DEMAND

WHAT IS DEMAND ?
Demand means Desire backed by the willingness to buy and the
ability to buy.

In Economics, demand implies-

 Desire to acquire
 Willingness to Pay the Price
 Ability to make Payment
Demand for any commodity or service is stated with reference to time, its
price
and the price of related goods , consumer’s income, taste etc.

The demand function is expressed as

D = f ( P, Y, Pr, T )

Where D is demand
F is function
P is price
Y is income
Pr is Price of related goods
T refers to Taste of the consumer
DETERMINANTS OF
DEMAND
 FACTORS INFLUENCING DEMAND

ECONOMIC NON ECONOMIC

• Price • Expectations
• Income • Population
• Price of related goods • Time Period
• Income distribution • Taste and fashion
• Savings • Social – Political conditions
• Money Supply • Natural factors
1. Price :
Demand depends upon Price
D = f (P)
Demand is inversely related to Price
When Price is high ,demand is less and When Price is less , Demand is
more.

2. Income :
Demand depends on Income
D = f (Y )
Demand is directly related to Income
If Income is more, demand is more and when Income is less demand too is
less.
3. Price of Related goods :
Price of related goods is another determinant of demand.
D = f (Pr)
This is called cross relationship.
Related goods may be either -
Complementary goods ( car and Petrol or Sugar and tea powder )
Substitutes ( rice and wheat or Coffee and Tea )
Complementary goods : In this case like car and petrol, sugar and tea
powder , cross relationship is negative. Example : when the price of Petrol
increases demand for petrol falls and along with it the demand for its
complementary, car also falls
Substitutes : In this case like rice and wheat the cross relationship is
positive. Example : when the price of rice increases, its demand falls . But
the demand for its substitute wheat increases.
4. Income distribution:
Demand is influenced by the pattern of Income distribution.
In an economy where income is concentrated in the hands of a few,
demand will be less.
If there is equality in the distribution of wealth and Income, demand will
be more.

5. Savings :
Both Savings and Consumption ( demand) depend on Income.
More the savings lesser will be the demand .
Lesser the savings more will be the demand.

6. Money supply :
Increased money supply increases the demand ( causes Inflation ).
Decreased money supply decreases the demand ( causes deflation ).
Non- Economic determinants
1. Expectations :
If the consumers expect a fall in the Price in the near future, present
demand will decrease.
If they expect a rise in the Price in the near future, Present demand will
increase.

2. Population :
More the Population , more will be the number of consumers and more
demand.

3. Time Period :
If the time is too short , demand will be less ( demand depends on income,
tastes, customs which cannot be altered all of a sudden so demand )
But in the Long run demand changes due to changes in tastes, customs
and behaviour.
4. Taste , behaviour and Fashion:
These are Psychological factors which determine demand

5. Political , Social and climatic conditions:

Demand depends on the policies of the Government ( If Government
increases taxes , Prices will be high , demand will fall ).
Demand depends on customs and traditions ( Demand for mangalsutra )
Demand depends on climatic conditions ( Demand for raincoats during
rainy season ).

6. Natural factors:
Diseases , epidemics plays a very important role in determining demand
( Masks, sanitizers during COVID -19 ).
 LAW OF DEMAND
 Law of demand is known as the ‘ First law of Purchase’.
 It expresses an inverse relationship between Price and
Quantity demanded.
 It is but natural to consume ( buy / demand ) more when
price falls and consume less when Price rises.
 This natural response of consumers to changes in
Prices is presented in the Law of Demand.
Symbolically the Law of demand can be shown as-

D=f (P)
Where D is Demand and P is Price.
It is read as Demand depends on Price.

Dr Marshall was one of the chief advocates of the Law of

Demand.

According to him “ the amount demanded increases with a fall in

Price and diminishes with a rise in Price”.
The Law of demand is based on the following assumptions:
1. Ceteris Paribus- Other things ( income, tastes etc )other than
price remains constant.

2. MU of money remains constant.

3. Cardinal Measurement of utility.

4. Consumer is Rational.

5. Consumer cannot influence price.

6. Commodity should neither be a superior or inferior good.

7. No substitutes available.
 Demand Schedule and Curve.
Law of Demand can be explained with the help of a demand schedule.
A demand Schedule shows list of the quantities demanded at various
prices.

PRICE QUANTITY DEMANDED Other things remaining the same,

Rs 6 2 eggs
when the price is high, Quantity
demanded is less and vice versa.
Rs 5 4 eggs

Rs 4 6 eggs In the example given, when the price

is Rs 6/- eggs demanded are 2….but
Rs 3 8 eggs when the price falls to Rs 1/- then
more eggs that is 12 eggs are
Rs 2 10 eggs
demanded.
Rs 1 12 eggs
Demand schedule can be represented in the form of a demand curve.
A demand Curve is a graphical explanation of the law of Demand

Quantity demanded is measured on OX

axis.
Price is measured on OY axis.

Demand curve is a downward sloping

curve because…..
When Price is more demand is less
When Price is less demand is more
 REASONS FOR THE OPERATION OF THE LAW OF DEMAND
OR
WHY DOES THE DEMAND CURVE SLOPE DOWNWARDS ?
Or
WHY DOES THE DEMAND CURVE HAS A NEGATIVE SLOPE ?

1. Law of Diminishing Marginal utility.

2. Price Effect.
3. Income Effect
4. Substitution Effect.
5. Principle of different Uses.
6. Number of Consumers.
1. Law of Diminishing Marginal utility:

The law of DMU serves as the foundation for the Law of

demand.

Downward sloping demand curve indicates decreasing

marginal utility.

With increase in consumption utility diminishes , so the

consumers are ready to buy more only at less price.
2. Price Effect:

The Price effect explains the effect of change in Price on

demand.

It is natural to buy more when price falls and buy less when
Price rises.
2. Income Effect:

The Income effect denotes the effect of change in price on

real income or purchasing power.

The real income of the consumer increases when price falls.

The consumer spends less in order to buy the same
commodity and he is also able to spend a portion of his
increased income to buy other commodities.
3. Substitution Effect:

The Substitution effect explains the effect of change in price

of a certain commodity ( say rice) on the demand of its
substitute (say wheat ) .

When the price of a commodity( Eg: rice) falls consumers will

buy more of that same commodity.

But when the price of a commodity (Eg: rice) increases , it will

be substituted for cheaper goods ( wheat ).
4. Principle of different uses:

The demand curve slopes downwards as certain goods have

different uses.

With a fall in the price their use increases and with a rise in
the price their use decreases.

Example- Electricity.
5. Number of Consumers:

A fall in the Price increases the number of consumers.

The rich people generally do not respond to change in prices.

The negative slope of the demand curve is due to the
response of the low and middle income group.
 Exceptions to the Law

Normal demand curve Exceptional demand curve

1. Giffen’s paradox:
Sir Robert Giffen of England for the first time observed an
abnormal situation where he saw people demanded more when
the Price increased. This is an Exception to the Law of demand
(According to the Law of demand when Price is more , demand
is less ). It is called Giffen's Paradox.
In the 19th century in England because of the nation wide famine
the price of bread increased . But the demand for bread did not
fall. Instead it was increasing. Giffen conducted a study and
observed that Law of demand did not hold good in the case of
necessaries .
Bread is a necessary good in England so when its price
increased, people reduced the consumption of unnecessary
things and diverted their resources for the purchase of bread.
2. Veblen Effect:
Thornstein Veblen observed another exception to the Law of
Demand in the case of conspicuous consumption.
According to him Law of demand does not apply to commodities
having prestige value or status symbol .
Some commodities are bought not because of its use but
because their possession confers a social distinction on the
holder.
Example : Diamonds, Ferrari Sergio car
3.Speculative Effect:
Law of demand does not apply to speculative market where
shares , stocks are dealt.
An increase in the price of shares is an indication of increased
dividend.
Increase in Profits makes the consumers to purchase more when
the Price of shares is high.
4. Highly priced commodities :
Some consumers are of the opinion that highly priced goods are
of superior quality.
Example – cosmetics
5. Economic fluctuations:
The Law of demand does not hold good during Inflation and
Deflation.

During Inflation even if the Prices are high demand does not fall
because of the increase in money supply.

During deflation even if the prices fall demand does not increase
because of the decrease in money supply.
Some of the exceptions to the Law of demand are universal.

Law of Demand is a guide to determine Price and Quantity

of Production.

It is one of the basic Laws of Economics .