DEMAND

GROUP MEMBERS:
AGAM SAXENA
AKSHAY
AKSHITA GUPTA
ESHIKA SINGHAL
LAKSHAY GOYAL
 What is Demand ?
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. Effective demand for a thing depends on :

(i) Desire

(ii) Means to purchase

(iii) Willingness to use those means for that purchase.

Two things are to be noted about the quantity demanded.

1. The quantity demanded is always expressed at a given price.

2. The quantity demanded is a flow concept.
 Factors of Demand
1. Price of the commodity: Ceteris paribus i.e., other things being equal, the
demand for a commodity is inversely related to its price. It implies that a rise in the
price of a commodity brings about a fall in the quantity purchased and vice-versa.
This happens because of income and substitution effects.

2. Price of related commodities: Related commodities are of two types:

· Complementary goods

· Competing goods or substitutes

3. Income of the consumer: Other things being equal, the demand for a
commodity depends upon the money income of the consumer. The purchasing power
of the consumer is determined by the level of his income. In most cases, the larger
the average money income of the consumer, the larger is the quantity demanded of a
particular good.
4. Tastes and preferences of consumers: The demand for a commodity also depends upon the tastes and
preferences of consumers and changes in them over a period of time. Goods which are modern or more in fashion
command higher demand than goods which are of old design and out of fashion.

5. Consumer’s Expectations: Consumer’s Expectations regarding future prices, income, supply conditions etc. influence
current demand. If the consumers expect increase in future prices, increase in income and shortages in supply, more quantities
will be demanded.

Other factors: Apart from the above factors, the demand for a commodity depends upon the following factors:

· Size of population: Generally, larger the size of population of a country or a region, greater is the demand .

· Composition of population: If there are more old people in a region, the demand for spectacles, walking
sticks, etc. will be high. Similarly, if the population consists of more of children, demand for toys, baby foods,
toffees, etc. will be more.

· The level of National Income and its Distribution: The level of national income is a crucial determinant of
market demand. Higher the national income, higher will be the demand for all normal goods and services.

· Consumer-credit facility and interest rates: Availability of credit facilities induces people to purchase
more then what their current incomes permit them. Credit facilities mostly determine the demand for durable
goods which are expensive and require bulk payments at the time of purchase.
 Law of Demand
The law of Demand states that, other things being constant(ceteris Peribus), the
demand for a good extends with a decrease in price and contract with an increase in
price.
In other words, there is an inverse relationship between quantity demanded of a
commodity and its price.
 Assumptions of law of Demand
1. Tastes and Preference of the consumer remain constant .
2. There is no change in the income of the consumer.
3. Prices of the related goods do not change.
4. Consumers do not expect any change in the price of the commodity in near future.

DEMAND CURVE
 Exceptions of law of demand
1. Conspicuous goods / Prestige goods

2. Giffen goods

3. Conspicuous necessities

4. Future expectations about prices

5. Speculative goods.
 Rationale of the Law of Demand
● Law of Diminishing marginal utility
Marginal utility is additional satisfaction you derive from each item.
Law defines that with each additional item marginal utility decreases and
thus consumer will be willing to pay only less for each additional unit.
● Price effect
It is the total fall in quantity demanded due to an increase in price.
It manifests itself as income effect and substitution effect.
● Substitution effect
The change in the relative price(price of one commodity relative to prices of
other commodities) causes the substitution effect.
If prices of all the commodities changed by same margin, there would be no
substitution effect.
● Income effect
When the price of commodity falls, it allows customer to buy more goods
with same amount of money or buy same no of goods with lesser money,
thus increasing the demand of the goods as purchasing power of customer
increases.
● Arrival of new customers
Fall in prices of a commodity will increase the no of consumers as new lesser
prices might come under the budget of those who were not able to buy it
with previous price tags, thus increasing the demand for that particular
commodity.
● Different uses
Several commodities have multiple uses and if their prices fall, they will be
used for varied purposes and therefore the demand for such commodities will
increase as well.
 INDIVIDUAL DEMAND V/S MARKET DEMAND
BASIS INDIVIDUAL DEMAND MARKET DEMAND
Quantity demanded by all consumers in the
Meaning Quantity demanded by a single consumer
market
Inter-relationship It is a component of market demand Aggregation of individual demands
Demand curve Demand Curve is relatively steeper Demand curve is relatively flatter
Scope Narrow scope Broad scope
Compliance with demand
May or may not follow Law of demand Always follows law of Demand
law

Demand Schedule (Tabular

representation of qty.
demanded)

Demand Curve (Graphical

representation of demand
schedule
Movement along demand curve- Quantity
demanded changes due to change in price other
factors constant
● EXPANSION IN DEMAND
Rise in quantity demanded due to fall in price
● CONTRACTION IN DEMAND
Fall in quantity demanded due to rise in price
Shift in demand demand curve- When
demand changes due to factor other than the
own price of the commodity
● INCREASE IN DEMAND
Rise is demand due to factor other than own price
● DECREASE IN DEMAND
Fall in demand due to factor other than own price
 Elasticity Of Demand
➢ Refers to the percentage change in demand for a commodity with respect to percentage change in any
of the factors affecting demand for that commodity.

Elasticity of demand = Percentage change in demand X / Percentage change in factor affecting demand of X

Types of elasticity of demand,

● Price elasticity of demand

● Cross elasticity of demand
● Income elasticity of demand
 Example
Price of goes up even a little bit, demand goes down a lot.
Inelasticity Of Demand
➢ Inelastic demand refer to change in price of a good result in no or slight change is Quantity demanded.
➢ Example - The price of soap goes up a lot, the demand stay almost remain same.
 CASE STUDY
Covid hit India in 2019. Which impacted various industries one of them was the Gas industry. The rising crude oil
prices and the higher taxation impact, have contributed to the price rise of petrol and diesel regularly setting new
record highs across the country in 2021.

Despite the miniscule pocket allowance customers submitted to the price rise because fuel is a necessity and they
required vehicles for moving between their house to work or home to healthcare facilities

After the steep rise in the petrol burnt a hole in the pocket, a very small class of people dropped using petrol run
vehicles for short distances. Yet, the overall demand of transportation gas remained more or less unchanged.

Questions -

1. Do the increase in price of gas affect the demand ?

2. In the long run, will consumer find alternatives to petrol/diesel run vehicles if the price increases steadily?
3. Explain the nature of Elasticity of Demand between Car and Bicycle?
 Questions
1. Which of the following pairs of goods is an example of substitutes?

· Tea and Sugar

· Pen and ink

· Tea and coffee

· Shirt and trousers

2. All but one of the following are assumed to remain the same while drawing an individual’s demand curve for a commodity. Which one is it?

· The preference of the individual

· His monetary income

· Price of the commodity

· Price of related goods

3. In case of an inferior good, the income elasticity of demand is:

· Positive

· Negative

· Zero

· Greater than one

4. Suppose the price of Pepsi increases, we will expect the demand curve of Coca Cola to:

· Shift towards left since they are substitutes

· Shift towards right since they are substitutes

· Remain at the same level

· None

5. All of the following are determinants of demand except:

· Taste and preferences

· Quantity supplied

· Income of the consumer

· Price of related goods

6. The second glass of lemonade give lesser satisfaction to a thirsty boy. This is a clear case of:

· Law of demand

· Law of diminishing returns

· Law of diminishing utility

· Law of supply
7. What will happen in the rice market if buyers are expecting higher rice prices in the near future?

· The demand for rice will increase

· The demand for rice will decrease

· The demand for rice will be unaffected

· None of the above

8. As income increases, the consumer will go in for superior goods and consequently the demand for inferior goods will fall. This means:

· Income elasticity of demand less than one

· Negative income elasticity of demand

· Zero income elasticity of demand

· Unitary income elasticity of demand

9. The luxury goods like jewellery and fancy articles will have:

· Low-income elasticity of demand

· High income elasticity of demand

· Zero income elasticity of demand

· None of the above

10. Comforts lies between

· Inferior goods and necessaries

· Luxuries and inferior goods

· Necessaries and luxury goods

· None of the above

11. The price of tomatoes increases and people buy tomato puree. You infer that tomato puree and tomatoes are:

· Normal goods

· Substitutes

· Complements

· Inferior goods