Chapter (3)

Demand and Law of Demand

Learning Objectives
Demand and Law of Demand
• Meaning of Demand
• Market Demand
• Determinants of Demand
• Demand Schedule and Demand Curve
• Law of Demand
• Exceptions to the Law of Demand

3.1 Meaning of Demand

In Economics, Demand means desire to have a commodity backed by enough
money to pay for the good demanded. Thus, in economics we are concerned only with
demand, which is effectively backed up by an adequate supply of purchasing power,
i.e with effective demand. Thus, if a person desires to buy a car, he should have
enough money to buy that; then only demand becomes effective. It should also be
mentioned here that demand is not complete unless the consumer has willingness to
buy a good or service. A person has the desire and enough money but at a particular
point of time, he may not have willingness to buy the good due to sudden change in
his taste or preference. For example, when a person goes to a showroom to buy his
dream car but declines to buy, just because he does not find his preferred color.
Moreover, demand for a good is always expressed in relation to a particular price and
a particular time. Therefore, we may define demand for a good as the amount of it,
which will be purchased per unit of time at a given price.
According to F. Benham, “The demand for anything at a given price is the
amount of it which will be bought per unit of time at that price.” Another good
definition of demand, given by Bober is—“the various quantities of a given
commodity or service which consumers would buy in one market in a given period of
time at various prices, or at various incomes, or at various prices of related goods.,”

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constitute demand. Demand, in economics, always refers to a schedule. The quantity
which is purchased at some particular price is called the quantity demanded.

3.2 Market Demand

Market demand is the total sum of the demands of all individual consumers,
who purchase the commodity in the market. A market demand schedule is shown as
under:

Market Demand Schedule

Price A’s demand B’s demand C’s demand Market demand

(per unit) (A + B + C)
1\ 8 9 10 27
2 7 6 9 22
4 6 4 8 18
6 5 3 7 15
8 4 2 6 12
10 3 1 5 9

Let us assume that there are three consumers—A, B and C. Their individual
demand schedule is shown in 2nd, 3rd and 4th columns respectively. Market demand is
the sum of A’s, B’s and C’s demand of, say, apples. We find that the market demand
schedule also behaves in the same way as an individual’s demand for a commodity.
That is, at lower price, demand is more and vice versa. A market demand curve is the
graphical representation of market demand and is derived by the lateral/horizontal
summation of all individuals’ demand curve in the market as shown in the Fig. 3.1. As
the individual’s demand curve slope downward from left to right, the market demand
curve also slopes downward to the right.

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 Fig. 3.1

3.3 Determinants of Demand

Demand for a product depends upon a number of factors. The most important
of these are- the price of the product, income of the consumer, tastes and fashion and
the prices of related goods. We can put it in the functional form as:
Dx = f (Px, I, Py, T, F…)
Where Dx = demand of good x; Px, = price of good x; I = income of the
consumer; Py = prices of related goods; T = tastes and F = fashion. Thus, demand for
a commodity depends upon the following factors:
1. Price of the commodity: Price of a commodity is an important factor that
determines demand for a commodity. When price of a commodity rises, consumers
buy less and when prices fall, demand increase. Here, we assume other things
(factors) to be remaining constant, i.e ceteris paribus.
2. Income of the consumer: The demand for goods depends upon the
incomes of the people. The greater the income, the greater will be the demand for a
good. More income means greater purchasing power. People can afford to buy more
when their incomes rise. On the other hand, if income falls, demand for a commodity
also decreases.
3. Prices of related goods: Related goods are of two types- substitute and
completemetns. Subsituttue goods can be interchangeably used. For example, tea and
coffee are substitute goods. If tea is dearer, one can use coffee and vice versa.
Completemaentary goods are demanded together as bread and butter or car and petrol.
When price of a substitute for a good falls, the demand for that good declines and
when price of substitute rises, the demand for that good increase. In case of

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complementary goods, the change in the price of any of the two goods also affects the
demand of the other. For instance, if demand for two wheelers fall, the demand for
petrol also goes down.
4. Taste and preferences of the consumer: These are important factors,
which affects the demand for a product. If tastes and preferncecs are favorable, the
demand for a good will be is large. On the other hand, when any good goes out of
fashion or people’s tastes and preferneces no longer remain favorable, the demand
decreases.

3.4 Demand Schedule and Demand Curve

A demand schedule is a tabular statement that shows the different quantities of
a commodity that would be demanded at different prices. It expresses what quantities
of a good will be purchased at different possible prices. A demand schedule is shown
as below:

Price of apples per unit Quantity demanded

( in Kyats) ( units)
8 5
6 7
4 8
2 10

. It is clear from the table, that when price of an apple is ks. 8 the consumer
demands 5 apples and when price falls to ks.2 each demand of apples goes up to 10
units. Thus, price and quantity demanded shows inverse relstionship. On the basis of
the above demand schedule, we can derive an individual’s demand curve. A Demand
curve is the graphical representation of the demand schedule. This is shown is in Fig
3.2 below. Prices of apples are measured along Y-axis nd quantities demand along X-
axis. A, B, C and D are the different combinations of price and quantity demanded.
Joining these points, we get the demand curve dd sloping downwards to the right,
indicating inverse relationship between price and quantity demanded.

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 Fig. 3.2

3.5 Law of Demand

The law of demand expresses the functional relationship between price and
quantity demanded of a good. It is one of the most impotant laws of economics
theory. According to this law, other things remaining constant (ceteris paribus), if
the price of a commodity falls the quantity demanded of it will rise and if price of
the good rises quantity demanded will fall.
Thus, there is inverse relationship between price and quantity demanded.
Thus, we buy more units of apple when its price comes down from Ks.4 per unit to
Ks.2 per unit. Law of demand only applies when certain conditions are met, which
have been mentioned as below.
Assumption of the Law
The law of demand assumes the following:
1. Incomes of consumers do not change. If consumer’s income increases or
decreases, the law will not hold good.
2. People’s tastes and preferences remain unchanged; and
3. Prices of substitutes and complements do not change.
The law of demand can be explained with the help of a demand schedule and
through a demand curve. A demand schedule is shown as under.

Price of apples per unit Quantity demanded

(in Kyat) (units)
8 5
6 7
4 8
2 10

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 It is seen in the table that when the price of the commodity is Ks. 8/- per unit,
consumers buy 5 units only and at Ks. 2/- per unit, they buy 10 units of the
commodity. Thus, as price down, consumers buy more a commodity and vice versa.
The demand curve drawn from this schedule is shown in Fig 3.3. Along x-axis,
quantity is measured and along y-axis price of the commodity is measured. By joining
various points or combinations of price and quantity demanded, we get a curve 'dd'
falling downwards from left to the right. This is known as the demand curve. The
demand curve clearly indicates that price is inversely related to quantity demanded.
As price falls, demand rises and it shrinks when price rises. It is to be noted here that
we have assumed other factors to be constant. Thus, any changes in these factors such
as tastes, fashion, income or prices of related goods etc, will falsify the law of
demand. In that case, the demand curve will not behave in the manner stated above.
For instance, if income of consumer rises at the time when price of goods have rises,
demand will not go down. Rather, it may increase.

Fig. 3.3

Why does the Law of Demand Operate?

Demand curve by and large slopes downward to the right. This is because of
operation of the lae of diminishing marginal utility. When the price of a commodity
decreases, new demand is created. Also that existing buyers buy more. As the
particular commodity has become cheaper, some people will purchase it in preference
to other commodities. If that law of diminishing marginal utility is true, the demand
curve must slope downwards. This is because only a downward sloping demans curve
represents increase in demand due to fall in the prices of a commodity. Further, when

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price of commodity falls, real income of the people increase. In other words, they are
able to buy more goods and services now with the same amount of money they have.
This is called income effect. Likewise, when the commodity is cheaper, it tends to be
substituted for other commoditites, which are dearer. This is called substitution
effect. Both income effect and substitution effect together increase the capacity of the
consumers to buy more of a commodity, when its price comes to low level. Another
reason for downward sloping demand curve is that when a commodity becomes
cheaper, it can be put to more uses or not so urgent uses. This also makes demand to
be greater when price falls.

3.6 Exceptions to the Law of Demand

There are a few exceptions to the law of demand. It means those conditions
when the law does not hold good. These are:
1. There certain goods called as Giffen goods. In case of such goods, the law of
demand does not hold good. Sir Francis Giffen observed that when Irish
potato prices increased in bad years, people curtailed spending on other
commodities and increased their spending on potatoes. Because with high
potato prices and no increase in their money incomes, they were now too poor
to afford meat and other foodstuffs. So they had to sustain themselves by
eating more potatoes. That is people demanded more potatoes when their
prices increased and vice versa.
2. In case of conspicuous consumption, as observed by Thorstein Veblen, the
demand curve does not slope downwards. Sometimes people buy some
products to show their status in the society. The possession of such
commodities, they feel, may confer a higher level of social status on their
holder. These goods are diamonds and other precious stones etc. Rich class
buys such goods at very high price to show that they belong to a prestigious
class.
3. The law of demand also not applies to a commodity whose quality is judged
by its high price. At high prices, some people buy more of such commodity
than at lower price thinking that high priced are better than those priced lower.
This is out of sheer ignorance that people act in such a way.
4. Speculation (a prediction of a future event and act accordingly) is another
exception to the law of demand. If the price of commodity is increasing and

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 people expect a further rise in the price, they will tend to buy more of the
commodity at higher price than they did at the lower price. It is observed that
when there is a hike in edible oil prices recently, some people purchased more
of it in the expectation that future prices will be even more.

3.7 Movement Along and Shift in Demand Curve

Movement along the demand curve takes place when there is a change in price
of a good, other things remaining same. This is also termed as a change in Quantity
demanded. That is changes in demand due to a change in the price of a commodity,
other things being equal. In other words, when either due to increase or decrease in
the price of a good, the demand increases, then it is seen that the demand curve
remain the same; only the equilibrium position on the demand curve is changed. That
is changes in demand due to a change in the price of a commodity, other things being
equal. This is called extension and contraction in demand. Thus when quantity
demanded of a good rises due to the decrease in price alone, it is said that extension of
demand have taken place. And quantity demanded falls due to rise in price; it is called
contraction in demand. The extension and contraction in demand is illustrated in the
Fig.3.4.

Fig. 3.4

Assuming other factors such as tastes, income and price of related goods
constant, demand curve DD is drawn. At OQ price, OM of the commodity is
demanded so that the equilibrium point is at B. If price falls to OP, the quantity
demanded increases to OS but the consumer remains on the same curve DD; only

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equilibrium position moves from B to C. In case of rise in price to OR, demand
shrinks to ON and the equilibrium position also moves to the left from B to A. This is
called contraction in demand. The extension and contraction in demand take place
only due to changes in the price of a commodity, other factors remaining same.
Now let us explain shifts in the demand curve. A demand curve either shifts to
the right or left, due to changes taking place in other factors and not price of the
commodity.
The change in the position of the demand curve due to these changes can be
termed as the increase and decrease in demand. When due to changes in the factors
such as tastes, fashion, price of related commodities, income etc, the demand curve
shifts upwards or to the right, increase in demand is said to have taken place.
Similarly, when less is demanded at the same price due to changes in other factors, it
is called decrease in demand. Here, the demand curve gets shifted leftward.
Thus increase in demand is due to the following factors:
1. Taste and fashion/preferences are more favorable for the good.
2. Income of the consumer increases.
3. Price of substitutes has risen.
4. Price of complementary goods has declined.
5. Propensity to consume of the people has increased.
6. Numbers of consumers have increased.
Likewise, decrease in demand may take place due to the following reasons:
1. Taste and fashion/preferences are not favorable for the good.
2. Income of the consumers has fallen.
3. Price of substitutes has fallen.
4. Price of complementary goods has risen.
5. Propensity to save of the people has increased.
Increase and decrease in demand (shifts in the demand curve) is shown in the Fig. 3.5.

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 Fig. 3.5

DD is the demand curve when price is OP. At this price, ON quantity is

bought. When consumer’s income falls, price remaining same, demand curve shifts to
the left as D" D". The consumer buys less of the same commodity, i.e, ON" now.
When income rises, price remaining same, consumer is able to buy more, i.e., ON'. In
such case, the demand curve shifts to the right as D'D'.

Summary
1. Demand means desire to have a commodity backed by enough money to pay
for the good demanded. In economics, we are concerned only with demand, which is
effectively backed up by an adequate supply of purchasing power, i.e with effective
demand.
2. In economics, Demand, always refers to a schedule. The quantity which is
purchased at some particular price is called the quantity demanded.
3. Market demand is the total sum of the demands of all individual consumers,
who purchase the commodity in the market.
4. The functional form is: Dx = f (Px, I, Py, T, F…) Where: Dx= Demand of
good x; Px, = Price of good x; I = Income of the consumer; Py = Prices of related
goods; T = Tastes and F = Fashion.
5. The law of demand expresses the functional relationship between price and
quantity demanded. If the price of a commodity falls the quantity demanded of it will

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rise and if price of teh good rises quantity demanded will fall other things remaining
constant (ceteris paribus).
6. A demand schedule is a tabular statement that shows the different quantities of
a commodity that would be demanded at different prices.
7. Price and quantity demanded are inversely related to quantity demanded. As
price falls, demand rises and it shrinks when price rises.
8. There are a few exceptions to the law of demand. It means those conditions
when the law does not hold good.
9. Movement along the demand curve takes place when there is a change in price
of a good, other things remaining same. This is also termed as a change in Quantity
demanded.
10. A demand curve either shifts to the right or left, due to changes taking place in
other factors and not price of the commodity.

Key Terms
Demand Market demand
Demand schedule Demand curve
Law of demand Exceptions to the law of demand
Movement along and shift in demand cureve

Questions for Discussion and Review

1. What is meant by demand?
2. Explain the market demand. Use diagrams for illustration.
3. Explain fully how the demand is determined.
4. Define demand schedule and demand curve.
5. State the law of demand.
6. What are the exceptions to the law of demand?
7. Illustrate the movement along and shift in demand curve the aid of diagram.

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