Shanakar narayan College of Arts &

Commerce

Name:
Aakash Dasharathbhai Darji

Class:
M.Com (Part I)

Roll No:
08

Subject:
Economics For Business Decisions

Topic:
Law of Demand & Determinants of Demand

INDEX
SR.NO. DECSCRIPTION

1. Meaning And Determinants of Demand

2. Definition of demand

3. Determinants of Demand

4. Assumptions of Law of Demand

5. Exception of Law of Demand

6. Characteristics of Law of Demand

7. Acknowledgement

8. Conclusion

9. Reference

What is the Law of Demand?

The law of demand is given as, “If the price of a product falls, its
quantity demanded increases and if the price of the commodity rises, its
quantity demanded falls, other things remaining constant.”

MEANING AND DETERMINANTS OF DEMAND

We have often heard the phrase ‘there is a huge demand for product XYZ
in the market’. But what does this exactly mean? What constitutes the
demand for a product in the economy? Let us learn about the concept of
demand and the determinants of demand in a market.

What is Demand?

Demand in terms of economics may be explained as the consumers’

willingness and ability to purchase or consume a given item/good.
Furthermore, the determinants of demand go a long way in explaining the
demand for a particular good.

For instance, an increase in the price of a good will lead to a decrease in

the quantity that may be demanded by consumers. Similarly, a decrease in
the cost or selling price of a good will most likely lead to an increase in
the demanded quantity of the goods.

This indicates the existence of an inverse relationship between the price of

the article and the quantity demanded by consumers. This is commonly
known as the law of demand and can be graphically represented by a line
with a downward slope.

The graphical representation is known as the demand curve. The

determinants of demand are factors that cause fluctuations in the economic
demand for a product or a service.

DEFINITION OF DEMAND:

DEMAND IS THE ABILITY AND WILLINGNESS TO BUY

SPECIFIC QUANTITY OF A GOOD AT ALTERNATIVE PRICES IN
A GIVEN TIME PERIOD, CETERIS PARIBUS.

BY : FERGUSON
“DEMAND IS THE ABILITY AND WILLINGNESS TO BUY A
SPECIFIC QUANTITY OF A GOOD AT ALTERNATIVE PRICES IN
A GIVEN PERIOD OF TIME, CETERIS PARIBUS

BY : SCHILLER

DETERMINANTS OF DEMAND

Demand for commodity depends on a number of factors. they together

determine the quantity of a commodity that would be purchased but an
individual or household. the important determinants of demand are
explained below:

The price of commodities is quoted in two different ways. the first is the
market or the market futures price, which is the price reported in the
news. the spot price, on the other hand, is the cash price of commodities.
this is what traders actually for the commodity on the day of purchase.

Some of the important determinants of demand are as follows,

1] Price of the Product:

People use price as a parameter to make decisions if all

other factors remain constant or equal. According to the law of demand,
this implies an increase in demand follows a reduction in price and a
decrease in demand follows an increase in the price of similar goods.

The demand curve and the demand schedule help determine the demand
quantity at a price level. An elastic demand implies a robust change
quantity accompanied by a change in price.  Similarly, an inelastic
demand implies that volume does not change much even when there is a
change in price.

More Topics under Theory Of Demand

 Law Of Demand And Elasticity Of Demand

 Exceptions to the Law of Demand

 Elasticity of Demand

 Movement along the Demand Curve and Shift of the Demand

Curve

 Price Elasticity of Demand

 Income Elasticity of Demand

  Cross Elasticity of Demand

 Demand Forecasting

 Methods of Demand Forecasting

2] Income of the Consumers:

Rising incomes lead to a rise in the number of goods

demanded by consumers. Similarly, a drop in income is accompanied by
reduced consumption levels. This relationship between income and
demand is not linear in nature. Marginal utility determines the proportion
of change in the demand levels.

3] Prices of related goods or services;

 Complementary products – An increase in the price of one

product will cause a decrease in the quantity demanded of a
complementary product. Example: Rise in the price of bread
will reduce the demand for butter. This arises because the
products are complementary in nature.
  Substitute Product – An increase in the price of one product will
cause an increase in the demand for a substitute product.
Example: Rise in price of tea will increase the demand for
coffee and decrease the demand for tea.

4] Consumer Expectations:

Expectations of a higher income or expecting an increase

in prices of goods will lead to an increase the quantity demanded.
Similarly, expectations of a reduced income or a lowering in prices of
goods will decrease the quantity demanded.

5] Number of Buyers in the Market:

The number of buyers has a major effect on the total or

net demand. As the number increases, the demand rises. Furthermore, this
is true irrespective of changes in the price of commodities.

ASSUMPTIONS OF LAW OF DEMAND

 The law of demand follows the assumption of ceteris
paribus, which means that the other factors remain unchanged or
constant.

As mentioned earlier, the demand for a commodity or service not only

depends on its price but also on several other factors such as price of
related goods, income, and consumer tastes and preferences.

In the law of demand, other factors are assumed to remain constant

while only the price of the commodity changes.

Following are the assumptions of law of demand:

 No expectation of No change in consumer’s No change in the price of
futur`es or shortages preferences related goods

No change in size, age No change in the range

No change in consumer’s
composition and sex of goods available to the
income
ratio of the population consumers

No change in
government policy
No expectation of future price changes or shortages:
The law requires that the given price change for the
commodity is a normal one and has no speculative consideration. That is
to say, the buyers do not expect any shortages in the supply of the
commodity in the market and consequent future changes in the prices.
The given price change is assumed to be final at a time.

No change in consumer’s preferences:

The consumer’s taste, habits and preferences should
remain constant. 4. No change in the fashion: If the commodity
concerned goes out the fashion the buyer may not buy more of it even at
a substantial price is reduced.

No change in the price of related goods:

Prices of other goods like substitutes and supportive,
i.e., complementary or jointly demanded products remain unchanged. If
the prices of other related goods change, the consumer’s preferences
would change which may invalidate the law of demand.
No change in consumer’s income:
Throughout the operation of the law, the consumer’s
income should remain the same. If the level of a buyer’s income
changes, he may buy more even at a higher price, invalidating the law of
demand.

No change in size, age composition and sex ratio of the

population:
For the operation of the law in respect of total market
demand, it is essential that the number of buyers and their preferences
should remain constant. This necessitates that the size of population as
well as the age structure and sex ratio of the population should remain
the same throughout the operation of the law.

Otherwise, if the population changes, there will be additional buyers in

the market, so the total market demand may not contract with a rise in
price.
No change in the range of goods available to the consumers:
This implies that there is no innovation and arrival of
new varieties of product in the market which may distort consumer’s
preferences.

No change in government policy:

The level of taxation and fiscal policy of the
government remains the same throughout the operation of the law.
Otherwise, changes in income-tax, for instance, may cause changes in
consumer’s income or commodity taxes and may lead to distortion in
consumer’s preferences

EXCEPTION OF LAW OF DEMAND

There are certain exceptions to the law of demand that

with a fall in price, the demand also falls and there is an increase in
demand with an increase in price.
In case of exceptions, the demand curve shows an upward slope and
referred to as exceptional demand curve. Figure shows an exceptional
demand curve:

Exceptional Demand Curve

Exception to law of demand refers to conditions where the law of

demand is not applicable.

1. Giffen goods
2. Articles of distinction goods
3. Consumers ignorance
4. Situations of crisis
 5. Future price expectations

Exceptions to the Law of Demand

Giffen Goods:
Giffen good is a commodity that is unexpectedly
consumed more as its price increases. Thus, it is an exception to the law
of demand. In the case of Giffen goods, the income effect dominates
over the substitution effect.

After the Irish Famine (1845), the potato crop failed due to plant disease,
late blight, which destroys both the leaves and the edible roots, or tubers,
of the potato plant. Due to this, the price of potatoes increased
tremendously.

Despite the fact that the price increase made people to find substitutes of
potatoes, they moved away from luxury products so that their overall
consumption of potatoes increased.

Articles of distinction goods:

Named after economist, Thorstein Veblen, these
commodities satisfy the desires of the upper-class people in society.
Veblen goods include those commodities whose demand is proportional
to their price and thus, they are exceptions to the law of demand.

These articles are purchased only by a few rich people

to feel superior to the rest. For example, diamonds, rare paintings,
vintage cars, and antique goods are examples of Veblen goods.
Consumer’s ignorance:
Consumer ignorance is another factor that motivates
people to purchase a commodity at a higher price, which violates the law
of demand. This results out of the consumer biases that a high-priced
commodity is better in quality than a low-priced commodity.

Situations of crisis:
Crisis such as war and famine negate the law of
demand. During crisis, consumers tend to purchase in larger quantities
with the purpose of stocking, which further accentuates the prices of
commodities in the market. They fear that goods would not be available
in the future.

On the other hand, at the time of depression, a fall in the price of

commodities does not induce consumers to demand more.

Future price expectations:

When consumers expect a rise in the prices of
commodities, they tend to purchase commodities at existing high prices.
For example, speculation of market strategists on an increase in gold
prices in the future induces consumers to purchase higher quantities in
order to stock gold.

On the contrary, if consumers expect a fall in the price of a commodity,

they postpone the purchase for the future.

CHARACTERISTICS OF LAW OF DEMAND

The following are the main characteristics of law of demand:

1. Inverse Relationship
2. Price independent and Demand dependent variable
3. Other things being equal
4. Qualitative statement
5. Concerned with certain period of time
 Characteristics of Law of Demand

Inverse Relationship:
According to this law there is an inverse relationship
between the quantity demanded and the price of a commodity. If the
price of a commodity increases the quantity demanded decreases and if
the price decreases the quantity demanded increases.
Price independent and Demand dependent variable:
Price of a commodity is an independent variable. The
law of demand explains the change in demand of a commodity due to
change in its price. In mathematical terms price is an independent
variable and demand is a dependent variable.

Other things being equal:

This law holds good only when the other things remain
the same. This ‘other things remaining the same’ is called the
assumptions of the law of demand.

Qualitative statement:
The law of demand is a qualitative statement which
tells us that a fall in the price of a commodity will lead to an increase in
the quantity demanded and a rise in price will lead to a fall in the
quantity demanded. But it does not tell us how much change in price
will bring how much change in quantity demanded.
Concerned with certain period of time:
The law of demand is related with a particular period of
time, for example weekly, monthly, annually etc.

ACKNOWLEDGEMENT:

There are a number of persons that have contributed to this research that
I want to thank. I am very grateful to Jesper Strandberg, Ola Dietrichson,
Helena Lidelöw, Ola Magnusson, Mikael Thorgren, Lars Eriksson,
Roger Pettersson, Malin Nordgren, Mats Öberg, Sverker Andreasson,
Anton Lundholm, Magnus Lindskog, Refik Salievski, Henrik Johnsson,
Magnus Karlsson, Lars-Åke Lindvall, Lina Andersson, Markus
Holmlund, and Morgan Eriksson. Thank you all for great discussions
and input to the research project. I also want to thank Dr Jonathan
Gosling and Professor Mohamed Naim for a warm welcome and great
discussions during my visit at Cardiff Business School. The research has
been financed by The Lars Erik Lundberg Foundation for Research and
Education.
CONCLUSION:

All these demand determinants are important & all business firms should
take into consideration for making their marketing strategies, those are
taken into consideration by all new businesses in terms of launching
their products in the market.

REFRENCE:

1. Economics for Business Decisions (Manan Prakashan)

2. Google / Wikipedia

THANK YOU