UNIT - 2

Chapter 1: Demand and Its Determinants

1. Introduction to Demand
In economics, demand is one of the most essential foundations of market analysis. Every
economic decision — whether made by individuals, firms, or governments — is influenced
by the concept of demand.

In simple terms, demand represents the consumer side of the market — it tells us how much
quantity of a product people are willing and able to buy at different prices.
It helps producers understand what to produce, how much to produce, and at what price
to sell.

2. Meaning of Demand
In economics, demand refers to the quantity of a good or service that consumers are
willing and able to purchase at various prices during a given period of time, while all
other factors remain constant (ceteris paribus).

In everyday language, want and demand are not the same. A person may want something, but
unless they have the money and willingness to buy it, it does not constitute economic
demand.

Example

If a person wishes to buy a car but does not have enough money, that is only a desire, not
demand.
However, if the person has both the desire and purchasing power to buy the car at a certain
price, it becomes effective demand.

Key Components of Demand

1. Desire: The individual must want the product.

2. Willingness to Pay: The person must be ready to spend money for it.
3. Ability to Pay: The person must have sufficient purchasing power.
4. Time Period: Demand is always measured per unit of time — per day, per month, per
year, etc.
 5. Price Relationship: Demand depends on the price of the product — generally, as
price rises, demand falls.

Formal Definition (Prof. 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.”

Explanation of Benham’s Definition

Let’s break it down:

• “At a given price” – Demand is always measured with reference to a specific price
level.
• “Amount bought” – Only the quantity actually purchased counts as demand (not just
desired).
• “Per unit of time” – Demand is expressed over a period (say, 1 week, 1 month, etc.).

Example:
If at ₹50 per litre, consumers buy 500 litres of milk per day, that is the demand for milk per
day at ₹50.

3. Determinants of Demand (Factors Affecting Demand)

Demand does not depend on price alone.
There are many other forces that influence how much consumers are willing and able to buy.
These are known as determinants of demand.

1. Price of the Commodity

Price is the most direct determinant of demand.

Usually, there is an inverse relationship between price and quantity demanded — this
means:

• When price increases, demand decreases.

• When price decreases, demand increases.

Example:
If the price of mangoes rises from ₹80/kg to ₹120/kg, people may buy fewer mangoes.
If it falls to ₹50/kg, they will buy more.
2. Income of the Consumer

The purchasing power of consumers depends on their income.

• For normal goods, demand increases when income rises.

• For inferior goods, demand decreases as income rises.

Example:
When a person’s salary increases, they may shift from local clothing to branded apparel —
increasing demand for high-quality goods.

3. Prices of Related Goods

Demand for a product can also change depending on the prices of related goods, which are
of two types:

• Substitute Goods:
Goods that satisfy the same need.
If the price of one rises, demand for its substitute rises.
Example: If tea becomes expensive, demand for coffee increases.
• Complementary Goods:
Goods used together.
If the price of one rises, demand for the other falls.
Example: If petrol prices rise, demand for cars may decline.

4. Tastes and Preferences

Consumers’ tastes, fashion trends, and lifestyle choices influence demand.

Favorable changes increase demand; unfavorable changes reduce it.

Example:
With rising health awareness, demand for sugar-free products and fitness gadgets has
increased, while demand for sugary drinks has fallen.

5. Future Expectations

If consumers expect prices to rise, they buy more now (increasing current demand).
If they expect prices to fall, they postpone purchases (reducing current demand).

Example:
If people hear about an upcoming fuel price hike, petrol demand increases immediately.
6. Population and Demographic Factors

• A larger population means greater total demand.

• The age structure of the population also affects demand.
o Young population → demand for education, technology, and fashion.
o Older population → demand for healthcare and medicines.

7. Government Policies

Government taxes and subsidies have a direct impact on demand.

• Taxes ↑ → Prices ↑ → Demand ↓

• Subsidies ↑ → Prices ↓ → Demand ↑

Example:
The government subsidy on electric vehicles has boosted EV sales.

8. Climatic and Seasonal Factors

Some goods are in demand only during particular seasons.

Example:
Umbrellas and raincoats during monsoon; woollen clothes in winter.

9. Advertising and Marketing

Effective advertising creates awareness and shapes preferences, thus influencing demand.

Example:
Brand campaigns by Apple or Coca-Cola increase product desirability and sustain long-term
demand.

4. Law of Demand
The Law of Demand is one of the cornerstones of economics.
It expresses the inverse relationship between price and quantity demanded, assuming
other factors remain constant (ceteris paribus).
Definition (Alfred Marshall)

“Other things being equal, the higher the price of a commodity, the smaller is the quantity
demanded, and the lower the price, the greater is the quantity demanded.”

Explanation

When the price of a good falls, people buy more of it; when the price rises, they buy less.
This is because a price fall increases consumers’ purchasing power, and vice versa.

Assumptions of the Law of Demand

The law holds true only if:

1. Income remains unchanged.

2. Tastes and preferences are constant.
3. Prices of related goods do not change.
4. Population remains stable.
5. No expectation of future price change.
6. No government interference (taxes, subsidies).

Demand Schedule

Price (₹) Quantity Demanded (Units)

50 10
40 20
30 30
20 40
10 50

As price decreases, demand increases — showing the inverse relationship.

Demand Curve

• X-axis = Quantity demanded

• Y-axis = Price
• The curve slopes downward from left to right, reflecting the law of demand.

Price │\
│ \
 │ \
│ \
└────────── Quantity

5. Reasons for the Law of Demand (Rationale)

1. Substitution Effect:
Consumers substitute cheaper goods for costlier ones.
Example: Cheaper tea replaces expensive coffee.
2. Income Effect:
A price fall increases real income, so consumers buy more.
3. Law of Diminishing Marginal Utility:
Each additional unit gives less satisfaction, so buyers will only buy more if price falls.
4. Entry of New Consumers:
Lower prices attract new buyers who couldn’t afford the product before.
5. Multiple Uses:
Some goods serve many purposes — electricity or water usage expands as prices
drop.

6. Exceptions to the Law of Demand

Exception Explanation
Inferior goods where demand rises with price (e.g., low-income
Giffen Goods
staple foods).
Prestige Goods Luxury goods bought for status (e.g., diamonds, branded cars).
Future Price If consumers expect prices to rise, they buy more even at higher
Expectations prices.
Basic goods like salt and medicine show little change in demand
Necessities
with price.
Ignorance Effect Buyers assume higher prices mean higher quality.

7. Expansion and Contraction of Demand vs Increase and

Decrease in Demand
Expansion and Contraction of Demand (Movement Along the Same
Curve)

These occur only due to a change in the price of the same commodity.

• Expansion of Demand:
Demand increases due to a fall in price.
Movement down the same demand curve.
 • Contraction of Demand:
Demand decreases due to a rise in price.
Movement up the same demand curve.

Situation Cause Movement Result

Expansion Price falls Downward on curve More demanded
Contraction Price rises Upward on curve Less demanded

Increase and Decrease in Demand (Shift of the Curve)

These occur due to other factors (income, tastes, advertising, etc.) while price remains
constant.

• Increase in Demand:
More demanded at same price → curve shifts rightward.
• Decrease in Demand:
Less demanded at same price → curve shifts leftward.

Situation Price Quantity Curve Movement Cause

Increase in Demand Same More Rightward shift Income ↑, tastes favorable
Decrease in Demand Same Less Leftward shift Income ↓, tastes unfavorable

Graphical Representation

(A) Expansion & Contraction (Movement)

Price │\
│ \
│ \
│ \
└────────── Quantity

(B) Increase & Decrease (Shift)

Price │\
│ \
│ \D₁ → Original Curve
│ \
│ \D₂ → Shift Right (Increase)
│ /D₃ → Shift Left (Decrease)
└────────── Quantity

Key Differences

Basis Expansion/Contraction Increase/Decrease

Price Changes Constant
 Basis Expansion/Contraction Increase/Decrease
Cause Price factor Non-price factors
Curve Movement on same curve Shift of entire curve
Example Price fall → more demand Income rise → more demand

8. Importance of the Study of Demand

Understanding demand is vital for:

1. Producers: Helps decide production levels and pricing.

2. Government: Aids in taxation and subsidy policy.
3. Consumers: Guides rational decision-making.
4. Economists: Basis for price determination and market equilibrium.
5. Business Planning: Helps forecast sales and plan marketing strategies.

9. Conclusion
The concept of demand lies at the heart of economic analysis.
It reveals how consumers behave in response to changes in prices, income, and other
influences.
By studying demand, businesses can align production with consumer needs, economists can
predict market outcomes, and governments can design policies for welfare and growth.

In short, understanding demand is understanding the pulse of the economy.

MCQs

1. In economics, demand means:

A) The desire to buy a commodity

B) The ability to buy a commodity
C) The willingness and ability to buy a commodity at a given price and time
D) The total quantity produced in the market

Answer: C) The willingness and ability to buy a commodity at a given price and time

2. According to the Law of Demand, when price increases:

A) Demand increases
B) Demand decreases
C) Demand remains constant
D) Supply decreases
Answer: B) Demand decreases

3. The Law of Demand shows the relationship between:

A) Price and Supply

B) Income and Price
C) Price and Quantity Demanded
D) Income and Quantity Demanded

Answer: C) Price and Quantity Demanded

4. Which of the following is not a determinant of demand?

A) Price of the commodity

B) Income of the consumer
C) Government policy
D) Cost of production

Answer: D) Cost of production

5. When income of the consumer rises, the demand for normal goods:

A) Decreases
B) Increases
C) Remains unchanged
D) Becomes zero

Answer: B) Increases

6. The Law of Demand assumes that:

A) Income of consumers changes

B) Prices of related goods change
C) All other factors remain constant
D) Government imposes new taxes

Answer: C) All other factors remain constant

7. The demand curve normally slopes:

A) Upward from left to right
B) Downward from left to right
C) Vertically upward
D) Horizontally straight

Answer: B) Downward from left to right

8. An increase in demand means:

A) A rise in quantity demanded due to fall in price

B) A rise in demand at the same price due to other factors
C) A fall in demand due to higher price
D) Movement along the same demand curve

Answer: B) A rise in demand at the same price due to other factors

9. The demand for tea will increase if:

A) Price of tea increases

B) Price of coffee increases
C) Income of consumers decreases
D) Consumers start preferring coffee

Answer: B) Price of coffee increases

10. Goods whose demand increases with an increase in price are called:

A) Normal Goods
B) Inferior Goods
C) Giffen Goods
D) Complementary Goods

Answer: C) Giffen Goods

Practice Questions:

• Define demand. Explain the key elements and conditions required for effective demand.

• Discuss in detail the determinants of demand and explain each with suitable examples.

• State and explain the Law of Demand. Illustrate your answer with a demand schedule and
demand curve.
• Explain the reasons behind the downward slope of the demand curve.

• Discuss the exceptions to the Law of Demand with examples.

• Differentiate between Expansion and Contraction of Demand and Increase and

Decrease in Demand, with the help of diagrams.

• “Price is not the only factor determining demand.” Explain this statement with examples.

• How do changes in population and tastes affect market demand?

• Explain how the concept of demand helps producers and government in decision-making.

• Discuss the importance of studying demand in modern economics.

Application & Case-Based Questions:

1. The price of petrol increases sharply in India. What is likely to happen to the demand
for:
o Cars
o Public transport services
Explain with reasons.
2. Due to advertisements, the sale of a new smartphone brand increased even though its
price remained constant.
o Identify the type of change in demand.
o Explain why this happened.
3. If the income of consumers falls, what will happen to the demand for:
o Branded clothes
o Generic or local clothes
Give economic reasoning.
4. A rise in the price of butter causes a fall in the demand for bread.
o Identify the relationship between the two goods.
o Explain the concept involved.
5. Suppose the price of cold drinks rises from ₹20 to ₹30 per bottle, and the demand falls
from 100 to 60 bottles.
o What economic principle does this illustrate?
o Sketch a simple demand curve to represent this situation.