Demand

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What is Demand
Demand – A desire backed up by ability and willingness
to pay for it
Demand = Desire to buy + Willingness to buy + Ability to
pay
Demand is a relative term i.e. it’s related to time , price,
place. It is inversely related to price.
Determinants of Demand
Determinants of Demand
1. Price of the Commodity
Primary influence on commodity
Qdx= f( Px). Ceteris paribus
Less demand – High price
More demand – Less price
Determinants of Demand

2. Prices of related Goods

a). Complementary Goods
When goods are used
together to satisfy a
given want , they are said
to be complementary
goods
 Price of Related Goods
b).Substitutes

Eg. Tea and Coffee. Incase of rise in price of

tea, with price of coffee remaining same
demand for tea will fall and vice versa.
Determinants of Demand

3. Consumers Income
The relation between income and demand is called
income demand.
Normal Goods: A good which people demand more of
when their income rises (or less of when their income
falls). Normal goods have a positive income elasticity
of demand.
Necessity
Inferior Goods: Demand falls with increase in income
Determinants of Demand

4. Advertisements
Any sales propoganda and advertisement can increase demand
of a product.
Determinants of Demand

5. Taste and Preference

Changing fashions tend to increase market demand.
Eg. Dhoni’s Hairstyle, SRK wearing mufflers
Determinants of Demand

6. Expectation about future prices

Our expectations regarding prices that would be in market

in the future influence the demand for commodity in the
present.
If buyers expect further rise in price in future then they
may buy more of that product
Determinants of Demand
7. Customs and Traditions
The customs and traditions prevalent in the society
determine market demand.
Eg. In Diwali there is great demand for crackers and
sweets.
Determinants of Demand
8. Savings/ Disposable Income
The disposable income that the household has. More
specifically, the fraction of household income that it is
generally willing to spend on commodities
An increase in income leads to an increase in demand
for most normal goods.
Determinants of Demand
9. Climate
Demand for certain products are
determined by weather conditions.
Eg. Summer ,the market demand
increases for fans, air-conditioners.
Determinants of Demand
10. Government Policies: Government Policies through
taxation and subsidy affects the demand for the
commodity. Taxing a commodity increases the price
and it does affect demand
11. Size and Composition of Population:
12. State of Economy
Law of Demand
 The law of demand states that, everything else being
equal as the price of a good increases, quantity
demanded decreases; conversely, as the price of a good
decreases, quantity demanded increases.
Demand Schedule : A demand schedule is a table that
shows the quantity demanded of a good or service at
different price level
Demand Curve: . A demand schedule can be graphed
as a continuous demand curve on a chart where the Y-
axis represents price and the X-axis represents quantity.
Demand curve can be Linear or Non Linear
Types of Demand Schedule
Individual Demand Schedule and Demand Curve
Market Demand Schedule and Market Demand Curve
 Market demand schedule is a tabulation of the
quantity of a good that all consumers in a market will
purchase at a given price. At any given price, the
corresponding value on the demand schedule is the
sum of all consumers’ quantities demanded at that
price.
Activity
Assume that in the market for tacos, Mike
and Steve are the only consumers and their
individual demand schedules are represented
in the table below. Using the information in
the table, complete the following steps:
Complete the table by filling in the number
of tacos demanded in the market (by both
Mike and Steve) at each price.
At a price of $8, how much tacos are
demanded by the market?
If producers in the market want to sell 11
tacos, what does the price need to be to sell
all 11 ?
Assume that producers in the market only
wanted to sell tacos to Steve, what minimum
price would they need to charge so that Steve
would buy tacos, but not Mike?
Case study: Crazy About Coffee

https://open.lib.umn.edu/principleseconomics/part/
chapter-3-demand-and-supply/
Solve
Px= 1, 2,3
Suppose that an individual’s demand function for
commodity X is Qdx = 8- Px ceteris paribus. Find the
individual demand schedule and draw the demand curve
based on the schedule
Qdx= 8-Px
Let Px=1
Qdx= 8-1
Qdx= 7

Ans: By substituting various prices of X into this demand

function, we get the individual’s demand schedule
Answer
Solve
From the demand function Qdx = 8/Px (Px is given in
dollars), derive
(a) the individual’s demand schedule at Prices $ 1, 2, 4
and 8
 (b) the individual’s demand curve
 (c) What type of demand curve is this?
Rectangular Hyperbola
Answer
Solve
If there are 1000 identical individuals in the market,
each with the demand for commodity X given by
Qdx = 8 – Px ceteris paribus (cet. par.)
Find the market demand schedule and the market
demand curve for commodity X
Market demand Function
Why does the Demand Curve Slope
Downward
1.Diminishing marginal utility:This law suggests that
as more of a product is consumed the marginal
(additional) benefit to the consumer falls, hence
consumers are prepared to pay less.While total utility
continues to rise from extra consumption, the additional
(marginal) utility from each bar falls. If marginal utility
is expressed in a monetary form, the greater the quantity
consumed the lower the marginal utility and the less the
rational consumer would be prepared to pay.
.
Cardinal - utils
BARS TOTAL UTILITY ( utils) MARGINAL UTILITY
1 100
2 190 90
3 270 80
4 340 70
5 400 60
6 450 50
7 490 40
8 520 30
9 540 20
Why does the Demand Curve Slope
Downward
2.Income effect: If we assume that money income is
fixed, the income effect suggests that, as the price of a
good falls, real income – that is, what consumers can buy
with their money income – rises and consumers increase
their demand.
3. Substitution effect:In addition, as the price of one
good falls, it becomes relatively less expensive.
Therefore, assuming other alternative products stay at
the same price, at lower prices the good appears cheaper,
and consumers will switch from the expensive
alternative to the relatively cheaper one.
Changes in the Demand Curve
Shift in the Demand Curve: A shift in the demand
curve occurs when the whole demand curve moves to the
right or left. For example, an increase in income would mean
people can afford to buy more goods even at the same price.
The demand curve could shift to the right for the following
reasons:
The good became more popular (e.g. fashion changes or
successful advertising campaign)
The price of a substitute good increased.
The price of a complement good decreased.
A rise in incomes (assuming the good is a normal good, with
positive income elasticity of demand)
Seasonal factors.
Decrease in Demand
Changes in the Demand Curve

Movement Along the Demand Curve:A change in price causes

a movement along the demand curve. It can either be contraction
(less demand) or expansion/extension. (more demand)

Contraction in demand. An increase in price from $12 to $16

causes a movement along the demand curve, and quantity
demand falls from 80 to 60. We say this is a contraction in
demand
Expansion in demand. A fall in price from $16 to $12 leads to an
expansion (increase) in demand. As price falls, there is a
movement along the demand curve and more is bought.
Dx= F (Px, Py, T, Y,……U)
 Exceptions to the Demand Curve
1. Giffen goods: Giffen Goods is a concept that was
introduced by Sir Robert Giffen
Origin of the Term…..The Irish Potato Famine is a classic
example of the Giffen goods concept. Potato is a
staple in the Irish diet. During the potato famine,
when the price of potatoes increased, people spent
less on luxury foods such as meat and bought more
potatoes to stick to their diet. So as the price of
potatoes increased, so did the demand, which is a
complete reversal of the law of demand.
A Giffen good is a low income, non-luxury product
that defies standard economic and consumer demand
theory. Demand for Giffen goods rises when the price
rises and falls when the price falls.
Exceptions to the Demand Curve
2. Veblen Goods: Veblen Goods is a concept that is
named after the economist Thorstein Veblen, who
introduced the theory of “conspicuous consumption”.
According to Veblen, there are certain goods that
become more valuable as their price increases. If a
product is expensive, then its value and utility are
perceived to be more, and hence the demand for that
product increases.
Exceptions to the Demand Curve
3. The expectation of Price Change: There are times
when the price of a product increases and market
conditions are such that the product may get more
expensive. In such cases, consumers may buy more of
these products before the price increases any further
4. Necessary Goods and Services: Another exception
to the law of demand is necessary or basic goods.
People will continue to buy necessities such as
medicines or basic staples such as sugar or salt even if
the price increases. 
1.Which of the following is a Veblen Good?
Potatoes
Salt
Luxury Car
None of the above
2.