityeffect.Because of this substitution
effect,demand for the commodity in question rises. In most ofthe casz substitution effect
is stronger than the income effect. Marshall explained the downward slope of the demand
curve with the help of substitution effect, ignoring the income effect. Later on, income
effect was also considered by Hicks and Ælen (under the indifference curve analysis) l to
explain the downward slope ofthe demand cur, re. The sum ofincome effect and substitution
effect is called price effect. The demand cunre slopes downward, as a fall in price of a
commodity causes more of it to.be demanded and vice-versa.
commodity
(4) Changesin theNumberofConsumers: Many peoplecan notafford tobuya
who could not
at a high price. When the price ofthe commodity falls, a number of persons
the number
afford it at a higher price; can purchase it at the reduced pricd 2. This increases
quantity demanded of the
of consumers of the commodity. Thus, at a lower price, the
of the commodity
commodity increags because of the increasein the number ofconsumers
and vice-versa.
Manycommoditiescanbeputtoseveral uses.A commodity
(5) DiverseUsesofaCommodity: electricity can be used
demand. For example,
having several uses is said to have a composite be
so on. At a higher price, electricity may not
for lighting, cooking, heating, cooling and

L An alternative to aplain consume" behavimlr-

pricefallsandstopoonsumption,whenprice rises These
2. Such consumers, who merdy inaease or decease their consumpti)n ofa
conwmers are different from intra-marginal law ofdemand is applicable to
consumption in die faceofprice variation.The
product, but not give up OfNart
t}ze type ofconsumers. i,
5.12 Economics
I
used for all ofthese purposes, i.e., the use ofelectricity may be restricted to lighting only.Bq
if price of electricity falls, people may afford to use it for other purposes also. Thus,the
demand of electricity at a lower price will increase.

5.5.2 Exceptions to Law of Demand

Law of demand expressing the inverse relationship between price and quantity demanded ofa
commodity is generally valid in most of the situations. But, there are some situations under which
there may be direct relationship between price and quantity demanded ofa commodity. These are
known as exceptions to the law of demand.
(1) Giffen Goods : The Inost important exception to the law ofdemand is associated with the
name of Robert Giffen (1837-1910). Early in the nineteenth century, he observed rise in the
demand for bread by low paid British workers with the increase in its price. Bread was the
staple food for the British workers. When the price of bread rose, they were compelled to
spend more on the same quantity of bread. With little money income left with them, they
could not afford to buy as much meat as before. To maintain their total intake of good, they
substituted bread (still being cheaper food) for meat even at a higher price of it. Thus, a
direct relationship is established between price and quantity. After the name of Robert Giffen,
these goods for which there is a direct price-demand relationship are called Giffengoods.
Such basic food items (like potato, bajra, barley, gram, etc.) consumed by poor families are
some other examples of Giffen goods on which large part of the total income is spent by the
consumers, i.e., it must have strong income effect. In the case ofGiffen good, demand curve
slopes upward and the law ofdemand does not operate.
(2) Conspicuous Consumption: Another exception is associated with name of Thorstein Veblen
( 1857-1929). He was a social critic and propounded the doctrine ofconspicuous consumption.
According to him, if consumers measure the desirabilityor the utility of a commodity
solely by its price and nothing else, they tend to buy more of the commodity at a higher
price and less of it at a lower price. In this case, the relationship between price and quantity
demanded of the commodity becomes direct, leading to an exception to the law of demand.
Diamonds are often cited as an example. Commodities like diamond, precious stones, rare
etc., have a status or prestige value (rather than intrinsic value) for the rich section
of the society. In this type of situation, prestige is directly associated with the price of the
good. Higher the price of the good, greater will be the status or prestige of the buyer in the
society and vice-versa. Such Veblengoods (after the name of the propounder) lose their
snob appeal or ostentation function, when the price falls.That is why, rich people buy more
of it at a higher price and less of it at a lower price. Therefore, the law of demand does not
apply in case ofcommodities which are used as status symbols.
(3) Emergency: The law ofdemand does not hold in times of emergency like flood, drought,
famine or war, as households do not behave in normal way in such periods. Fear ofshortage
of goods in future in such periods increases their present demand, although the prices are
rising.
(4) Ignorance: Further, an ignorant buyer may buy more of a commodity, when its price in
fact goes up. He may also be haunted by the phobia that higher priced commodity is better
in quality and vice-versa.
Theoryof Demand

(5) Other Exceptions 5.13

: There are
apparent and not some other
real. Over the exceptions to the law
prosperity larger course of business ofdemand,which are only
amounts of goods cycle, it is found that during period of
periods of business are purchased at
cycle, smaller higher prices and during depression
interpreted, this is also quantities are purchased
not an exception at lower prices. If properly
for many goods to the law ofdemand.
increases during This only shows that demand
and not because prosperity because of increasein the income ofpeople
of decrease in
for goods increases prices ofgoods.
because the decline Similarly,during depression period, demand
the decrease in the in the income ofthe people and not
prices ofgoods. because of
Thus, it does not contradict
Another apparent law ofdemand.
exception to the law
under different brand of demand is found when a commodity is sold
names at different
are sold at•different prices. Almost identical 'Lux' arid 'Supreme Lux'
prices. Higher priced
tux', even though both 'Supreme Lux' is sold more than the lower priced
are almost the same.
of demand. This is so But, this is also not a real exception to the law
because those who buy
are different. Hence two higher priced brand, think that the two brands
brands should be analysed as different
commodities in this situation.
Not withstanding these
exceptions, the universal
doubted. Even the demand for applicabilityof the law of demand is un-
Giffen goods is to be considered
Bread is bare necessity for from existence point of view.
existence. The wage earners purchase
bread despite the price rise as it is the same or more amount OP
cheap and people are habituated to consume.
demand for luxurious goods is considered Further, the
from social point of view and not from economic
consideration.

5.6 MOVEMENTALONG DEMANDCURVE

(EXTENSION AND CONTRACTION IN DEMAND)
We have studied under the law of demand that other things remaining
the same, if price of a
commodity rises, its demand decreases and if price ofthe commodity falls, its demand
increases.
When quantity demanded of a commodity increases as a result of the fall in the price, it is called
extension (or expansion) in demand (a movement down the demand curve) and when the quantity
demanded decreases as a result ofan increase in the price of the commodity, it is called contraction
in demand (a movement up the demand curve). Thus, extension and contraction in demand imply
change in quantity demanded due to change in the price ofthe commodity, other things remaining
the same.
Extension in demand is shown in Fig. 5.5. At price OPI , OQI quantity of the commodity is
demanded. If the price falls to quantity demanded of the commodity increases to OQ2. QI (22
is the extension in demand, which results from a fall in the price of the commodity from OPI to
OP2.Contraction in demand is shown in Fig. 5.6. At price the quantity demanded of the
com- modity is OQI. When the price of the commodity rises to the quantity demanded of
the commodity falls to OQz. Q2 QI is the contraction in demand resulting from an increase in the
price from OPI to OP2
 Economics
5.14 I

Y D
Y D

D D

x x
0 Q2+-Ql
Quantity Quantity

Fig. 5.5 : Extension in Demand Fig. 5.6 : Contraction in Demand

Both extension and contraction in demand are represented by a movement (moving down and up
respectively) along the same demand curve. In these cases, there is no shift in the demand

5.7 SHIFT IN DEMAND CURVE (INCREASE AND DECREASE IN DEMAND)

The factors or determinants of demand other than the price of goods are assumed to be constant
for the period for which the demand curve is prepared. As long as these factors remain unchanged,
the demand curve constructed on the basis of these assumptions hold good, i.e., at lower prices,
larger quantities will be demanded. Whenever these factors change, a new demand curve will come
into existence, either at a lower level or a higher level, depending upon whether these factors have
changed for the better or worse.
When demand of a good changes due to the change in the determinants of demand other than
price of good in question, it is called change (increase or decrease) in demand, as the case may be.
The direction ofchange in quantity demanded depends on the nature ofchange. Increase in demand
means that even at the same price more quantity is demanded (or same quantity is demanded at a
higher price). This maybe due to the increase in the income of the people, increase in the population,
increase in the prices ofthe substitutes of the good in question, a fall in the prices ofcomplementary
goods, expectations of rise in price in future, redistribution of income toward groups who favour
the commodity, a favourable change in tastes and preferences of the consumers for the commodity
in the question . The increase in demand is shown in Fig. 5.7. DD is the initial demand curve. At
price OP, OQ quantity is demanded. Due to the aforementioned changes in the determinants of
demand other than price, the demand curve shifts to the right. DD is the new demand curve.
Now, at the same price OP, the quantity demanded is OQI. Thus, the demand has increased from
OQ to OQi. QQI is the increase in demand.
Similarly, there is decrease in demand, when the demand curve shifts to the left. Decrease in demand
means that even at the same price, small quantity is demanded or the same old amount is demanded
at a lower price. This may be due to the decrease in the income of the people, decrease in the
population, decrease in the prices of substitute goods, increase in the prices of complementary
goods, expectations of fall in price in future, redistribution of income away from groups who
Theoryof Demand

favourthe commodity or a
decline in the
The decrease in the demand tastes and preferences
is shown in ofthe consumers for the commodity.
quantity is demanded. Due Fig. 5.8. DD is
to the changes the initial demand curve. At price OP,OQ
demand curve shifts to the left. in the determinants
DI)' is of demand other than price, the
quantity demanded is oq. the new demand curve.
The quantity Now, at the same price OP, the
decrease in demand. It can demanded has decreased
also be shown from QQ to Qq. QQI is the
demanded, but at a lower that in case ofdecrease
price. Thus, in in demand, same quantity may be
same old quantity OQ may be Fig. 5.8, after a
leftward shift in the demand curve, the
demanded at a lower
price OP

o x
Quantity
x
Quantity
Fig. 5.7 : Increase in Demand
Fig. 5.8 : Decrease in Demand
The causes ofchange in demand (upward or
downward shift in demand can be summarised as in
Table 5.3

Table 5.3
Increase in Demand Decrease in Demand
(Upward or Rightward Shift in Demand) (Downward or Leftward Shift in Demand)
1. Increase in income and wealth of the 1. Decrease in income or wealth of the
people. people.
2. Increase in the population. 2. Decrease in the population.
3. Increase in the prices of substitute goods. 3. Decreasein the prices of substitute goods.
4. Decrease in the prices of complementary 4. Increase in the prices of complementary
goods. goods.
5. Expectations of rise in prices in future. 5. Expectationsof fall in prices in future.
6. Changes in tastes, preferences, fashions, 6. Changes in tastes, preferences, fashions
customs, habits, etc. in favour of a customs, habits, etc. against a commodity.

commodity.
contraction) implies a movement along
TOsum up, a change in quantity demanded (extension or
(increase or decrease) means a shift in the demand
the demand curve, while a change in demand
5.16 Economics.

curve. Movement along a demand curve is different from the movement ofthe curve. A movement
along a demand curve indicates that a different quantity will be demanded because the pricehas
changed. Ifwe move along a demand curve to the right (when the price ofthe commodity falls)) it
is a case of extension in demand. If the movement is to the left of the given point on the demand
curve (when the price of the commodity rises), we get contraction of demand. On the other
when the demand curve moves to the right, it is called increase in demand, since at each possible
price, more is demanded. Similarly,a movementofthe demand curve to the left implies that there
is decrease in demand. Increase or decrease (change) in demand takes place due to change in factors
other than the pricegfthe commodity in question.

POINTS TO REMEMBER

5.1 Introduction
1. The decision of firm with respect to any functional area - manpower utilisation, production
planning, inventory management, investment decision, cost budgeting, purchase plan,
market research, pricing decision, advertising budget, profit maximisation, etc requires
detailed analysisof demand.
5.2 Meaning of Demand
1. A demand is an effective desire. To become a demand a desire (i) must be backed by thé
ability or capacity to pay for the good, (ii) the willingness and readyness to pay on the part
of the consumer to spend for the good.
2. A demand is away defined with reference to price and a time period.
3. A demand, which cannot be met due to shortage of commodity is called unsatisable demand.

53 Price Demand Relationship

1. An individual demand schedule is a tabular representation of prices and quantities showing
how much an individual consumer will be prepared to buy from the market at each of the
given prices. Individual demand curve is the graphical representation of the combination
of the prices and quantitiesof the commodityunder consideration.
2. Market demand schedule shows the total demand of all the consumers in the market at
various prices in a tabular form. Its graphicalrepresentationis called as market demand
curve, which is found out by horizontal summation of individual demand curves.
3. The demand function for a commodity is the relation between the various amounts of the
commodity that might be bought and their determinants in a market at a given point of
time. The determinants of demand include: (i) price of the commodity, (ii) prices of related
goods, (iii) income of the consumer, (iv) taste and preferencesof the consumer, (v)
expectation about future prices and incomes, (vi) sociological, educational, marital, climatic
and economic factors, (vii) size and regional distribution of population, (viii) demographic
composition of population, (ix) economic distribution of income. The last three factor
additionally determine the market demand.
Theoryof Demand

5.5 Law of Demand 5.17

1. According to law
of demand,
the factors
remaining the same, price
2. The inverse of the commodity and
relationship between
account of (i) the law the price
of diminishing and quantity demanded afa commodity is on
consumers, (iii) diverse marginal utility, (ii) change in the number
uses of a commodity, of
3. The law ofdemand (iv) income effect,
is not (v) substitution effect.
goods, (iii) emergency applicable in case of(i) Giffen goods, (ii)
(iv) ignorance of conspicuous consumption
the consumers.
5.6 Movement Along demand
Curve
1. Change in quantity
demanded Consequent
(holding other demand upon the changein price of the commodity
determinants
demand curve. Increase in constant) results in a movement along the same
quantity demanded due to a fall in the
referred to as extension in price ofthe commodity is
the price of the commodity demand. While decrease in quantity demanded
is referred to as contraction due to a rise in
in demand. Thus, it explains the

5.7 Shift in Demand Curve

1. Change in factors other than
price of
demand. Accordingly, the demand the commodity results in increaseor decreasein
curve shifts to the right or left in the two cases
respectively. It does not explain the law of
demand.

CHECK YOUR PROGRESS

I. Why is demand analysis essential for successful production
planning and capital
expansion?
2. What do you understand by the term 'demand' in Economics.Will a beggar desiring to
purchase Maruti Car constitute demand? Explain.
3. Market demand is the main concern of business managers. Then why should they study
individual demand?
4. Briefly point out the main determinants of demand for a commoditity,particularly-for
con-sumer durables like T.V.,washing machine, refrigerator,etc.
5. What is a demand function ? State and graphically explain the relationship between different
determinants of demand and the quantity demanded.
6. Individual demand schedules of Anil Bhatla,SanjeevDhingra and Vinod Nanglee are given
in the following table. Prepare market demand curve geometrically.

Price Anil Bhatla Sanjeev Dhingra Vinod Nanglee

30 60 110
1
22 40 60
2
16 30 45
3
24 36
4 12
demand. State its assumptions and exceptions.Whether this
7. State and explain the law of
law holds goods for inferior goods?