MICRO ECONOMICS Chapter 3 DEMAND (Notes)

Demand- is the quantity of a commodity that a consumer is willing and able to buy, at given price during a
given period of time.
Market demand – refers to the quantity of a commodity that all consumers are willing and able to buy, at given
price during a given period of time.
DETERMINANTS OR FACTORS AFFECTING DEMAND
Demand for a good increases or decreases due to a number of factors:
• Price of a given commodity.
• It is the most important factor affecting the demand of a commodity.
• There exists an inverse relation between price and quantity demanded.
• It means, when price increase, quantity demanded falls due to decrease in the satisfaction level of the
consumers.
• For example, if the price of tea increases, its quantity demanded will fall as the satisfaction derived from
tea decreases.
• Price of related goods
There are two types of related goods;
Substitute goods.- are those goods which can be used in place of one another for satisfaction of a
particular [Link] ,tea and coffee.
• An increase in the price of a substitute leads to an increase in the demand for the given commodity and
vice versa.
• For example, when price of tea increases, then the demand for coffee increases as coffee becomes
relatively cheaper compared to tea.
• So, price of substitute goods and demand has an inverse relation.
Complementary goods.- are those goods which are used together to satisfy a particular [Link],car and
petrol.
• An increase price of complementary good leads to a decrease in demand of the given commodity and
vice versa.
• For example, if price of car increases, then the demand for car decrease which leads to a decrease in the
demand of petrol.
• So, price of complementary good and demand have an inverse relation.
• When price of substitute good increases, the demand for the given good increases. This leads to a
rightward shift in the demand curve.
• In the diagram, the demand curve DD shifts rightwards to [Link] quantity demanded increases from
OQ to OQ1, but the price remains the same at OP.
• When price of complementary good increases, the demand for given good decreases. This leads to a
leftward shift in the demand curve.
• In the diagram, the demand curve DD shifts leftwards to [Link] quantity demanded falls from OQ 2
to OQ1, but the price remains the same.
•
DECREASE IN DEMAND & INCREASE IN DEMAND
[Link] of the consumer.
• The effect of change in income on demand depends on the nature of the commodity.
• If the given good is normal good, then an increase in income leads to a rise in its demand, while a decrease
in income reduces the demand.
• They have a direct relation.
• If the given commodity is an inferior good, then an increase in income reduces the demand ,while a decrease
in income will lead to an increase in demand.
• They have an inverse relation.
• For e.g., when income of a consumer increases, the consumer reduces consumption of toned milk and
increases consumption of full cream milk. Here, toned milk is inferior good and full cream milk is normal
good.
• When income increases, demand fora normal good increases. This leads to a rightward shift of demand
curve. Here the quantity demanded increases, but price remains the same.
• When income increases, the demand for Inferior good decreases. This leads to a leftward shift of demand
curve. Here, the quantity demanded decreases, price remains the same.
[Link] and preferences.
• Taste and preferences of consumers directly influence the demand of a commodity.
• They include changes in fashion, customs, habits etc.
• If the commodity is in fashion or preferred by the consumers, then demand for the commodity rises.
• On the other hand, demand for a commodity falls, if the consumers have no taste for the commodity.
• They have a direct relation.
• When the preference for a good is high, then the demand for the good increases. There is a rightward shift in
the demand curve. Here, quantity demanded increases, but price remains the same.
FACTORS AFFECTING MARKET DEMAND.
Market demand is influenced by all the factors affecting individual demand for
commodity. It is also affected by other factors:
1. Size and composition of the population.
• Market demand is affected by the size of population in a country.
• Increase in population raises the market demand, while decrease in population reduces the market demand.
• Composition of population like ratio of males, females, children etc. also affects the market demand for
goods.
• For e.g., if a market has a larger proportion of females, then demand for goods for their use like sarees,
lipstick increases.
2. Distribution of income.
• If income in the country is equitably distributed, then market demand for commodities will be more.
• If income distribution is uneven, i.e. people are either very rich or very poor, then market demand for goods
will remain at a lower level.
DEMAND FUNCTION
• it shows the functional relationship between quantity demanded for a particular commodity and the factors
affecting it.
DEMAND SCHEDULE
• it is a tabular statement showing various quantities of a commodity being demanded at various levels of
price, during a period of time.
• It shows the inverse relation between the price of the commodity and its quantity demanded.

MARKET DEMAND SCHEDULE

• It refers to a tabular statement showing various quantities of a commodity that all the consumers are willing
to buy at various levels of price, during a given period of time.
• It is the sum of all individual demand schedules at each and every price.
 INDIVIDUAL DEMAND SCHEDULE MARKET DEMAND SCHEDULE
Table 1 Table 2
Price Qtydd
5 10
4 15
3 23
2 30
1 35
Price DD of A DD of B M DD
5 10 20 30
4 15 25 40
3 23 32 55
2 30 41 71
1 35 45 80

In the Table1, as price decreases, In the table 2,market demand is

the quantity demanded increases. obtained by adding demand of
household A and B.
DEMAND CURVE
• It is a graphical representation of demand schedule.
• It is the locus of all the points showing various quantities of a commodity that a consumer is willing to buy
at various levels of price, during a given period of time, assuming no change in other factors.
• It shows the inverse relation between quantity demanded of a commodity with its price, keeping other
factors constant.

• In the diagram, price is taken on Y axis and quantity demanded on X axis.

• At each possible price, there is a quantity which consumer is willing to buy.
• The demand curve slopes downwards due to the inverse relation between
price and quantity demanded.
MARKET DEMAND CURVE
• It refers to graphical representation of market demand schedule.
• It is obtained by horizontal summation of individual demand curves
• In the diagram, DA and DB are individual demand curves.
*market demand curve DM obtained by horizontal summation of the individual demand curves D A and DB.
SLOPE OF THE DEMAND CURVE.
• It is defined as the change in the variable on Y axis divided by the change in the variable on the X axis.
• The slope of the demand curve equals change in price divided by change in quantity.
• Due to the inverse relation between price and demand, slope of demand curve is negative.
• Slope of demand curve = Change in price(∆P)
Change in quantity (∆Q)

LAW OF DEMAND
• Law of demand states the inverse relationship between price and quantity demanded, keeping other factors
constant(ceteris paribus)
Assumptions of law of demand:
While stating the law of demand, we use the phrase “keeping other factor
constant” or ceteris paribus.
1. Price of substitute good do not change.
2. Price of complementary goods remain constant
3. Income of the consumer remains the same.
4. Taste and preferences of the consumer remain the same.

Price Qtydd
5 10
4 15
3 23
2 31
1 40

• In the table, when price falls, more and more quantity is demanded.
• In the fig, DD is a downward sloping curve indicating an inverse relation between price and demand.
REASONS FOR LAW OF DEMAND.
Law of diminishing marginal utility
• Law of diminishing marginal utility states that as we consume more and more units of a commodity, the
utility derived from each successive units goes on decreasing.
• Demand for a commodity depends on its utility.
• If the consumer gets more satisfaction, he will pay more.
• As a result, consumer will not be prepared to pay the same price for additional units of the commodity
• The consumer will buy more units of the commodity only when price falls.

Units of ice TU MU
cream
1 20 20
2 36 16
3 46 10
4 50 4
In the schedule, as consumer consumes the 1stice cream, MU is [Link] consumption increases the from 1 to
4MU falls from 20 to 4.

MOVEMENT ALONG THE DEMAND CURVE( CHANGE IN QUANTITY DEMANDED)

• When quantity demanded of a commodity changes due to a change in its price, keeping other factors
constant is known as change in quantity demanded.
• It is graphically expressed as a movement along the demand curve.
• Expansion of demand refers to an increase in quantity demanded due to a fall in price of the commodity,
other factors remaining the same. It leads to a downward movement along the demand curve.
• Contraction of demand refers to a decrease in quantity demanded due to an increase in the price of
commodity, other factors remaining the same. It leads to an upward movement along the demand curve.
• It follows the law of demand.

• In the diagram,OP1 is the price and OQ1 is the quantity demanded.

• When price falls to OP2, quantity demanded increases to OQ2, resulting in a downward movement from B to
C along the demand curve. (EXPANSION OF DEMAND)

• When price rises to OP0 quantity demanded decreases toOQ0, resulting in an upward movement from B to A
along the demand curve. (CONTRACTION OF DEMAND)

SHIFT IN DEMAND CURVE (CHANGE IN DEMAND)

• When the demand for the commodity changes due to change in any other factor other than the own price of
the commodity, it is known as change in demand.
• It is expressed as a shift in the demand curve.
• Increase in demand refers to a rise in the demand of a commodity caused due to any factor other than the
own price of the commodity. It leads to a rightward shift in the demand curve.
• Decrease in demand refers to a fall in the demand of a commodity caused due to any factor other than the
own price of the commodity. It leads to a leftward shift in the demand curve.
• the demand increases or decreases, but price remains constant.
• It works against the law of demand.

• In the diagram, OP is the price and OQ is the quantity demanded.

• when demand rises from OQ to OQ1,at the same price OP, it leads to a rightward shift in the demand curve
from DD to D1D1 [INCREASE IN DEMAND]
•
• When demand falls from OQ to OQ2, at the same price OP, it leads to a leftward shift in demand curve from
DD to D2D2. [DECREASE IN DEMAND]
•
CAUSES OF RIGHTWARD SHIFT OF DEMAND CURVE.
Rightward shift of demand is caused by factors other than price.
• Increase in income of consmuers in case of normal good.
• Decrease in income of consumers in case of inferior good.
• Favourable change in taste and preferences.
• Increase in price of substitute good.
• Decrease in price of complementary good.

CAUSES OF LEFTWARD SHIFT OF DEMAND CURVE.

Leftward shift of demand is caused by factors other than price.
• Decrease in income of consumers in case of normal good.
• Increase in income of consumers in case of inferior good.
• Unfavourable change in taste and preferences.
• Decrease in price of substitute good.
• Increase in price of complementary good.