Demand

 What is demand
Desire backed by the ability and willingness
to pay for a commodity.
 Demand= Desire + ability + willingness
 Individual demand
 Market Demand
 Demand Schedule
 Demand curve
 Demand
According to Bobber
By demand we mean various quantities of a
commodity that a consumer would buy from one
market at given period of time at various prices or
at various incomes or at various prices of related
commodities.
From this definition we can explain three types of
demand
1. Price demand
2. Income demand
3. Cross demand
 Contd…

Law of Demand
Other things remains constant (ceterius Paribus)
Quantity demanded of a commodity extends with a
fall in price and contracts with a rise in price
Reasons for demand curve slopes downwards
1. Income effect
When the price of a commodity falls the consumer
can buy more quantity of the commodity with his
given income. OR if he chooses to buy the same
amount of the commodity as before, some money
will be left with him because he has to spend less
due to its lower price.
 Contd…

In other words, as a result of fall in the price of a

commodity, real income of the consumer or
purchasing power increases. This is called income
effect
2. Substitution effect
When price of commodity falls it become relatively
cheaper than other commodities. This induces the
consumer to substitute the commodity whose price
has fallen for other commodities which have now
become relatively dearer. As a result of this
substitution effect quantity demanded of the
commodity whose price has fallen, rises.
 Contd…

Veblen Effect
According to Veblen, some consumers measure the
utility of a commodity entirely by its price. i.e. for
them, greater the price of a commodity the greater
its utility. For e.g. diamonds are considered as
prestige good in the society and for the upper strata
of the society the higher the price of the diamonds,
the higher the prestige value of them and therefore
the greater utility.
At a higher price the quantity demanded of
diamonds by a consumer will rise. This is called
Veblen effect.
 Contd…

Giffen goods
Sir Robert giffen observed that when price of bread
increased, the low paid British workers in the early
19th century purchased more bread and not less of it
and this is contrary to law of demand.
Reason for this is that, these workers consumed a diet
of mainly bread and when price went up they were
compelled to spend more on given quantity of bread.
Therefore they could not afford to purchase as much
meat before. They substituted bread for meat in order
to maintain their intake of food. Such good in whose
case there is a direct price-demand relationship are
called Giffen goods
 Causes of Changes in Demand
Change in real income:
Money income : Amount of money which a person
may earn.
Real income: Quantity of goods and services which
an individual can buy with that amount of money.
Change in the level and distribution of
income:
Demand for those goods will increase which are
purchased by a class whose spending power has
increased. Larger the average household income
greater is the demand for the commodities they
consume.
 Contd………..

Change in tastes, preferences and fashion

Climate or weather changes
Changes in the size of population:
For eg: If America allow a free entry to Indians we
can expect emigration from India. If Indians stick on
to their own mode of living in food and dress in
their own homes; the demand for such things will be
created there.
 Contd…….
Change in composition of population
For e.g. In a country of increasing population ,like
India, where lakhs of children are born every day,
there will be demand for toys, feeding bottles etc.
Change in money supply
When there is inflation additional money will add
to the purchasing power of the commodity and the
prices will rise. But rise of prices will not be
uniform for all the commodities. People will have t
readjust their expenditure.
 Contd………

Change in price of the commodity

Change in savings
Demand depends on marginal propensity to save.
Large saving means less money available for
purchase.
Conditions of Trade
Expectations or anticipations
Prices of related commodities