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Lecture No.11&12
Demand – Meaning, Definition, Types of demand - income demand, price demand,
cross demand- Demand Schedule, demand curve, Law of demand – contraction and
extension, increase and decrease in demand

DEMAND

Meaning of Demand
Demand in economics means a desire to possess a good supported by willingness and
ability to pay for it. If you have a desire to buy a certain commodity, say, a tractor, but do
not have the adequate means to pay for it, it will simply be a wish, a desire or a want and
not demand. Demand is an effective desire, i.e., a desire which is backed by willingness
and ability to pay for a commodity in order to obtain it. In the words, "Demand means the
various quantities of a good that would be purchased per unit of time at different prices in
a given market. There are thus three main characteristics of demand in economics.
i. Willingness and ability to pay. Demand is the amount of a commodity for which a
consumer has the willingness and also the ability to buy.
ii. Demand is always at a price. If we talk of demand without reference to price, it will be
meaningless. The consumer must know both the price and the commodity. He will then
be able to tell the quantity demanded by him.
iii. Demand is always per unit of time. The time may be a day, a week, a month, or a year.

Individual's Demand for a commodity:

The individual‟s demand for a commodity is the amount of a commodity which the
consumer is willing to purchase at any given price over a specified period of time. The
individual's demand for a commodity varies inversely with price ceteris paribus. As the
price of a good rises, other things remaining the same, the quantity demanded decreases
and as the price falls, the quantity demanded increases. Price (p) is here an independent
variable ad quantity (q) dependent variable.

The Market Demand for a Commodity:

The market demand for a commodity is obtained by adding up the total quantity
demanded at various prices by all the individuals over a specified period of time in the
market. It is described as the horizontal summation of the individuals‟ demand for a
commodity at various possible prices in market.
In a market, there are a number of buyers for a commodity at each price. In order
to avoid a lengthy addition process, we assume here that there are only four buyers for a
commodity who purchase different amounts of the commodity at each price. The
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horizontal summation of individuals‟ demand for a commodity will be the market

demand for a commodity as is illustrated in the following schedule:
Demand Schedule
Demand schedule is a tabular representation of the quantity demanded of a commodity at
various prices. For instance, there are four buyers of apples in the market, namely A, B, C
and D.
Demand schedule for apples

PRICE (Rs. Buyer A Buyer B Buyer C Buyer D Market

per dozen) (demand in (demand in (demand in (demand in Demand
dozen) dozen) dozen) dozen) (dozens)

10 1 0 3 0 4

9 3 1 6 4 14

8 7 2 9 7 25

7 11 4 12 10 37

6 13 6 14 12 45

The demand by buyers A, B, C and D are individual demands. Total demand by the four
buyers is market demand. Therefore, the total market demand is derived by summing up
the quantity demanded of a commodity by all buyers at each price.

Demand Curve
Demand curve is a diagrammatic representation of demand schedule. It is a graphical
representation of price- quantity relationship. Individual demand curve shows the highest
price which an individual is willing to pay for different quantities of the commodity.
While, each point on the market demand curve depicts the maximum quantity of the
commodity which all consumers taken together would be willing to buy at each level of
price, under given demand conditions.

1) Derived demand.
Derived demand refers to demand for goods which are needed for further production. It is
the demand for producer‟s goods like industrial raw material, machine tools and
equipments.
2) Autonomous demand
Autonomous demand is independent of the other product or main product. It‟s not linked
or tie-up with the other goods or [Link]: food articles,clothes.
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Price Demand:It refers to various quantities of a good or service that a consumer would
be willing to purchase at all possible prices in a given market at a given point in time,
ceteris paribus.
Income Demand:It refers to various quantities of a good or service that a consumer would
be willing to purchase at different levels of income, ceteris paribus.

Cross Demand : It refers to various quantities of a good or service that a consumer would
be willing to purchase not due to changes in the price of the commodity under
consideration but due to changes in the price of related commodity. For example:
Demand for tea is more not because price of tea has fallen but because price of coffee has
risen. Thus demand for substitutes take the form of cross demand.

Law of Demand

1. The law of demand states that as price increases (decreases) consumers will purchase
less (more) of the specific commodity. Demand varies inversely with price.

As price falls from P1 to P2 the quantity demanded increases from Q1 to Q2. This is a
negative relation between price and quantity, hence the negative slope of the demand
schedule; as predicted by the law of demand.

Demand curve has a negative slope, i.e, it slopes downwards from left to right depicting
that with increase in price, quantity demanded falls and vice versa. The reasons for a
downward sloping demand curve can be explained as follows-
1. Income effect- With the fall in price of a commodity, the purchasing power of
consumer increases. Thus, he can buy same quantity of commodity with less money or he
can purchase greater quantities of same commodity with same money. Similarly, if the
price of a commodity rises, it is equivalent to decrease in income of the consumer as now
he has to spend more for buying the same quantity as before. This change in purchasing
power due to price change is known as income effect.
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2. Substitution effect- When price of a commodity falls, it becomes relatively cheaper

compared to other commodities whose prices have not changed. Thus, the consumer tend
to consume more of the commodity whose price has fallen ,i.e, they tend to substitute that
commodity for other commodities which have now become relatively dear.
3. Law of diminishing marginal utility– It is the basic cause of the law of demand. The
law of diminishing marginal utility states that as an individual consumes more and more
units of a commodity, the utility derived from it goes on decreasing. So as to get
maximum satisfaction, an individual purchases in such a manner that the marginal utility
of the commodity is equal to the price of the commodity. When the price of commodity
falls, a rational consumer purchases more so as to equate the marginal utility and the
price level. Thus, if a consumer wants to purchase larger quantities, then the price must
be lowered. This is what the law of demand also states.

Changes in demand for a commodity can be shown through the demand curve in two
ways: (1) Movement along the demand curve(Extension and contraction ) and (2) Shifts
of the demand curve( Increase and decrease).
(1) Movement along the Demand Curve:
Demand is a multivariable function. If income and other determinants of demand such as
tastes of the consumers, changes in prices of related goods, income distribution etc
remain constant and there is a change only in price of the commodity, then we move
along the same demand curve, In this case, the demand curve remains unchanged. When,
as a result of change in price, the quantity demanded increases or decreases, it is
technically called extension and contraction in demand.
A movement along a demand curve is defined as a change in the quantity demanded due
to changes in the price of a good will result in a movement along the demand curve. For
instance, a fall in the price of apples from P1 to P2 causes an increase in the quantity
demanded from Q1 to Q2

Shifts in the demand curve

A shift of the demand curve is referred to as a change in demand due any factor other
than price. A demand curve will shift if any of these occurs:
1. Change in the price of other goods (complements and substitutes); leading to increase
/ decrease of real income
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2. Change in the income level

3. Change in consumers‟ tastes and preferences
Each of these factors tends the demand curve to shift downwards to the left or upwards to
the right. While downward shift signifies decrease in demand, an upward shift of the
demand curve shows an increase in the demand.
As shown in the figure the demand curve will shift to D2 from D1 and accordingly the
price and quantity demanded will change.

Movements along a demand curve is the result of increase or decrease of the price of the good,
while the demand curve shifts when any demand determinant other than price changes

Determinants of demand
Various factors affect the quantity demanded by a consumer of a good or
service. The key determinants of demand are as follows
1. Price of the good: This is the most important determinant of demand. The relationship
between price of the good and quantity demanded is generally inverse as we will see later
while studying law of demand
2. Price of related goods:
 Substitutes: If the price of a substitute goes down than the quantity demanded of the
good also goes down and vice versa.
 Complementary goods: If the price of gasoline goes up the quantity demanded of
automobiles will go down. Thus the price of complements have an inverse
relationship with the demand of a good
3. Income: Higher the income of the consumer the more will be quantity demanded of
the good. The only exception to this will be inferior goods whose demand decreases
with an increase in income level
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4. Individual tastes and preferences: a preference for a particular good may affect the
consumer‟s choice and he / she may continue to demand the same even in rising
prices scenario
5. Expectations about future prices & income: If the consumer expects prices to rise in
future he / she may continue to demand higher quantities even in a rising price
scenario and vice versa

Exceptions to the law of demand

Unlike other laws, law of demand also has few exceptions i.e. there is no inverse
relationship between price and quantity demanded for these goods. Few of them are as
follows:
1. Giffen goods: These are those inferior goods whose quantity demanded decreases
with decrease in price of the good. This can be explained using the concept of income
effect and substitution effect

2. Commodities which are regarded as status symbols: Expensive commodities like

jewellery, AC cars, etc., are used to define status and to display one‟s wealth. These
goods doesn‟t follow the law of demand and quantity demanded increases with price
rise as more expensive these goods become, more will be their worth as a status
symbol.
3. Expectation of change in the price of the goods in future: if a consumer expects the
price of a good to increase in future, it may start accumulating greater amount of the
goods for future consumption even at the presently increased price. The same holds
true vice versa