THEORY OF

DEMAND
-MS. SHIVA JAIN
UNIT 1
Principle of Microeconomics, Mankiw (Ch-4,8)
● Demand
● Supply
● Price Determination
● Elasticity of Demand
● Elasticity of Supply
Microeconomics :Theory and Applications, Edgar K, Browning, Mark A, Zupan
● Consumer Surplus
Economics, Lipsey and Crystal
● Economic issues and concepts
● How economist work
DEMAND- INTRODUCTION

Demand is an economic principle referring to a consumer's desire and willingness to pay a price for a
specific good or service.
Think of demand as your willingness to go out and buy a certain product.

Demand= Desire + willingness to pay

MARKET

● A market is a group of buyers and sellers of a particular good or service.

● The buyers as a group determine the demand of the product and seller as a group determine supply of
the product.

● Market can take many forms.

 Organized : Agricultural Commodities(Auctioning happens)
 Unorganized : Ice Cream (No auctioneer bidding)
COMPETITION

Perfectly Competitive markets:

● A market that has numerous buyers and sellers that each has a negligible effect on the market price.
● The goods offered for sale are exactly the same.(Homogenous goods). Eg: Farmer’s market

Monopoly
Markets that have single seller and this seller sets the price. Eg: IndianRailways

Some markets fall between extremes of the Perfect Competition and Monopoly.
LAW OF DEMAND

●It is an inverse relationship between price and demand for a good or service,
ceteris paribus.

● It simply states that as the price of a commodity increases, demand decreases,

provided other factors remain constant. Also, as the price decreases, demand
increases.
INDIVIDUAL DEMAND

-It refers to demand from individual, what he will buy at various prices.

Individual Demand Schedule- Tabular representation

INDIVIDUAL DEMAND CURVE

● Graphical
Representation
● Downward sloping
curve
MARKET DEMAND SCHEDULE
MARKET DEMAND CURVE(HORIZONTAL SUMMATION,
KEEPING PRICE FIXED)
DEMAND FUNCTION
A function explains the relationship between two or more variables.

A demand Function for a good is the relationship between (demand )various amount of commodity that
might be bought and its determinant in a given market in a given period of time.

The determinants of demand provide analysis of consumer behaviour. They affect both the direction and
proportion of change in demand.

Determinants:

●Own Price

●Price of related goods ( substitute/complementary)

●Level of disposable income

●Taste and Preference
●Expectations
●Number of buyers

Demand Function can be expressed as :

DETERMINANTS OF DEMAND
PRICE OF COMMODITY
•INVERSE RELATIONSHIP
•LAW OF DEMAND
•DP/DQ<0
PRICE OF RELATED GOODS
 Goods that are perceived by the consumer as the same, such that they can be used instead
of one another and provide the same level of satisfaction, are called Substitute Goods.
 P coffee inc q coffee Q tea inc
● Substitute goods Dqd/Dpy>0 , Dcoffee/Ptea>0
● Direct relationship
● When there is an increase in the price of a related product leads to a rise in the quantity demanded of
the main product, then the goods are said to be substitutes.

 On the other hand, goods that are used by the consumer together and are of no use when
consumed alone, are called Complementary Goods.
● Complementary goods Dqd/Py<0
● Psugar inc P cofffee inc q coffe dec direct
● Inverse price and demand relationship
● When the reduction (hike) in the price of a related good, results in an increase (decrease) in the
quantity demanded of the main product, then the goods are said to be complements.
SUBSTITUTE GOODS

● Dqx/Dpy>0 substitute goods

● x, y goods tea and coffe
● D derivative
● Q quantity p price
● Ptea increases Qtea fall, Q coffee inc
● Dqcoffe/ Dptea>0
● When there is inc in price of tea then quantity demanded for tea will fall and quantity demanded for
coffee increase. So price of tea and quantity of coffee positive/ direct relationship.
COMPLEMENTARY GOODS.

● Dqx/Dpy<0
● x, y good flour and cookies
● D derivative
● Q quantity p price
● When price of flour rises Quantity of flour will decrease, and because flour and cookies are
complimentary gods so quantity cookies will decrease.
INCOME OF THE CONSUMER

- Normal Good: If the demand for good falls when income falls, the good is called normal good.
- Normal goods has a positive correlation between income and demand. (DI/Dq>0)
- Examples of normal goods are clothing, and household appliances.

- Inferior Good :If the demand for good falls when income rises, the good is called Inferior goods.
- Inferior goods has a negative correlation between income and demand.(DI/DQ<0)
- Eg:Bus rides, santro, jowar etc
Taste and Preferences
If you like ice cream more, you buy more of it.

Expectation about future prices and Income

If you expect to earn a higher income next month then you will spend
buying more goods now.

Number of Buyers

Market demand depend on no. of buyers. If no. of buyers increase

market demand will increase.

When quantity demanded changes due to variation in its own price

there will be movement in demand curve if variables mentioned
above changes there will be shift in demand curve.
ASSUMPTIONS

• Income of the individual remains constant.

• Prices of the related goods remain unchanged.
• The taste and preferences for a given good remains same.
• The composition and size of the overall population in the country remains constant.
• The degree of taxation and fiscal policy of the government remains unchanged throughout
the operation of the law
• No new product is introduced in the market.
• There are no climatic variations.
DEMAND CURVE

The figure, represents the association

between Price (P) and Quantity demanded
(Q). Initially, at price P, Quantity
demanded was Q1. Whereas, with a
increase in price from P1 to P2, the
Quantity demanded decreased from Q1 to
Q2. This shows that with increase in price
from P1 to P2, the quantity demanded
decreases from Q1 to Q2.
 EQUATION

D= a - b P

Where, a = quantity of intercept

And b= Slope

dQ/dP , is the rate of change in quantity

demanded with the change in the price
of a commodity.