DEMAND
What is demand?
• Demand in economics is the consumer's desire and ability to purchase
a good or service. It's the underlying force that drives
economic growth and expansion. Without demand, no business
would ever bother producing anything.
• Market demand is the total quantity demanded across all consumers
in a market for a given good.
• Aggregate demand is the total demand for all goods and services in an
economy.
Law of Demand
• "Law of Demand states that people will buy more at lower prices and buy
less at higher prices, if other things remaining the same."- Prof. Samuelson.
• The Law of Demand states that amount demanded increases with a fall in
price and diminishes when price increases." - Prof. Marshall
• "According to the law of demand, the quantity demanded varies inversely
with price." –Ferguson
Law of Demand……..simply put
• The law of demand governs the relationship between the quantity
demanded and the price. This economic principle describes
something you already intuitively know.
• Other things remaining constant, if the price of a good or service
increases, people will buy less of it.
• The reverse is also true. If the price drops, people will buy more.
Individual Demand Schedule
Here is an example of a demand schedule:
Price/unit Quantity (in units)
• The demand schedule is a table
$3.46 10.0
that tells you how many units of
a good or service will
$3.55 9.8
$3.69 9.5
$3.80 9.4 be demanded at the various
$3.85 9.3 prices, ceteris paribus.
$3.88 9.3
$3.88 9.3
$4.01 9.1
$4.09 8.9
$4.45 8.5
Individual Demand Curve
• If you were to plot out how
many units you would buy at
different prices, then you've
created a demand curve.
• It graphically portrays the data
that's been detailed in a demand
schedule.
• Or it’s a graphical representation
of the Law of Demand
Market Demand
Market Demand Schedule Market Demand Curve
Types of Demand function
I. Linear Demand Function:
• Qx = a – bPx
• Qx = 100 – 5Px
Types of Demand function
II. Non- Linear Demand Curve
• Slope is different at every point on the demand curve.
Reasons for downward sloping demand
curve:
• Income Effect – as price falls, consumer’s real income or purchasing
power increases, thus he can buy more
• Substitution Effect – as price falls, the good becomes relatively
cheaper and consumer can buy more to substitute the this good for
other goods which have become relatively dearer
• Law of Diminishing Marginal Utility – as we consume more and more
units of the same commodity the satisfaction derived from every
successive unit keeps diminishing, thus a consumer will buy more only
if its cheaper
Determinants of Demand: The other things
that are assumed to remain constant……..
• Income of the consumer(Y) – Normal goods , and Inferior goods
Normal Goods– Essentials or basic consumer good, luxury goods
• Price of related goods (Py ) – Substitute goods and complementary
goods
• Tastes and Preferences of consumers (T) – life style , customs , habits,
change in fashion , standard of living, religious values , age, sex
• Advertisement (A)
• Expectations of consumers about future changes in price (E)
Determinants of Demand: The other things
that are assumed to remain constant……..
• Distribution of income in the society (Dy)
• Growth of Population (P)
• Government Policy (G)
• Climatic conditions (C)
• Therefore:
• Demand Function:
Dd = f( Px , Y, Py , A ,T, Dy ,P, G,C,E )
Px: Price of the good or service
Exceptions to the law of Demand:
• Giffen goods- strongly inferior goods, consumer spends a major
proportion of his income on such goods, their demand increases with
an increase in price
• When price is equated with quality
• Veblen Effect or Goods of Conspicuous consumption/snob appeal-
some consumers measure utility of a commodity by its price, such
goods have high prestige value eg. diamonds, rare artefacts, paintings,
products of certain consumer brands
• Expectations regarding future prices
• Bandwagon Effect: Trying to fit in a group
Exceptions to the Law of Demand: An
upward sloping Demand Curve
Change vs Variation in Demand
Change in demand Variation in demand
• When price of the good remains • When only the price of the good
constant changes
• When factors other than price, • When all factors other than price,
change remain constant
• Causes a movement along the same
• Causes a shift in the demand curve demand curve
• Rightward Shift- Increase in demand • Expansion or Downward movement -
• Leftward Shift: Decrease in demand Increase in quantity demanded
• Contraction or Upward movement -
Decrease in quantity demanded
Change in Demand
Increase in Demand Decrease in Demand
Variation in Demand: Movement along the same
Demand Curve due to change in price only
Expansion in Demand / Downward movement Contraction in Demand/ Upward
along the demand curve when price falls movement along the demand curve when price rises
Exercise:
• What will be the effect of the following on the demand curve for
Good X? Draw diagrams to explain your answer.
• 1) A fall in the price of Good Y, when X and Y are substitutes
• 2) Newspapers have reported that Good X has health giving
properties
• 3) An increase in the price of Good X
• 4) Consumer’s income has decreased and Good X is a normal good
• 5) The producers of Good X have spent heavily on its advertising
Answers:
• 1 and 4: Demand Curve for Good X will shift to the left indicating a
decrease in demand for X
Answers:
• 2 and 5: Demand Curve for Good X will shift to the right indicating an
increase in demand for X
Answers:
• 3) Contraction in Demand/ Upward movement along the same
demand curve when price rises of Good X
•