GRADE -11 MICRO ECONOMICS

Ch:03 DEMAND

Introduction

This chapter takes into account the demand and the factors
affecting it, both at the personal and market level. It highlights the
law of demand, movement along the demand curve and the related
changes. Explanation for the downward slope in the law of demand
and exceptions to it are dealt with.

1. Demand is a quantity of a commodity which a consumer wishes to

purchase at a given level of price and during a specified period of
time.
In other words, demand for a commodity refers to the desire to buy
a commodity backed with sufficient purchasing power and the
willingness to spend.

2. Desire is just a wish for a commodity and a person can desire a

commodity even if he does not have the capacity to buy it from the
market whereas demand is desire backed by purchasing power that
is to say whatever an individual is willing to buy from the market in a
given period of time at a given price. A poor person can desire to own
a car but that will not become a demand because he does not have
the purchasing power to buy a car from the market.

3. Factors affecting personal (individual) demand:

(a) Price of the commodity: Inverse relationship exists between

price of the commodity and demand of that commodity.
It means with the rise in price of the commodity the demand of that
commodity falls and vice-versa.

b) Price of related goods: It may be of two types:

1. Substitute goods
2. Complementary goods

Let us discuss it in detail,

(i) Substitute Goods: Substitute goods are those goods which can

be used in place of another goods and give the same satisfaction to a
consumer.

There would always exist a direct relationship between the price of

substitute goods and demand for given commodity.
It means with an increase in price of substitute goods, the demand
for given commodity also rises and vice-versa. For example, Pepsi and
Coke.

(ii) Complementary Goods: Complementary goods are those which

are useless in the absence of another goods and which are demanded
jointly.
There would always exist an inverse relationship between price of
complementary goods and demand for given commodity.
It means, with a rise in price of complementary goods, the demand
for given commodity falls and vice-versa. For example pen and refill.

(c) Income of a Consumer: There are three types of goods:

 1. For Normal Commodity: For normal commodity, with a rise in
income, the demand of the commodity also rises and vice-versa.
Shortly, direct relationship exists between income of a
consumer and demand of normal commodity.
2. For Inferior Goods: For inferior goods, with a rise in income,
the demand of the commodity falls and vice-versa.
Shortly, inverse relationship exists between income of a
consumer and demand of inferior goods.
3. For Necessity Goods: For necessity goods, whether income
increases or decreases, quantity demanded remains constant.

(d) Taste and Preferences of the Consumer: Tastes, preferences

and habits of a consumer also influence its demand for a commodity.

For example, if Black and White TV set goes out of fashion, its
demand will fall. Similarly, a student may demand more of books and
pens than utensils of his preferences and taste.

(e) Miscellaneous: Some of the other factors affecting the demand

of a consumer are: Change in weather, change in number of family
members, expected change in future price, etc.
4. Market demand refers to the quantity of a commodity that all
the consumers are willing and able to buy, at a particular price
during a given period of time.

5. Factors affecting Market demand:

1. Price of the commodity

2. Price of related commodity
3. Income of a consumer
4. Taste and preference of a consumer
5. Miscellaneous
6. Population Size: Demand increases with the increase in
population and decreases with the decrease in population. This
is because with the increase (or decrease) in population size,
the number of buyers of the product tends to increase (or
decrease). Composition of population also affects demand. If
composition of population changes, namely, female population
increases, demand for goods meant for women will go up.
7. Distribution of Income: Market demand is also influenced by
change in distribution of income in the society. If income is not
equally distributed, there will be less demand. If income is
equally distributed, there will be more demand.

6. Demand function shows the relationship between quantity

demanded for a particular commodity and the factors that are
influencing it.

7. Individual demand function refers to the functional relationship

between individual demand and the factors affecting the individual
demand.
Market demand function refers to the functional relationship
between market demand and the factors affecting the market
demand.

. Demand Schedule is a table showing different quantities being

demanded of a given commodity at various levels of price. It shows
the inverse relationship between price of the commodity and its
quantity demanded. It is of two types:

1. Individual Demand Schedule

2. Market Demand Schedule

10. Individual demand schedule refers to a table that shows

various quantities of a commodity that a consumer is willing to
purchase at different prices during a given period of time.

11. Market demand schedule is a tabular statement showing

various quantities of a commodity that all the consumers are willing
to buy at various levels of price. It is the sum of all individual
demand schedules at each and every price.
Market demand schedule can be expressed as,

Movement Along The Demand Curve Or Change In Quantity

Demandend

1. It is based on Law of Demand which states that quantity

demanded of the commodity changes due to the changes in price of
the commodity.
2. The change in quantity demanded due to the change in price of
the commodity is known as movement along the demand curve. It may
be of two types; namely,
(a) Expansion in Demand (Increase in quantity demanded)
(b) Contraction in Demand (Decrease in quantity demanded)
3. Expansion in Demand (Increase in quantity demanded or
downward movement along the demand curve):
(a) It is based on Law of demand which states that quantity
demanded of the commodity rises due to the fall in price of the
commodity.
(b) The rise in quantity demanded due to the fall in price of the
commodity, is known as expansion in demand.
(c) It is shown in the figure given below
In the given diagram price is measured on vertical axis whereas
quantity demanded is measured on horizontal axis. A consumer is
demanding OQ quantity at OP price.
• But, due to fall in price of the commodity from OP to OP 1 the
quantity demanded rises from OQ to OQ1 which is known as
expansion in demand.
4. Contraction in Demand (Decrease in quantity demanded or
upward movement along the demand curve):
(a) It is based on Law of Demand which states that quantity
demanded for the commodity falls due to the rise in price of the
commodity.
(b) The fall in quantity demanded due to the rise in price of the
commodity is known as contraction in demand.
(c) This is shown in the figure given below:

 In the given diagram, price is measured on vertical axis whereas

quantity demanded is measured on horizontal axis. A consumer is
demanding OQ quantity at OP price. But, due to rise in price of the
commodity from OP to OP1, the quantity demanded falls from OQ to
OQ1 which is known as Contraction in Demand.

Shift In Demand Curve Or Change In Demand

1. It is based on factor other than price. If demand changes due to

the change in factors other than price, it is known as shift in
demand curve.
2. It may be of two types,
(a) Increase in Demand (b) Decrease in Demand
(a) Increase in Demand:
(j) An increase in demand means that consumers now demand more at
a given price of a commodity.

(iv) But, due to the change in factors other than price then demand
curve shifts rightward from DD to D1D1.
(v) With the rightward shift in demand curve from DD to D1D1 the
quantity demanded rises from OQ to OQ1 which is known as increase
in Demand.
(b) Decrease in Demand:
(i) A decrease in demand means that consumers now demand less at a
given price of a commodity.
(ii) Its conditions are:
• Price of substitute goods falls.
• Price of complementary goods rises.
• Income of a consumer falls in case of normal goods.
• Income of a consumer rises in case of inferior goods.
• When a preference becomes unfavourable.
(iii) In the given diagram price is measured on vertical axis whereas
quantity demanded is measured on horizontal axis. A consumer is
demanding OQ quantity at an OP price.

iv) But, due to the change in factor other than price, the demand
curve shifts leftward to DD to D1D1
(v) With the leftward shift in demand curve from DD to D1D1, the
quantity demanded falls from OQ to OQ1 which is known as decrease
in demand.

Causes Of Law Of Demand And Exceptions To Law Of Demand

1. There is a inverse relationship between price of the commodity

and quantity demanded
for that commodity which causes demand curve to slope downward
from left to right.
2. It is because of the following reasons:
(a) Income effect:
(i) Quantity demanded of a commodity changes due to change in
purchasing power (real income), caused by change in price of a
commodity is called Income Effect.
(ii) Any change in the price of a commodity affects the purchasing
power or real income of a consumers although his money income
remains the same.
(iii) When price of a commodity rises more has to be spent on
purchase of the same quantity of that commodity. Thus, rise in price
of commodity leads to fall in real income, which will thereby reduce
quantity demanded is known as Income effect.

It refers to substitution of one commodity in place of another

commodity when it becomes relatively cheaper.
(ii) A rise in price of the commodity let coke, also means that price
of its substitute, let pepsi, has fallen in relation to that of coke,
even though the price of pepsi remains unchanged. So, people will
buy more of pepsi and less of coke when price of coke rises.
(iii) In other words, consumers will substitute pepsi for coke. This is
called Substitution effect.
(c) Law of Diminishing Marginal Utility:
(i) This law states that when a consumer consumes more and more
units of a commodity, every additional unit of a commodity gives
lesser and lesser satisfaction and marginal utility decreases.
(ii The consumer consumes a commodity till marginal utility (benefit)
he gets equals to the price (cost) they pay, i.e., where benefit = cost.
(iii) For example, a thirsty man gets the maximum satisfaction
(utility) from the first glass of water. Lesser utility from the 2nd
glass of water, still lesser from the 3rd glass of water and so on.
Clearly, if a consumer wants to buy more units of the commodity, he
would like to do so at a lower price. Since, the utility derived from
additional unit is lower.

d) Additional consumer:
(i) When price of a commodity falls, two effects are quite possible:
* New consumers, that is, consumers that were not able to afford a
commodity previously, starts demanding it at a lower price.
• Old consumers of the commodity starts demanding more of the
same commodity by spending the same amount of money.
(ii) As the result of old and new buyers push up the demand for a
commodity when price falls.
3. Exceptions to the Law of Demand are:
(a) Inferior Good or Giffen Goods:
(i) Giffen goods are a special category of inferior goods in which
demand for a commodity falls with a fall in its price.
(ii) In case of certain inferior goods when their prices fall, their
demand may not rise because extra purchasing power (caused by fall
in prices) is diverted on purchase of superior goods.
(b) Goods expected to become scarce or costly in future:
(i) These goods are purchased by the household in increased
quantities even when their prices are rising upwards.
(ii) This is due to the fear of further rise in prices.

(c) Goods of Ostentation:

(i) Status symbol goods are purchased not because of their intrinsic
value but because of status or prestige value.
(ii) The same jewellery when sold at a lower price sells poorly but
offered at two times the price, sells quite well.
4. Necessities:
(a) The law of demand is not seen operating in case of necessities of
life such as food grain, salt, matchstick, milk for children, etc.
(b) A minimum quantity of these goods has to be bought whether the
prices are high or low. In such cases, law of demand fails to operate.
5. Ignorance: Being ignorant of prevailing prices, a consumer may
buy more of a
commodity when its price has gone up.
6. Emergency: In times of emergency like flood, famine or war, the
households do not
behave in a normal way and consequently law of demand may not
operate.
Words that Matter

1. Demand: Demand is a quantity of a commodity which a consumer

wishes to purchase at a given level of price and during a specified
period of time.
2. Substitute goods: Substitute goods are those goods which can
be used in place of another goods and give the same satisfaction to a
consumer.
3. Complementary Goods: Complementary goods are those which are
useless in the absence of other good and which are demanded
jointly.
4. Normal goods: For normal commodity, with a rise in income, the
demand of the commodity also rises and vice-versa.
5. Inferior Goods: For inferior goods, with a rise in income, the
demand of the commodity falls and vice-versa.
6. Market demand: Market demand refers to the quantity of a
commodity that all the consumers are willing and able to buy, at a
particular price during a given period of time.
7. Demand function: It shows the relationship between quantity
demanded for a particular commodity and the factors that are
influencing it.
8. Cross Price effect: When demand for one commodity is affected
by the change in the price of another commodity it is known as Cross
Price Effect.
9. Law of Demand: It states that price of the commodity and
quantity demanded are inversely related to each other when other
factors remain constant (ceteris Paribus).
10. Movement along the demand curve: The change in quantity
demanded due to the change in price of the commodity is known as
movement along the demand curve.
11. Expansion in demand: The rise in quantity demanded due to the
fall in price of the commodity, is known as expansion in demand.
12. Contraction in demand: The fall in quantity demanded due to
the rise in price of the commodity is known as contraction in demand.
13. Shift in demand: If demand changes due to the change in
factors other than price, it is known as shift in demand curve.
14. Increase in demand: An increase in demand means that
consumers now demand more at a given price of a commodity.
15. Decrease in demand: A decrease in demand means that
consumers now demand less at a given price of a commodity.
16. Income Effect: Quantity demanded of a commodity changes
due to change in purchasing power (real income), caused by change in
price of a commodity is called Income Effect.
17. Substitution Effect: It refers to substitution of one
commodity in place of another commodity when it becomes relatively
cheaper.
18. Law of Diminishing Marginal Utility: This law states that when
a consumer consumes more and more units of a commodity, every
additional unit of a commodity gives lesser and lesser satisfaction
and marginal utility decreases.
19. Giffen goods: Giffen goods are a special category of inferior
goods in which demand for a commodity falls with a fall in its price.
In case of certain inferior goods when their prices fall, their
demand may not rise because extra purchasing power (caused by fall
in prices) is diverted on purchase of superior goods.