I BBA: MANAGERIAL ECONOMICS

LAW OF DEMAND
Meaning of Demand
The demand for a commodity is its quantity which consumers are able and
willing to buy at various prices during a given period of time. Demand is a common
parlance means desire for an object. But in economics, demand is the quantity of
goods and services which a person can purchase with a requisite amount of money.
According to [Link], “Demand means the various quantities of goods that would
be purchased per time period at different prices in a given market”. Thus demand for
a commodity is its quantity which consumer is able and willing to buy at various
prices during a given period of time.
In the opinion of Stonier and Hague, “Demand in economics means demand
backed up by enough money to pay for the goods demanded”. In other words, demand
means the desire backed by the willingness to buy a commodity and purchasing
power to pay. Hence desire alone is not enough. There must have necessary
purchasing power, ie., cash to purchase it.
“The demand for anything, at a given price, is the amount of it which will be
bought per unit of time at that price.” -PROF. BENHAM
“By demand, we mean the quantity of a commodity that will be purchased at a
particular price and not merely the desire of a thing.”-HANSEN

FACTORS DETERMINING INDIVIDUAL DEMAND:

Demand is not dependent on price alone. There are many other factors which
affect the demand of a product.

1. Price of the Product:

This is the basic factor influencing the demand. There is a close relationship
between the quantity demanded and the price of the product. Normally a larger
quantity is demanded at a lower price and vice-versa. There is inverse relationship
between the price and quantity demanded. This is called the law of demand. However,
there are exceptions, i.e., for Giffen goods, as price rises demand also rises.

2. Income of the Consumer:

The income of the consumer is another important variable which influences
demand. The ability to buy a commodity depends upon the income of the consumer.

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When the income of the consumer’s increases, they buy more and when income falls
they buy less. A rich consumer demands more and more goods because his
purchasing power is high.

3. Prices of Related Goods:

The related goods are generally substitutes and complementary goods. Demand
for a product is also influenced by the prices of substitutes and complements.
Goods which are perceived by the consumer to be alternatives to a product are
termed as substitute goods. There is direct relationship between the demand for a
product and the price of its substitute. Example- scooter and a motorcycle, tea and
coffee.
Complementary goods are those goods which are used jointly and consumed
together like tennis ball and a racket, petrol and car. The relationship between the
price of a product and the quantity demanded of another is inverse. For example if
the price of cars were to rise, less people would choose to buy and use cars, switching
perhaps to public transport-trains.

4. Consumer’s Tastes and Preferences:

The demand for a product depends upon tastes and preferences of the
consumers. As tastes and preferences shift from one commodity to the other, demand
for the first commodity reduces and that of the other rises. A favourable change in
consumer preference will cause the demand to increase. Likewise, an un-favourable
change in consumer preferences will cause the demand to decrease.

5. Consumer’s Expectation:
A consumer’s expectation about the future changes in price and income may
also affect his demand. If a consumer expects a rise in prices he may buy large
quantities of that particular commodity. Similarly, if he expects to fall in future, he
will tend to buy less at present. Similarly, expectation of rising income may induce
him to increase his current consumption.

6. Economic Conditions:
The demand for commodities also depends upon prevailing business conditions
in the country. For example, during the inflationary period, more money is in
circulation and people have more purchasing power. This causes an increase in
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demand of various goods even at higher prices. Similarly, during deflation

(depression), the demand for various goods reduces in spite of lower prices because
people do not have enough money to buy.

7. Government Policy:
Government policy of a country can also affect the demand for a particular
commodity, ex., taxation. Reduction in the taxes and duties will allow more persons
to enter a particular market and thus raising the demand for a particular product.

8. Season and Weather:

Demands for commodities also depend upon the climate of an area and
weather. In cold hilly areas woollens are demanded. During summer and rainy season
demand for umbrellas may rise. In winter ice is not so much demanded.

LAW OF DEMAND:
The law of demand indicates the relationship between the price and the
quantity demanded of a commodity. Other things being equal, the quantity demanded
extends with a fall in price and contrasts with a rise in price. The quantity demanded
varies inversely with the price. Marshall defined the law of demand thus: “the greater
the amount to be sold, the smaller must be the price. Law of demand expresses the
functional relationship:
D = f (P)
Where, D = Quantity demanded; and
P = Price.
‘Other things being equal’ is a very important qualifying phrase in the law. This
law holds good only under certain assumptions.

Assumptions:
This law will be applicable only if the below mentioned points are fulfilled.
i. No change in price of related commodities.
ii. No change in income of the consumer.
iii. No change in taste and preferences, customs, habit and fashion of the
consumer.
iv. No change in size of population
v. No expectation regarding future change in price.
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Demand Schedule:
It is a tabular representation of various quantities of a commodity demanded by
different consumers at different prices during a given period of time. It is an imaginary
schedule:

Price of Commodity X Total Market Demand

(per unit in Rs.) (per day)

10 10 Units

8 20 Units

6 30 Units

4 40 Units

2 50 Units

The above demand schedule shows negative relationship between price and
quantity demanded for a commodity. Initially, when a price of a good is Rs.10 per
unit, quantity demanded by the consumer is 10 units. As the price decrease from
Rs.10 to Rs.8 per unit and then to Rs.6 per unit, quantity demanded by the consumer
increases from 10 to 20 and then to 30 units respectively. Further, fall in price to
Rs.4 and then to Rs.2 per unit, results in increase in quantity demanded by the
consumer from 30 to 40 units and then to 50 units respectively. Thus, from the above
schedule we can conclude that there is opposite inverse relationship in between price
and quantity demanded for a commodity.
DEMAND CURVE

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It is a graphical representation of market demand schedule. To get the demand

curve DD, price and quantity demanded are measured along the y-axis and x-axis
respectively. By plotting various combinations of price and quantity demanded, we
get a demand curve DD derived from points A, B, C, D and E. The demand
curve DD slopes downwards from left to right showing an inverse relationship between
price and demand. It has a negative slope.

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 the figure given below. Many
causes can be attributed to an upward sloping demand curve.

1. 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 or
deceptive packing and high price deceive the people. This can be called as ‘Ignorance
effect’.

2. Speculative Effect:
When the price of a commodity goes up, people may buy larger quantity by
anticipating a further rise in its price. On the other hand, when the price falls, people
may not react immediately and may still purchase the same quantity and waiting for
another fall in the price. In both the cases, the law of demand fails to operate. This is
known as speculative effect.

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3. The Giffen Effect:

A fall in the price of inferior goods (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. Thus, in case of
Giffen goods, there is indirect relationship between price and quantity demanded.

4. Fear of Shortage:
People may buy more of a commodity even at higher prices when they fear of a
shortage of that commodity in near future. This is contrary to the law of demand. It
may happen during times of War, Pandemic and mostly in the case of goods which
fall in the category of necessities life like sugar, groceries, edible oil, etc.

5. Prestigious Goods:
This is explained by Prof. Thorsfein Veblen. If consumers measure the
desirability of a commodity 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. For example, Diamond,
Jewellery and luxury cars etc. As their prices go up and become costlier, rich people
think it is more prestigious to have them. So they purchase more. This is also known
as Demonstration effect.

6. Conspicuous Necessities:
Another exception occurs in use of such commodities as due to their constant
use, have become necessities of life. For example, the prices of mobile phone, TV,
refrigerators, washing machines, cooking gas, scooters, etc., have been continuously
rising, their demand does not show any tendency to fall.

MOVEMENT ALONG A DEMAND CURVE AND SHIFTS IN THE DEMAND

CURVE (DIAGRAMS):
I. Change in Quantity Demanded — Movement along a Demand Curve:
Extension and Contraction of Demand:
The quantity demanded of a product does not remain constant, but keeps on
changing due to various factors. If the quantity demanded changes due to change in
price only, it is called expansion and contraction of demand. If price decreases, it
results in expansion of demand and if price increases it results in contraction of
demand. This situation is shown by movement along the same demand curve.
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In the above figure, we have shown expansion and contraction of demand. At

price OP, quantity demanded is OQ. If price reduces to OP1, the quantity demanded
increase to OQ1. This increase of quantity demanded would be called expansion of
demand. If, however, price increases from OP to OP2, then quantity demanded
decrease in equality would be called contraction of demand.

II. Change in Demand— Shifts in the Demand Curve:

Increase and Decrease of Demand:
If the change in quantity demanded of a product takes place due to any factor,
other than price of the product, then it is called increase or decrease of demand. This
phenomenon is shown by a shift in the entire demand curve. For example- if the
income of the consumer rises then his entire demand curve shifts to right which
shows that consumer’s demand for the product has increased for every given price.

In the figure, we can say if demand increases due to increase in income then demand
curve shifts to right from DD to D1D1. If, however, the demand decreases due to fall
in income then the demand curve shifts to left from DD to D2D2.

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