DEMAND ANALYSIS

CONTENT

➢ Meaning of Demand
➢ Demand Determinants
➢ Demand Function
➢ Kinds of Demand
➢ Law of Demand
➢ Movement along Demand Curve
 MEANING OF DEMAND
 Demand is effective desire which can be fulfilled. Demand must satisfy the
following pre-requisites:
❖ Desire for specific commodity
❖ Ability to pay or sufficient resources to purchase the desired commodity
❖ Willingness to spend on the commodity
❖ Availability of the commodity at particular price, time, and place.
❖ All these mentioned requisites must be satisfied simultaneously to satisfy the
meaning of demand.
DEMAND DETERMINANTS
Demand determinants refer to the factors that affect demand for commodity, such as:
❖ Price of the Commodity
❖ Income of the Consumer
❖ Price of related goods
❖ Taste and preferences of consumer

❖ Growth of population
❖ Government policy
❖ Climatic Conditions
❖ Income distribution
❖ Expected change in price
❖ Future expectation about income
 DEMAND DETERMINANTS
Some important determinants of demand are discussed as follows:
❖ Price of the Commodity: Normally, quantity demanded of a commodity varies inversely with its
price, ceteris paribus (i.e. other things remaining the same). As price of a commodity rises, quantity
demanded of it falls and as price of the commodity falls, quantity demanded of it rises.
❖ Income of the Consumer: Change in income of the consumer also brings about changes in demand
for a commodity. Demand for a normal good varies directly with income of the consumer, other things
remaining the same. Normal goods are those goods whose demand increases with increase in income
of the consumer and vice versa. Demand for inferior goods decreases with increases in income of the
consumer.
❖ Price of Related Goods: Goods are said to be related when they are either substitute goods or
complementary goods. Substitute goods are those goods which compete with each other to satisfy a
particular want. E.g. railways and airways, branded mobiles and Chinese mobile. etc. Complementary
goods are those goods which are jointly demanded to satisfy a particle want. Examples of
complementary goods are car and petrol, etc. In case of substitute goods: Quantity demanded of a
commodity varies directly with the price of its substitute. In case of complementary goods: Quantity
demanded of a commodity varies inversely with the price of its complementary goods.
❖ Taste And Preferences: Demand for goods is affected by taste and preferences of the consumer which
are subjective in nature, and are shaped by individual like and dislikes, faith and belief, fashions,
habits, trends etc.
DEMAND FUNCTION
Demand functions expresses the functional relationship between demand for a commodity (i.e. a consumer
good) and its determinants.
It can be written as:
Dx= f (Px, Y, PR, T, P, G.,.............
Where,
D, symbolizes demand for commodity
P, symbolizes price of commodity
Y symbolizes income of the consumer
PR symbolizes price of related good
T symbolizes taste and presences
P symbolizes expected change in price of commodity
G symbolizes growth of population
KINDS OF DEMAND
There are three kinds of demand relations which are usually studied under demand
analysis such as:
Price Demand, Income Demand and Cross Demand.
❖ Price Demand: Price demand studies how demand for a commodity (D) changes
with respect to change in price(P), ceteris paribus (other things reaming the
same). D= f (P)
❖ Income Demand: Income Demand examines how demand for commodity (D)
changes as a result of change in income of the consumer(Y), other things
remaining the same. D= f (Y)
❖ Cross Demand: Cross demand studies how quantity demand of a commodity (D)
changes as a result of change in price of its related goods (PR), ceteris paribus.
Cross demand function can be denoted as follows: D=f(PR)
LAW OF DEMAND

❖ The law of demand states that there is inverse relationship between

price and quantity demanded of a commodity.

❖ In other words, the law of demand states that other things

remaining the same, lesser quantity of a commodity will be
demanded at higher prices, and more quantity of it will be
demanded at lower prices
DEMAND CURVE
❖ Demand curve is the graphical representation of the relationship between demand for a
commodity and its price.
❖ Normally, a demand curve sloped downwards from left to right indicating the operations
of law of demand.
EXCEPTION TO DEMAND CURVES/ LAW OF DEMAND

❖ In some rare situations, the law of demand does not hold

good.
❖ In such situations, the demand curve slopes upward instead
of sloping downward suggesting a rise in demand with
rising price.
❖ Cases in which this tendency is observed are referred to as
exceptions to the general law of demand.

Here demand curve (DD) is known as exceptional demand curve

EXCEPTION TO DEMAND CURVES/ LAW OF DEMAND
❖ Giffen Goods: Giffen goods are inferior goods that see an increase in demand when their prices rise. This
phenomenon occurs because a price increase leaves consumers with less real income, prompting them to buy
more of the cheaper (inferior) good while reducing consumption of more expensive substitutes. During a
famine in Ireland in the 19th century, potatoes were a staple food. As potato prices rose, poor consumers,
with little to spend, bought even more potatoes because they couldn’t afford meat or other costlier foods.
Instead of buying less, they ended up purchasing more potatoes, making it a Giffen good.
❖ Veblen Goods: These are luxury goods for which demand increases as the price rises because they serve as
status symbols. Higher prices make the goods more desirable to the wealthy, as they are associated with
prestige and exclusivity. Designer handbags, luxury cars (like Rolls-Royce or Lamborghini), and high-end
jewelry often see an increase in demand as their prices rise, because owning these items signals wealth and
social status.
❖ Necessities: For essential goods (like medicines or basic food items), the quantity demanded may not
decrease significantly even if the price rises, because people cannot easily reduce their consumption. If the
price of insulin for diabetics rises, the demand might remain unchanged because it is a life-saving
medication that patients need regardless of the cost.
❖ Speculative Goods: When prices of certain goods increase, people might expect further increases in the
future and buy more in anticipation of making a profit. This speculative demand contradicts the typical law
of demand.. In real estate markets, when housing prices increase rapidly, more people might rush to buy
houses, thinking the prices will continue to rise, thereby increasing demand instead of decreasing it.
 EXCEPTION TO DEMAND CURVES/ LAW OF DEMAND

❖ Quality-Price Perception: For some goods, a higher price may be perceived as an indicator of
better quality, leading to higher demand even when the price rises. Some consumers may buy
more expensive wine or perfume because they believe the higher price indicates superior quality,
thereby increasing demand as the price goes up.
❖ Ignorance about Prices: In some cases, consumers may not be fully aware of price changes, and
thus their demand remains unchanged even if the price increases. In remote areas, consumers
might continue buying the same quantity of a product even if the price increases due to a lack of
information or infrequent visits to the market.
❖ Conspicuous Consumption: This is related to Veblen goods but focuses on the social effect.
Consumers may purchase more of a good at a higher price to display wealth and status, valuing
the display over the intrinsic utility of the product. Expensive watches or art pieces may see
higher demand as their prices rise, as owning such items conveys social prestige.
❖ Future Price Expectations: If consumers expect that prices will rise in the future, they may
increase their current demand even at a higher price. During inflationary periods, people might
buy more of durable goods like cars or electronics, fearing that prices will go up further.
MOVEMENT ALONG DEMAND CURVE

 There are two concepts related to movement along demand curve:

❖ Extension of Demand
❖ Contraction of Demand
 EXTENSION OF DEMAND
 The expansion of demand refers to an increase in the quantity demanded of a good or
service due to a decrease in its price, while all other factors remain constant (ceteris
paribus). It is represented by a downward movement along the demand curve.
 Key points to understand:
❖ Movement along the demand curve: Expansion of demand happens when the price of a
good decreases, leading to a higher quantity demanded. This is not a shift of the demand
curve but a movement along the existing curve.
❖ Law of demand: According to the law of demand, as the price of a good falls, the
quantity demanded increases, all else being equal. Expansion of demand is a direct
application of this law.
 Example:
❖ If the price of a cup of coffee drops from $5 to $3, more people might decide to buy
coffee. This rise in the quantity demanded, due to the price drop, is referred to as the
expansion of demand.
EXTENSION OF DEMAND
 CONTRACTION OF DEMAND
 The contraction of demand refers to a situation where the quantity demanded of a good
or service decreases due to a rise in its price, while all other factors remain constant
(ceteris paribus). This is a movement upward along the demand curve, not a shift of the
entire curve itself.
 Key points to understand:
❖ Movement along the demand curve: Contraction of demand occurs when the price of a
good increases, leading to a lower quantity demanded. This is simply a response to price
changes, with no changes in other factors like income, preferences, or the prices of
related goods.
❖ Law of demand: The law of demand states that, other things being equal, as the price of
a good rises, the quantity demanded falls. Contraction of demand is a direct illustration
of this principle.
 Example:
❖ If the price of a cup of coffee rises from $3 to $5, fewer people may buy coffee. This
decline in quantity demanded due to the price increase is called a contraction of demand.
CONTRACTION OF DEMAND
 SHIFT IN THE DEMAND CURVE

 A shift in the demand curve occurs when the quantity demanded of

a good or service changes due to factors other than the price of the
good itself. This leads to the entire demand curve moving either to the
right (indicating an increase in demand) or to the left (indicating a
decrease in demand).
 Key Differences from Movement Along the Demand Curve:
• A movement along the curve (like contraction or expansion of
demand) happens due to changes in the good's price.
• A shift of the curve happens when factors other than price change,
such as income, tastes, or the prices of related goods.
 FACTORS CAUSING SHIFT IN THE DEMAND CURVE
❖ Change in consumer income:
Normal goods: When consumer income increases, demand for normal goods usually increases,
shifting the demand curve to the right.
Inferior goods: When income rises, demand for inferior goods decreases, shifting the demand curve
to the left.
❖ Changes in consumer preferences:
If a good becomes more popular or fashionable, demand will increase, shifting the curve to the right.
If the good falls out of favor, the curve shifts to the left.
❖ Changes in the prices of related goods:
Substitutes: If the price of a substitute (e.g., tea for coffee) rises, the demand for the good (coffee)
will increase, shifting its demand curve to the right.
Complements: If the price of a complementary good (e.g., sugar for coffee) rises, the demand for the
main good (coffee) will decrease, shifting its demand curve to the left.
FACTORS CAUSING SHIFT IN THE DEMAND
CURVE
❖ Expectations about future prices: If consumers expect prices to
rise in the future, they may increase their current demand, shifting
the curve to the right.
❖ Change in population: A growing population can increase
demand for many goods, shifting the demand curve to the right,
while a declining population may shift the curve to the left.
SHIFT IN THE DEMAND CURVE
SHIFT IN THE DEMAND CURVE