THEORY OF DEMAND
2.2 Demand- The quantity of commodity/good which the consumer's are willing and
able to purchase at a particular price during a particular period of time.
Types of Demand: a. Individual Vs Market b. Ex-ante Vs Ex-post c. Autonomous Vs.
Derived d. Joint Vs. Composite.
Determinants of Demand: Factors affecting / influencing the demand for a
commodity.
Demand Function: States the functional relationship between the demand for a
commodity and its determinants.
Mathematical expression - Dx= F( Px, Px-1, Y, E, T, G, Pn, Dy, etc.)
Linear demand function- DX =[Link]
Non-linear demand function - DX= [Link]-b
Dx =30-2Px 5, 10, 12,15 20,10,6,0 Dx= [Link]
Dx= [Link]^-2 or Dx= 44 / Px2 2, 3, 4,5 and 6 11, 4.8, 2.75, 1.76 , 1.22
[Link]^-2
Law of Demand
The law states that there exist an inverse relationship between the price of the
commodity and the quantity demanded of that commodity. It means other things
remaining the same, the consumers will demand lesser quantity of goods at higher
price and vice-versa.
Assumption/Assumptions- One of the fundamental assumption as Ceteris Paribus
Individual Demand Schedule- Tabular representation of different quantities of a
commodity/good that a buyer is willing to buy at different prices during a given
period of time.
Individual Demand Schedule:-
Price of X Amount Demanded
80 2
70 4
60 6
50 10
40 16
Market Demand Schedule:-
p qdA qdB qdC md(qdA+qdB+qdC)
4 1 1 3 5
3 2 3 5 10
2 3 5 7 15
1 5 9 10 24
Demand Curve- Is a graphical presentation of demand schedule.
[Linear Demand Curve] [Non-linear demand curve]
Reasons for downward slope of the demand curve- [Link] of Diminishing Marginal
Utility
[Link] Effect [Link] Effect [Link] Consumers Creating Demand. 5.
Uses of the commodity
[Individual vs Market Demand curve]
Change in Demand and Change in Quantity Demanded:
Change in Quantity Demanded - This is a situation which occurs due to a rise or fall
in the price of a commodity only. It is described by a movement along the same
demand curve.
Change in Demand- This is a situation which occurs due to a variation in any
determinant of demand other than commodity own price. It is described by a shift in
the demand curve for the commodity or service.
Exception/ Limitations of law of demand-
a. Giffen Goods- The demand for inferior goods such as coarse grains will not
increase even with the fall of their price, because consumers of these commodities
will start consuming more of a superior commodity.
b. The snob effect/ Veblen effect- It refers to the desire of a person ( Usually the
richer one) to own exclusive or unique products .It serves as a status symbol.
c. The bandwagon effect- The demand for certain goods seems to be determined by
their usefulness but mostly on account of demonstration effect. Thus, demand in such
cases is influenced by the consumption of pace setters or trend setters.
d. Expected change in price- Any increase or decrease in the price of the commodity
in near future.
e. Ignorance on the part of consumer- If the consumer is not aware of the competitive
price of the commodity, he may purchase more of the commodity even at a higher
price. It may also due to the phobia of the consumer that high price commodities are
always superior in quality.
Application/ Importance of law of demand-
1. Determination of Price- The study of law of demand is helpful for a trader to fix the
price of a commodity. It enables the management in deciding whether how much
increase or decrease in the price of commodity is desirable.
2. Important for the Finance Minister in framing the taxation policy of the country.
3. In the field of planning- It is necessary to know whether a given change in price of
the commodity will have desired effect on the demand for a commodity within the
country or abroad.