What is Demand?

Demand for a commodity refers to the quantity of a commodity that a consumer is willing to buy at a
given price during a given period of time.

Therefore demand requires a desire to purchase a commodity and the ability to buy it; i.e., to
pay the price.
Mere desire is not demand. Let us consider the following statements:
It requires ability to pay for it. i) Mr. Akshay purchased 2kgs apples last week.
(Price of apples is not stated)
Demand = ability to pay + willingness to pay ii) Mr. Akshay purchased 2Kgs. apples when the
price of apples was Rs.60 per kg.
The definition of demand highlights three
essential elements of demand: (Period of time is not stated.)

(i) Price of the commodity
(ii) Quantity of the commodity
(iii)Period of time: the time period may be a
day, a week, a month, a year or any other
period.
iii) Mr. Akshay purchased 2Kgs. apples last week
when the price of apples was Rs.60 per Kg.
The third statement is complete as it states the
quantity of the apples, the price of apples and
the time period during which the said quantity
is demanded.
 Price of
the Price of Substitute Goods.
commodity Eg. like Tea and Coffee
Advertisin
g Price of
Expenditur related Price of Complementary
e goods goods. Eg. Car and Petrol

Factors
Season affecting
and Income of
demand
weather the buyer
for a
conditions commodity

Distributio Tastes and

n of preference
income s of the
and wealth buyer

Population
 Law of Demand

The law of demand states that other things remaining same, quantity demanded of a
commodity is inversely related to its price.
Exceptions to the law of demand

1. Giffen Goods:
Giffen goods are special type of inferior goods in which negative income effect is stronger than negative
substitution effect. Giffen goods do not follow law of demand as their demand rises when their price rises.
Examples of Giffen goods are jowar and bajra..

2. Status Symbol Goods:

Some goods are used by rich people as status symbols, e.g. diamonds, gold jewellery. The higher the price, the
higher will be the demand for these goods. When price of such goods falls, these goods are no longer looked at
as status symbol goods and, therefore, their demand falls.
 
3. Necessities:
Commodities such as medicines, salt, wheat, etc., do not follow law of demand because we have to purchase them in
minimum required quantity, whatever their price may be.
 
4. Goods Expected to be Scarce:
When the buyers expect a scarcity of a particular good in the near future, they start buying more and more of that
good even if their prices are rising. For example, during war, famine, etc., people tend to buy more of some
goods even at higher prices due to fear of their scarcity in near future.
 Elasticity of Demand

The elasticity of demand refers to the sensitivity in demand for goods to changes in other economic variables. These
economic variables can be the price of goods, prices of other goods or income. Here, one economic variable changes
while the other variables are kept constant.

Degree of responsiveness of quantity demanded to a change in price may differ; ie, Elasticity of demand could
also differ

Relatively Elastic Demand:

When the percentage change in
quantity demanded of a Pric
commodity is more than the e
percentage change in its price, the
demand for the commodity is
called relatively elastic.

For example, if the price of a

product increases by 20% and
the demand of the product
decreases by 25%, then the
demand would be relatively
elastic.

Quantity
Relatively Inelastic Demand
When the percentage change in
quantity demanded of a
commodity is less than the
percentage change in its price, the
demand for the commodity is Pri
called relatively inelastic. ce

For eg: If the price of a

product increases by 30% and
the demand for the product
decreases only by 10%, then
the demand would be called
relatively inelastic. Quantity

Unit Elastic Demand

When the percentage change in
quantity demanded is equal to
percentage change in price, the
demand is said to be unit elastic. Pric
e

For example, a product's

demand is unitary elastic if a
10% change in its price leads to
a 10% change in the quantity
customers desire. In this case, a
price reduction might motivate
customers to request more
product units. Quantity
Price Elasticity of Demand

The price elasticity of demand, commonly known as the elasticity of demand refers to the
responsiveness and sensitiveness of demand for a product to the changes in its price. In other words
-

If quantity demanded of a commodity rises by 20% due to 8% fall in its price

EP = 20 = 2.5
8
When price of a commodity is Rs.10 per unit, its demand is 100 units. When the price
falls to Rs. 8 per unit, demand expands to 150 units. Calculate price elasticity of
demand.

EP = 10 X 50
100 2
= -2.5

(Price elasticity is always negative due to inverse relationship between demand

and price.)
 Cost of Production
How do you know if a production order made a worthwhile profit?
Cost Function –
You do this by calculating the cost of production, but
what does that mean?  Cost is function of output. Cost will increase or
decrease with increase or decrease with output.
Cost is defined as the expenditure incurred by a firm Cost related to price paid by the factors of
or producer to purchase or hire factors of production production.
in order to produce a product.

As a producer he/she has to pay rent for land, wages

to labour and interest to procure capital. The
producer must also be compensated for his/her
services which is called normal profit.

Wages, rent, interest, profit are called factor costs of

production.

Besides these, the producer also incurs expenditure on

raw materials, electricity, water, depreciation of
capital goods such as machines and indirect taxes.

The producer also uses the services of certain factors

supplied by his/her own self.
Analysis of Cost for Production

Suppose, a firm producing pens incurs the following

costs at different levels of output. You will see that its
fixed cost remains constant whereas variable cost
changes with every change in level of output
No. of pens in
Total fixed cost Total variable cost
units
units (1 unit =
100 pens) (Rs.) (Rs.)
0 60 0
1 60 60
2 60 100
3 60 150
4 60 260
5 60 390

TFC - Total expenditure on fixed factors is called total

fixed cost (TFC)
TVC - Total expenditure on variable factors is called total
variable cost (TVC)
TC - Sum of TFC and TVC is the total cost (TC)
TC = TFC + TVC
TFC - Total expenditure on fixed factors is called total fixed
cost (TFC)

TVC - Total expenditure on variable factors is called total

variable cost (TVC)

TC - Sum of TFC and TVC is the total cost (TC)

TC = TFC + TVC

Average cost (AC) obtained by dividing total cost by the

number of units.
Marginal cost (MC) of producing a level of output is
the addition to the total cost or total variable cost
caused by producing an extra unit of output.
(MCn = TCn – TCn-1)