Chapter 5: Demand

Demand Desire
Willingness and ability to buy Willingness to buy but not able to
buy
Demand for a commodity or service as an effective desire, i.e., a desire
backed by means as well as willingness to pay for it.
The demand arises out of the following three things:
i. Desire or want of the commodity.
ii. Ability to pay,
iii. Willingness to pay.
Only when all these three things are present then the consumer presents his
demand in the market.
Definitions:
“Demand for a commodity is the quantity which a consumer is willing to buy
at a particular price at a particular time.”
“The demand for anything, at a given price, is the amount of it which will be
bought per unit of time at that price.”

Demand Schedule: It is a tabular presentation of demand at different

possible prices.
It is of two types:
Individual Demand Market Demand Schedule
Schedule

It is a tabular presentation of It is a tabular presentation of demand by

demand by a consumer at several consumers at different possible prices.
different possible prices.
Demand curve: It is a graphic presentation of demand scheduled, which
shows demand at different possible prices.
It is of two types:
Individual Demand Curve Market Demand Curve
It is a graphicr presentation It is a graphic presentation of demand by several
of demand by a consumer at consumers at different possible prices.
different possible prices.

Determinants of demand/ Factor that influence demand for a

commodity:
DD=F (Px, Pr, Y, T, E)

(a)Price of the commodity (Px): other things being constant, quantity

demanded of a commodity is inversely related to the price of the good.
Price increase demand of commodity decrease and if price decrease the
demand of commodity decreases.

(b)Price of related goods (Pr): Related goods are those goods whose
demand changes due to change in the price of other goods.
Two types of Related goods
(1)Substitute goods: Those goods which can be used in place of one
another like tea and coffee. Ex Tea & coffee.
An increase in the price of coffee leads to increase in the demand for tea (a
direct relation)
If the price of one good increase the demand of other good increases and
vice versa. It shows positive price effect.
(2)Complementary goods: Those goods which are used together to
satisfy a particular want like tea and sugar.
An increase in the price of sugar leads to decrease in the demand for tea.
If the price of one good increase the demand of other good decreases and
vice versa. It shows negative price effect.

(c)Income of consumer: change in income also change the demand

of consumer. The income effect shows by two types of goods
(1)Normal goods: The demand for a normal good increases with the
increase in consumer’s income and vice-versa.
These include the commodities which we usually purchase. Besides, in
general, consumers purchase more of normal goods when their income
increases and purchase less of these goods when their income falls. For
example, if demand for a Refrigerator increases with an increase in income,
then the Refrigerator will be said to be a normal good. The income effect of
normal goods is positive

(2)Inferior goods: The demand for an inferior good decreases with the
increase in consumer’s income & vice-versa.
Consumers usually purchase inferior goods because they are essential for
their life; like, coarse grains, etc. For example, if the consumer’s income
increases and he prefers to replace his Single-Door Refrigerator with French
door style refrigerator, then the demand for Single-Door Refrigerator will
fall. Also, in this case, the Single-Door Refrigerator is the Inferior Good.

(d)Taste and preferences :If taste is shifts in a favor of commodity so

demand of that commodity increases and if If taste is shifts in a Against of
commodity so demand of that commodity decreases.
If a commodity is in fashion, its demand increases and if it becomes out of
fashion its demand decreases even its price remains the same.

(e)Expectation of change in the price in future: If the price of a

commodity is expected to increase in near future, the people will buy more
of that commodity than what they normally buy and vice-versa.
(f)Size of population: Increase in population raises the market demand
and vice-versa.
(g)Distribution of income: If income in the country is equitably
distributed, then market demand for the commodities will be more and vice-
versa.

Law of Demand: The law states that other things being constant, quantity
demanded of a commodity is inversely related to the price of the good.
The law of demand expresses functional relationship between price and the
quantity. It has been universally observed that people buy more quantity of
goods when, they are available at a lower price and the quantity purchased
declines with an increase in its price.
The law thus, states that other things being equal the quantity demanded
varies inversely with price. Lower the price, greater is the effective demand;
higher the price; lesser is the effective demand.
Assumptions of the law
(a)Consumer’s income remain constant.
(b)No expectation of rise or fall in the price of the commodity in near future.
(c)Price of related goods remain unchanged
(d)Taste and preference of consumer remain unchanged
Scheduled & Graphical Presentation of Law of Demand
Let’s take an example to understand the concept of the Law of Demand
better.
Price Quantity Demanded

4 2

3 4

2 6

1 8

The above table clearly shows that as the price of the commodity decreases,
its quantity demanded increases. Also, the demand curve DD is sloping
downwards from left to right, which means that there is an inverse
relationship between the price and quantity demanded of the commodity .

Reasons for law of demand/ Why does demand curve slopes

downward:

(a)Law of diminishing marginal utility: The law states that as we

consume more and more units of a commodity, the utility derive from each
successive unit goes on decreasing.
(b)Substitution effect: Substituting one commodity in place other when it
becomes relatively cheaper.
(c)Income effect: When the price of a commodity rises, real income of
consumer decreases that causes decrease in demand and vice-versa.
(d)Additional customers: When the price of a good falls, many new
consumers who were unable to buy it earlier due to its high price, starts
purchasing it.
(e)Different uses: When the price of a good increases and it has multiple
uses, its consumption will get restricted to essential uses only.

Exceptions to the Law of Demand:

There are certain exceptions to the law of demand. It means that under
certain circumstances, consumers buy more when the price of a commodity
rises and less when the price falls. In such case the demand curve slopes
upward from left to right i.e. demand curve has a positive slope as is shown
in Fig. 7.5. Many causes can be attributed to an upward sloping demand
curve.

1. Prestigious Goods:
This is explained by Prof.Veblen. If consumers measure the desirability of a
good entirely by its price and not by its use, then they buy more of a good
at high price and less of a good at low price, Diamond, Jewellery and big
cars etc., are such prestigious goods. In their case demand relates to
consumers who use them as status symbol. The demand for articles like gold
jewellery remains high even at higher price due to prestige
 As their prices go up and become costlier, rich people think it is more
prestigious to have them. So they purchase more. On the other hand, when
their prices fall sharply, they buy less, as they are no more prestigious
goods. This is known as (Veblen effect) or (Demonstration effect).
2. Ignorance:
Sometimes consumers are fascinated with the high priced goods from the
idea of getting a superior quality. However, this may not be always true.
Superior/deceptive packing and high price deceive the people. This can be
called as ‘Ignorance effect’.
3. The Giffen Effect:
Giffen goods: Those goods whose income effect is negative but price effect is
positive e.g demand for desert coolers will decrease with the increase in
income. But its demand remains high with the rise in its price.
A fall in the price of (Giffen Goods) tends to reduce its demand and a rise in
its price tends to extend its demand. This phenomenon was first observed by
SIR ROBERT GIFFEN, popularly known as Giffen effect.
He observed that the working class families of U.K. were compelled to curtail
their consumption of meat in order to be able to spend more on bread Mr.
Giffen, British economist, observed that rise in the price of bread caused the
low paid British workers to buy more bread.
These workers lived mainly on the diet of bread, when price rose, as they
had to spend more for a given quantity of bread, they could not buy as
much meat as before. Bread still being comparatively cheaper was
substituted for meat even at its high price.
4. Conspicuous Necessities:
Another exception occurs in use of such commodities as due to their
constant use, have become necessities of life. For example, inspite of the
fact that the prices of television sets, refrigerators, washing machines,
cooking gas, scooters, etc., have been continuously rising, their demand
does not show any tendency to fall. More or less same tendency can be
observed in case of most of other commodities that can be termed as
‘Upper-Sector Goods’.

Change in Quantity demand and Change in Demand:

Movement along the demand curve Shift in the demand curve/ change in
/change in Q.D demand
When the demand for a good changes due When the demand for a good changes due
to change in its own price. to changes in other factors than its own
It is of two types: price.
It is of two types:
 a) Increase in demand: when demand
for a good increases may be due to
a) Extension of demand: when demand Change in other factors.
for a good rises due to fall in its In case of Increase of dd the demand
own price. curve shifts rightwards.
In case of Expansion, Demand curve
moves Downward. Cause of Increase in demand:
i- increase in consumer’s income
P Q ii- Rise in price of substitute good
iii- Fall in price of complementary good
10 10 iv-Taste shifts in a favor of commodity
5 20 v- Consumer expect rise in price near
future.
b) Decrease in demand: when demand
for a good decreases may be due to
b) Contraction in demand: when change in other factors.
demand for a good falls due to rise in its In case of Decrease of dd the demand
own price. curve shifts Leftwards.
In case of Contraction, Demand curve
moves Downward. Cause of Decrease in demand:
i- decrease in consumer’s income
P Q ii- Fall in price of substitute good
iii- Rise in price of complementary good
10 10 iv-Taste shifts in an against of commodity
20 5 v- Consumer expect fall in price near
future.

Graphic Presentation: Graphic Presentation:

1. In case of Increase of dd the demand

1. In case of Extension of dd the demand
curve shifts rightwards from DD to D1D1
curve moves downward.
2. In case of Contraction of dd the 2. In case of decrease of dd the demand
curve shifts leftwards from DD to D2D2
demand curve moves Upward.
Change in Quantity demand is also known Change in demand is also known as Shift
as Movement along the demand curve. in the demand curve.