THEORY OF DEMAND

Ms. Stuti Jain

Symbiosis Law School, Noida
Meaning of Demand
• Individual Demand- demand by single consumer
• Market Demand- total of demand by all the individuals
Meaning of Demand
• Commodity that will be purchased at a particular price
during a particular period of time.
• Demand is the amount of good or service a consumer is
willing and able to purchase (spend) per period of time
• Prof. Benham “the demand for anything at a given price is
the amount of it which will be bought per unit of time at
that price”
Factors affecting Demand
1. Price of the Commodity
• Inverse relationship between Price and Quantity
• Price Demand

2. Income of the Consumers

• Normal goods- Positive relationship between Income &
Quantity
• Inferior goods- Negative relationship between Income &
Quantity
• Income Demand
Factors affecting Demand
3. Price of Related goods
• Substitute Goods- used in place of another Eg. Tea &
Coffee, Coke & Pepsi
• Complementary Goods-used together Eg. notebooks and
pens or pencils, golf balls and golf clubs; gasoline and
sport utility vehicles
• Inverse relationship between demand & price of its
complement
• Positive relationship between demand & price of its
substitute
Factors affecting Demand
4. Consumers Expectations with future prices
• Expectation of increase in future price ,demand in present
increases
• Expectation of decrease in future price ,demand in
present decreases

5.Consumers tastes & Preferences

• Social customs, habits, fashion, lifestyle
• Shifts in taste affect demand
Law of Demand
• The law of demand states that other factors being
constant (cetris peribus), price and quantity demand of
any good and service are inversely related to each other.
When the price of a product increases, the demand for
the same product will fall.
Assumptions- Law of Demand

No change in the No change in size No change in prices

income and composition of of related goods
the population

No change in No expectation of a No change in the

consumer's taste, price change in climatic conditions
preference etc. future
Demand Schedule- Individual Demand Schedule

• Demand of an individual customer for a commodity in

relation to its price.
• Exists an inverse relationship between the price and
quantity demanded.
Price per unit of Quantity demanded
commodity X of commodity X
(Px) (Qx)

100 50

200 40

300 30

400 20

500 10
Individual Demand Curve
• Graphical representation of the individual demand
schedule
• X-axis represents the demand and Y-axis represents the
price of a commodity.
Demand Schedule- Market Demand Schedule
• Summation of the individual demand schedules
• Depicts the demand of different customers for a
commodity in relation to its price
Quantity Quantity
Price per Market
demande demande
unit of Demand
d by d by
commodit consumer consumer
yX QA + Q B
A (QA) B (QB)

100 50 70 120

200 40 60 100

300 30 50 80

400 20 40 60
Market Demand Curve
• Graphical representation of the market demand schedule.
• X-axis represents the market demand in units and Y-axis
represents the price of a commodity
Exceptions to Law of Demand

1) Types of goods
Inferior Goods:
Generally low-quality goods are consumed by the poorer sections of
society. Inferior goods are consumed by poor consumers for their survival.
Consumers move to better quality goods with an increase in income.
Also, if the income of consumers falls they might shift from good
quality products to inferior goods or may reduce the demand for such
goods.
All goods whose income is negative are inferior goods.

Giffen Goods:
• Cheaper varieties of inferior goods.
• Bajra, low priced rice, low priced bread, cheaper vegetable like potatoes.
• Due to the lack of substitute consumers consume these goods even at a
high price.
Exceptions to Law of Demand

2) Articles of Snob appeal

• Distinct and costly goods
• Sign of prestige
• The consumer buys more of such product if the price of
such product is high.
• Conspicuous Consumption
• Diamond- rich demand because of status
3) Expectation Regarding Future prices- Quantity
demanded of a product increases if it is expected that there
will be a rise in the price of the product. Consumers
postpone their purchases when fall in price is expected.
Exceptions to Law of Demand

4) Emergencies
War, famines etc.
Consumers buy more without regard to prices

5) Ignorance
Assumption that higher prices goods are of a better quality
than low priced goods
Price- Index of Quality
Movement versus Shift in Demand Curve
• Movement- Expansion or Contraction of Demand/ change
in Demand
• Shift- Increase or Decrease in Demand Curve
• A shift in demand means at the same price, consumers
wish to buy more. A movement along the demand curve
occurs following a change in price.
Movement along the demand curve

• Contraction in demand- Fall in demand due to rise in the

price of a good
• Upward movement
• Expansion in demand-Rise in demand due to fall in the
price of a good
• Downward movement
Shifts in Demand
Increase in demand (Shift to the Right)
• When due to factors, other than price, there is more
demand at the same price or same demand higher price
• The Demand curve will shift rightward
• No change in the price of the product
• No change in the supply of product
• Income of Consumer is increasing
• Demand is increasing
Shifts in Demand
The Decrease in Demand (Shift to the Left)
• When due to factors, other than price, there is less
demand or same demand at lesser price
• Demand curve will shift leftward
• No change in the price of the product
• No change in the supply of product
• Income of Consumer is decreasing
• So demand for product decreasing
Thank you