Theory of Demand

Meaning of demand

Ability to Willingne
Desires
pay ss to pay
Determinants of Demand
1) Price of the commodity

Price Demand

INVERSE RELATION
PRICE = 10,000

PRICE = 1,00,000
• Affects the demand of a product to a large extent. There is an
inverse relationship between the price of a product and quantity
demanded. The demand for a product decreases with increase in its
price, while other factors are constant, and vice versa.

• For example, consumers prefer to purchase a product in a large

quantity when the price of the product is less.
2) Income of buyer

INCOME Demand

POSITIVE RELATION
3)Price of related good
–

• 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.
Increase in the price of one good, decreases the
demand for other product and vise-versa
EXAMPLE :- Price of bread increased due to which
demand for butter decreases
Price of related good continued..
–

• 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) Consumers Taste and preference
• The tastes and preferences of consumers are affected due to various
factors, such as life styles, customs, common habits, and change in
fashion, standard of living, religious values, age, and sex.
• A change in any of these factors leads to change in the tastes and
preferences of consumers. Consequently, consumers reduce the
consumption of old products and add new products for their consumption.
For example, if there is change in fashion, consumers would prefer new
and advanced products over old- fashioned products, provided
differences in prices are proportionate to their income.
• Apart from this, demand is also influenced by the habits of consumers.
For instance, most of the South Indians are non-vegetarian; therefore, the
demand for non- vegetarian products is higher in Southern India.
5) Expectation About future
• Imply that expectations of consumers about future changes in the
price of a product affect the demand for that product in the short run.
For example, if consumers expect that the prices of petrol would
rise in the next week, then the demand of petrol would increase in
the present.
• On the other hand, consumers would delay the purchase of products
whose prices are expected to be decreased in future, especially in
case of non-essential products. Apart from this, if consumers
anticipate an increase in their income, this would result in increase in
demand for certain products. Moreover, the scarcity of specific
products in future would also lead to increase in their demand in
present.
Future price to increase , present demand will increase

Future price to decrease , present demand will decrease

6) Population
• Acts as a crucial factor that affect the market demand of a product.
If the number of consumers increases in the market, the
consumption capacity of consumers would also increase. Therefore,
high growth of population would result in the increase in the demand
for different products.
 Price of
Income = Price of Population is DEMAND IS
20000 1,00,000 coffee is
tea = 55 kg 100 UNITS
40KG
OTHER FACTOR SHOULD NOT CHANGE

Income = Price of tea = Population is Price of DEMAND IS

20000 55 kg 1,00,000 coffee is 50kg 80 UNITS
 Exception
s of law
Situation Law of demand
of
demand
• People sometimes buy certain
commodities like diamonds at high
prices not due to their intrinsic worth
but for a different reason. The basic
object is to display their riches to the
other members of the community to
which they themselves belong.

• This is known as ‘snob appeal’, which

induces people to purchase items of
conspicuous consumption. Such a
commodity is also known as Veblen
good (named after the economist
Torstein Veblen) whose demand rises
(fails) when its price rises (falls).
• In case of certain highly
essential items such as life-
saving drugs, people buy a fixed
quantity at all possible price.
Heart patients will buy the same
quantity of ‘Sorbitrate’ whether
price is high or low. Their
response to price change is
almost nil.
• Some special varieties of inferior goods are termed as Giffen goods.
Cheaper varieties of this category like bajra, cheaper vegetable like
potato come under this category. Sir Robert Giffen or Ireland first
observed that people used to spend more their income on inferior
goods like potato and less of their income on meat. But potatoes
constitute their staple food. When the price of potato increased,
after purchasing potato they did not have so many surpluses to buy
meat. So the rise in price of potato compelled people to buy more
potato and thus raised the demand for potato. This is against the
law of demand. This is also known as Giffen paradox.
Giffen’ s Paradox