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Unit 1.3 Demand Theory

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12 views

Unit 1.3 Demand Theory

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zaibahadiya19
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Unit 1.

3 Demand Theory
Meaning of Demand
Demand for a commodity is the amount of it the consumer is willing to purchase
or take off from the market at various given prices in a period of time such as a
day, week , month or year. Demand for a commodity in Economics is

● Desire for a commodity


● Ability to pay
● Willingness to pay

Economics does not look at the ethics or morality as far as demand is


concerned.Example liquor and cigarettes. Bad for heath but if people are willing
purchase it will constitute demand
Law of Demand
Law of demand expresses the functional relationship between price and quantity
demanded. The law of demand states “ Other things being constant(ceterus
paribus) if price of a commodity falls, the quantity demanded of it will rise, and if
price of the commodity rises, quantity demanded will fall ” Thus there is an
inverse relationship between price and quantity demanded.

The law of demand can be depicted through a demand schedule and a demand
curve for a commodity
T
Market Demand
It is the lateral summation of individual demand of all consumers in the market at various
prices
Reasons for Downward Sloping Demand Curve
1. Law of Diminishing Marginal utility.
2. Income Effect- As price of a commodity falls the income of the consumer
remaining the same the purchasing power( real income) of the money income
increases enabling the consumer to buy more quantity of the good.If the price
a good rises income remaining the same the real income falls leading to
lesser demand for the good.
3. Substitution Effect -When the price of a commodity falls it becomes relatively
cheaper than its substitutes in the market.Hence consumers will buy more of
the commodity whose price has fallen and lesser quantities of its substitutes.
The reverse will occur when price of a good rises
Exceptions to the Law of Demand
1. Giffen’s Paradox-associated with the name of Robert Giffen. Direct
relationship between price and quantity demanded.
2. Veblen Effect-associated with Thorstein Veblen who propounded the theory of
conspicuous consumption.

Factors /Determinants of Demand

1.Price

2. Income of the Consumers

3. Tastes and preferences of Consumers


4. Changes in Prices of Related Goods- Substitutes or Complements- This diagram depicts what to the demand
for tea when the price of coffee its substitute changes

4. Price of Related goods- could be either substitutes or complementary goods


Diagrammatic representation of Change in Demand Due to Change in Price of its
Complementary Good
5.Number of Consumers in the Market- larger the number of consumers in a market
greater is the demand for a commodity and vice -versa

6. Income Distribution- highly uneven or skewed distribution of income lesser will be the
demand and vice versa. This is because of the nature of propensity to consume.

7. Consumers expectations If they expect an increase in income in future they tend to


spend more.Also expectations of people regarding future prices will influence the
demand .

Distinction Between Demand and Amount Demanded

Demand refers to the amount of a good consumers plan to purchase at various possible
prices in a specified time period.

Amount demanded refers to the quantity of a good that consumers plan to buy at a
particular price
Extension and Contraction of Demand
The movement along a demand curve in

response to a change is price. When Price

rises from P1 to P3 demand falls from

Q1 to Q3 ------- Contraction of demand

When price falls from P1 to P2 demand rise

From Q1 to Q2-Expansion?Extension of dd

* Assumption of ceterus paribus


Increase and Decrease in Demand

A rightward shift of the demand curve due to change in the non price determinants of demand like
increased income etc is

an increase in demand

When demand curve shifts t

To left due to change in

Shift factors then it is

Decrease in demand

● Price is constant
Demand Function
Individual demand for a commodity can be expressed mathematically in the general for as

Qd=f( P, Y, T, Pr, A)

Where Q= quantity demanded of the good

Y= Income

T= tastes and Preferences

Pr= Price of Related Goods

A= Advertising Expenditure

Generally we write it as Q-f(P) as the relationship between these two variables is most important

as other factors are assumed to be constant.

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