Chapter 3
DEMAND
3.1 MEANING OF DEMAND
Goods are demanded because they have the capacity to satisfy our wants. But, every want
of a consumer cannot be called a demand. Demand does not men mere desire for a
commodity.
Generally desire, want and demand are interchangeably used in day-to-fay life. But in
economics, all these terms have different meanings.
Demand is the quantity of a commodity that a consumer is willing and able to buy, at
each possible price during a given period of time.
The definition of demand highlights four essential elements of demand:
(i) Quantity of the commodity
(ii) Willingness to buy.
(iii) Price of the commodity
(iv) Period of time.
Demand for a commodity may be either with respect to an individual or to the entire market.
1. Individual demand refers to the quantity of a commodity that a consumer is willing and
able to buy, at each possible price during a given period of time.
2. Market demand refers to the quantity of a commodity that all consumers are willing and
able to buy, at each possible price during a given period of time.
3.2 DETERMINANTS OF DEMAND (INDIVIDUAL DEMAND)
Demand for a commodity increases or decreases due to a number of factors. The various
factors affecting demand are discussed below;
1. Price of the Given Commodity:
it is the most important factor affecting demand for the given commodity.
Generally, there exists an inverse relationship between price and quantity
demanded.
It means, as price increases, quantity demanded falls due to decrease in the
satisfaction level of consumers.
For example: if price of given commodity (say, tea) increases, its quantity
demanded will fall as satisfaction derived from tea will fall due to rise in its price.
Demand (D) is a function of price (P) and can be expressed ad: D = f(P). the inverse
relationship between price and demand, known as Law of Demand, is discussed in
Section 3.7
The following determinants are termed as ‘other factors; or ‘factors other than price’.
2. Price of Related Goods: Demand for the given commodity is also affected by the
change in prices of the related goods. Related goods are of two types:
(i) Substitute Goods:
Substitute goods are those goods which can be used in place of one
another for satisfaction of a particular want, like tea and coffee.
An increase in the price of substitute leads to an increase in the
demand for given commodity and vice-versa.
For example, If price of a substitute good (say, coffee) increases, then
demand for given commodity (say, tea) will rise as tea will become
relatively cheaper in comparison to coffee.
So, demand for a given commodity affected by change in price of
substitute goods.
(ii) Complementary Goods:
Complementary goods are those goods which are used together to satisfy
a particular want, like tea and sugar.
An increase in the price of complementary good leads to a decrease
in the demand for given commodity and vice-versa.
For example, if price of a complementary good (say, sugar) increases,
then demand for given commodity (say, tea) will fall as it will be relatively
costlier to use both the goods together.
So demand for a given commodity is inversely affected by change in
price of complementary goods.
Examples of Substitute and Complementary Goods
Substitute Goods
1. Tea and Coffee
2. Coke and Pepsi
.
Complementary Goods
1. Tea and Sugar
2. Pen and Ink
For detailed discussion on substitute goods and complementary goods, refer section
3.11.
3. Income of the Consumer: Demand for a commodity is also affected by income of the
consumer. However, the effect of change in income on demand depends on the nature
of the commodity under consideration.
If the given commodity is a normal good, then an increase in income leads to rise in
its demand, while a decrease in income reduces the demand.
If the given, commodity is an inferior good, then an increase in income reduces the
demand, while a decrease in income leads to rise in demand.
Example: Suppose, income of a consumer increases. As a result, the consumer reduces
consumption of toned milk and increases consumption of full cream milk. In this case,
Toned Milk’ is an inferior good for the consumer and “Full Cream Milk’ is a normal good.
3- Tastes and Preferences:
Tastes and preferences of the consumer directly influence the demand for a
commodity. They include changes in fashion, customs, habits etc.
If the commodity is fashion or is preferred by the consumers, then demand for
such a commodity rises.
On the other hand, demand for a commodity falls, if the consumers have no taste
for that commodity.
4. Expectation of Change in the Price in Future:
If the price of a certain commodity is expected to increase in near future, then
people will buy more of that commodity than what they normally buy.
There exists a direct relationship between expectation of change in the prices in
future and change in demand in the current period.
For example, if the price of petrol is expected to rise in future, its present demand
will increase.
3.3 DETERMINANTS OF MARKET DEMAND
There are certain special features of market demand, which are not observed in case of
individual demand. Market demand is influenced by all the factors affecting individual
demand for a commodity. In addition, it is also affected by the following factors:
1. Size and Composition of Population: Market demand for a commodity is affected by
size of population in the country. Increases in population raises the market demand,
while decrease in population reduces the market demand.
Composition of population, i.e., ratio of males, females, children and number of old people
in the population also affects the demand for a commodity. For example, if a market has
larger proportion of women, then there will be more demand for articles of their use such as
lipstick, sarees, etc.
2. Season and weather: The seasonal and weather conditions also affect the market
demand for a commodity. For example, during winter, demand for woollen clothes and
jackets increases, whereas, market demand for raincoat and umbrellas increases during
the rainy season.
3. Distribution of Income: If income in the country is equitably distributed, then market
demand for commodities will be more. However, if income distribution is uneven, i.e.,
people are either very rich or very poor, then market demand will remain at lower level.
3.4 DEMAND SCHEDULE
Demand schedule is a tabular statement showing various qualities of a commodity
being demanded at various levels of price, during a given period of time. It shows the
relationship between price of the commodity and its quantity demanded.
A demand schedule can be determined both for buyers and for the entire market. So,
demand schedule is of two types:
1. Individual Demand Schedule
2. Market Demand schedule
Individual Demand Schedule
Individual Demand Schedule refers to a tablular statement showing various quantities
of a commodity that a consumer is willing to buy at various levels of price, during a
given period of time. Table 3.1 shows a hypothetical demand schedule for commodity
‘x’
Table 3.1: Individual Demand Schedule
Price (in Rs.) Quantity Demanded of commodity X (in units)
5 1
4 2
3 3
2 4
1 5
As seen in the schedule, quantity demanded of ‘x’ increases with decrease in its price. The
consumer is willing to buy 1 unit at Rs. 5. When price also falls to Rs. 4, demand rises to 2
units.
A ‘Demand Schedule’ states the relationship between two variables; price and
quantity. It shows that more is demanded at lower prices than at higher prices-just as
you will probably buy more DVD’s when they are offered at aprice less than the
normal price.
Market demand Schedule
Market demand schedule refers to a tabular statement showing various quantities of a
commodity that all the consumers are willing to buy at various levels of price, during
a given period of time. It is the sum of all individual demand schedules at each and every
price.
Market demand schedule can be expressed as: Dm = DA + DB = ----------------
Where Dm is the market demand and D A + DB = ------------- are the individual demands of
Household A, Household B and so on.
Let us assume that A and B are two consumers for commodity x in the market. Table 3.2
shows that market demand schedule is obtained by horizontally summing the individual
demands:
Table 3.2: market Demand Schedule
Price Individual demand (in units) Marker Demand (In
units)
Rs. Household A (DA) Household B(DB) (DA + DB)
5 1 2 1 + 2 =3
4 2 3 2+3=5
3 3 4 3+4=7
2 4 5 4+5=9
1 5 6 5 + 6 = 11
Demand Vs Quantity demanded
Before we proceed further, it is important to understand the following observations:
Demand
Demand is not a particular quantity. It describes the behaviour of buyers at every
possible price. For example, there is a demand of 5 units at Rs. 1 per unit, demand is 4
units at Rs. 2 per unit and so on. It means;
Demand is not a fixed quantity; rather it changes with change in price. For example,
there will be more demand for movie tickets at a price of Rs. 50 per ticket than at Rs. 150
per ticket.
Quantity Demanded
It refers to specific quantity of the demand schedule that is demanded against a specific
price, i.e., it makes sense only in relation to a particular price. For example, 2 units are
demanded at Rs. 4 per unit.
It is not the actual quantity purchased. Rather, it is the desired quantity which the
consumers wish to purchase and not necessarily how much they actually succed in
purchasing.
3.6 DEMAND CURVE
Demand curve is a graphical representation of demand schedule. It is the locus of all
the points showing various quantities of a commodity that a consumer is willing to buy a
various levels of price, during a given period time, assuming no change in other factors.
It is shows the inverse relationship between the quantity demanded of a commodity
with its price, keeping other factor constant.
It can be drawn for any commodity by plotting each combination of demand schedule
on a graph.
Like demand schedules, demand curves also be drawn both for individual buyers and
for the entire market. So, demand curve is of two types:
(i) Individual Demand Curve
(ii) Market Demand Curve
Individual Demand Curve
Individual demand curve refers to a graphical representation of individual demand
schedule.
Y Demand Curve
5– .P
4- .Q
Price (in Rs.) 3- .R
2– .S
1- .T
D
O 1 2 3 4 5 X
Quantity demanded (in units)
Fig. 3.1
.
The demand curve ‘DD’ slopes downwards due to inverse relationship between price
and quantity demanded.
Market Demand Curve:
Marker Demand Curve refers to a graphical representation of market demand
schedule. It is obtained by horizontal summation of individual demand curves.
The points shown in Table 3.2 are graphically represented in Fig. 3.2. D A and DB are the
individual demand curves. Market demand curve (Dm) is obtained by horizontal
summation of the individual demand curves (DA and DB)
Y Market Demand Curve
5– . Dm is flatter than DA and DB
4-
Price (in Rs.) 3- .
2–
1- .
DA DB Dm X
O 2 4 6 8 10 12
Quantity demanded (in units)
Fig. 3.2
The points shown in Table 3.2 are
Market demand curve ‘DM’ also slope downwards due to inverse relationship between
price and quantity demanded.
Market Demand Curves is Flatter
Market demand curve is flatter than the individual demand curves. It happens because as
price changes proportionate change in individual demand
3.7 LAW OF DEMAND
.
Law of demand states the inverse relationship between price and quantity demanded,
keeping other factors constant (ceteris paribus). This law is also known as the ‘First law
of Purchase’.
Assumptions of Law of Demand
While stating the law of demand, we use the phrase ‘keeping other factors constant or
ceteris paribus’. This phrase is used to cover the following assumptions on which the law is
based:
1. Prices of substitute goods do not change.
2. Price of complementary goods remain constant.
3. Income of the consumer remains the same.
4. There is no expectation of change in price in the future.
5. Tastes and preferences of the consumer remain the same.
Law of demand can be better understood with the help of Table 3.3 and Fig. 3.3;
Table 3.3: Demand Schedule
Price (in Rs) Quantity demanded (in units)
5 1
4 2
3 3
2 4
1 5
Y Demand Curve
D
5– .
4- .
Price (in Rs.) 3- .
2– .
1- .
D
O 1 2 3 4 5 X
Quantity demanded (in units)
Fig. 3.3
demand curve DD slopes downwards from left to right, indicating an inverse
relationship between price and quantity demanded.
There exists an inverse relationship between price and
demand.
Reasons for Law of Demand
The various reasons for operation of Law of Demand are:
1. Law of Diminishing Marginal Utility: Law of diminishing marginal utility states that
as we consume more and more units of a commodity, the utility derived from each
successive units goes on decreasing. So, demand for a commodity depends on its
utility. If the consumer gets more satisfaction, he will pay more. As a result, consumer
will not be prepared to pay the same price for additional units of the commodity. The
consumer will buy more units of the commodity only when the price falls.
Law of diminishing marginal utility is considered as the basic reason for operation of
Law of Demand
2. Substitution Effect: Substitution effect refers to substituting one commodity in
place of other when it becomes relatively cheaper. When price of the given
commodity falls, it becomes relatively cheaper as compared to its substitute (assuming
no change in price of substitute). As a result, demand for the given commodity rises.
For example, if price of given commodity (Say, Pepsi) falls, with no change in price of its
substitute (say, Coke), then Pepsi will become relatively cheaper and will be substituted
for coke, i.e., demand for Pepsi will rise.
3. Income Effect: Income effect refers to effect on demand when real income of the
consumer changes due to change in price of the given commodity. When price of
the given commodity falls, it increases the purchasing power (real income) of the
consumer. As a result, he can purchase more of the given commodity with the same
money income
For example, Suppose Isha buys 4 chocolates @ Rs. 10 each with the pocket money of
Rs. 40. If price of chocolate falls to Rs. 8 each, then with the same money income, Isha
can buy 5 chocolates due to an increase in her real income.
‘Price Effect’ is the combined effect of Income Effect and Substitution Effect
Symbolically: Price Effect = Income Effect + Substitution Effect. For a detailed
discussion on Income Effect and Substitution Effect, refer Power Booster.
4. Additional Customers: When price of a commodity falls, many new consumers, who
were not in a position to buy it earlier due to its high price, starts purchasing it. In addition
to new customers, old consumers of the commodity start demanding more due to its
reduced price.
.
5. Different uses: Some commodities like milk, electricity, etc. have several uses, some of
which are more important than the others. When price of such a good (say, milk)
increases, its uses get restricted to the most important purpose (say, drinking) and
demand for less important uses (like cheese, butter, etc.) gets reduced. However, when
the price of sucha commodity decreases the commodity is put to all its uses, whether
important or not.
Exceptions of Law of Demand
.
Some of the Important Exceptions are:
1. Giffen Goods: These are special kind of inferior goods on which the consumer
spends a large part of his income and their demand rises with an increase in price
and demand falls with decrease in [Link] example, in our country, it is often seen
that when price of coarse cereals like jowar and bajra falls, the consumers have a
tendency to spend less on them and shift over to superior cereals like wheat and rice.
This phenomenon, popularly known as ‘Giffen’s paradox’ was first observed by Sir
Robert Giffen.
2. Status Symbol Goods or Goods of ostentation: The exception related to certain
prestige goods which are used as status symbols.
For example, diamonds, gold, antique paintings, etc. are bought due to the prestige they
confer upon the possessor. These are wanted by the rich persons for prestige and
distinction. The higher the price, the higher will be the demand for such goods.
3. Fear of Shortage: if the consumers except a shortage or scarcity of a particular
commodity in the near future, then they would start buying more and more of that
commodity in the current period even if their prices are rising. The consumers demand
more due to fear of further rise in prices.
For example, during emergencies like war, famines, etc. consumers demand goods
even at higher prices due to fear of shortage and general insecurity.
4. Ignorance: Consumers may buy more of a commodity at a higher price when they are
ignorant of the prevailing prices of the commodity in the market.
5. Fashion related goods: Goods related to fashion do not follow the law of demand and
their demand increases even with a rise in their prices.
For example, if any particular type of dress is in fashions, then demand for such dress
will increase even if its price is rising.
6. Necessities of Life: Another exception occurs in the use of such commodities, which
become necessities of life due to their constant use.
For example, commodities like rice, wheat, salt, medicines, etc. are purchased even if
their prices increase.
7. Change in Weather: With change in season/weather, demand for certain commodities
also changes, irrespective of any change in their prices.
For example, demand for umbrellas increases in rainy season even with an increase in
their prices.
It must be noted that in normal conditions and considering the given assumptions, ‘law of
Demand’ is universally applicable.
Individual Demand Vs Market Demand
Individual Demand Market Demand
It is the quantity demanded of a commodity It is quantity demanded of a commodity by
by an individual consumer at a given price all the consumption at a given price during
during a given period of time. a given period of time.
It may or may not follow the Law of It always follows the law of Demand, i.e.
Demand, i.e., it is possible that an individual market demand always falls with rise in
consumer may demand more even at price and vice-versa.
higher price.
Individual demand is not affected by all the Market demand is affected by all the factors
factors affecting market demand. affecting individual demand.