DEFINITIONS OF DEMAND
 Demand refers to the quantities of a commodity
that the consumers are able and willing to buy at
each possible price during a given period of
time, other things being constant.
 Constituents of demand
 Desire
 Money to satisfy desire
 Willingness to spend
 Relationship of price and quantity demanded
 Relationship of time and quantity of commodity
demanded
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 Law
of demand holds good when ‘other
things remain the same.’
 All determinants of demand other than the
price remain unchanged.
 no change in the price of related goods.
 No change in the income of the consumer
 No change in taste and preferences
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There is an inverse relationship between price and
demand for a commodity. It indicates the direction
of change in demand as a result of change in price.
DEMAND CURVE SLOPE DOWNWARD
Law of diminishing marginal utility: a consumer
demands a commodity because it has utility. As he
consumes more and more units of a commodity, in
a given time, the utility derived from each
successive units goes on diminishing.
Marginal utility of any good diminishes as more and
more of that good is purchased.
Marginal utility is the addition made to the total
utility by consuming one more unit of a commodity.
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ALGEBRIC EXPLANATION
Mu(1)/p(1) = Mu(2)/p(2) = ……. Mu(n)/p(n)
INCOME EFFECT: it is the effect that change in person’s real
income caused by change in the price of a commodity has on the
quantity of that commodity.
Fall in the price causes increase in the real income and so
extension in demand. On the contrary, rise in price causes
decrease in real income and so contraction in demand.
SUBSTITUTION EFFECT: it is a effect that a change in relative
prices of substitute goods has on the quantity demanded.
Substitutes are goods that can be used in place of each other. For
example tea and coffee.
To get maximum satisfaction, a consumer will buy more units of
that commodity whose price, in relation to its substitute, has
gone down. The consumer substitutes cheaper good for the good
whose price has not altered.
Some goods have more than one use. Milk,
may be used for drinking and for making curd
and cheese. At its high price an individual
consumer may buy milk for drinking only, but
at the reduced price milk may be bought for
making curd and cheese as well.
 SIZE OF CONSUMER GROUP
 When the price of a commodity falls, then
many consumers, who are unable to buy the
commodity at its previous price, come
forward to buy it. As a result total demands
go up.
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Positive slope of the demand curve.
price
quantity
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Articles of distinction
Veblen goods are articles of distinction or luxury
goods like jewelry, original works of art by great
artists.
These goods command more demand when their
prices are high.
Consumers out of ignorance or poor judgment
consider a commodity to be of a low quality if its
price is low and of high quality if its price is
high.
GIFFEN GOODS
These are those inferior goods whose demands
falls even when their price falls, so that the law
of demand does not hold good
EXCEPTION OF RISE OR FALL IN PRICE IN FUTURE
If prices are likely to rise more in the future
then even at the existing higher price people
may demand more units in the present. If prices
are likely to fall further in future then even at
the existing lower price people may demand less
in the present.
1.
Price of the commodity
Other determinants remaining constant, change in the price of
a good causes an inverse change in its demand. Rise in prices
causes contraction in demand and fall in prices causes
extension of demand. This relationship is called LAW OF
DEMAND.
2. Price of related goods
Related goods are classified as substitute goods and
complementary goods.
SUBSTITUTE GOODS: In case of substitute the quantity demanded
of one good is positively related to the price of other good. If
price of one good increases the demand for substitute
increases.
COMPLEMENTARY GOODS: These are those goods which complete
the demand for each other. There is negative relationship
between t e demand for first good and price of the second
good
Substitute goods
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complementary goods
Y
y
demand for
p1
p1
demand for
substitute
complementary
p
p
o
q
q1
x
o
goods
q
q1
x
3.INCOME OF THE CONSUMER
There is a positive relation between income of the
consumer and his demand for a good. The
relationship between income of the consumer and
demand for a commodity is discussed with
reference to: normal goods, necessaries, inferior
goods.
Relationship between income and
demand for the commodity
Normal
goods
• These are those goods the demand for which
tends to increase with the increase in
consumer’s income, and decrease with the
decrease in income.
• These are those goods the demand for which
tends to decline following a rise in consumers
Inferior
income, demand increases with fall in income.
goods
• The demand remains constant irrespective of
the level of income. For example salt and match
necessar box.
ies
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It includes fashion, habit custom etc. tastes and
preferences are influenced by advertisement,
change in fashion, new inventions etc. other
things being equal, demand for those goods
increases in which consumer develop taste and
preferences.
EXPECTATIONS
change in consumers expectations about such
things as product prices, product availability and
future income is another determinant of demand.
DISTRIBUTION OF INCOME
if there is uneven distribution of income, there
will be more demand for luxury goods, on the
other hand if income is evenly distributed, there
will be less demand for luxury goods and more
demand for necessaries and comforts.
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INCREASE IN DEMAND
Rise in demand in
response to change in
determinants of
demand other than the
price of the product
Demand increases in
two ways: same price
more demand and more
price same demand.
It causes rightward
shift in demand curve.
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DECREASE IN DEMAND
Fall in demand in
response to change in
determinants of
demand other than the
price of product.
Demand decrease in
two ways: same price
less purchase and less
price same purchase.
It causes leftward shift
in demand curve.
Extension in demand
 Rise in demand in
response to fall in
prices of a
commodity, other
things being equal.
 It is expressed by a
movement from a
higher point to a
lower point along the
same demand curve.
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Increase in demand
 It refers to the rise in
demand in response
to change in the
determinants of
demand.
 It is expressed by the
upward shift of the
entire demand curve.
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Contraction of demand
Fall in the demand in
response to a rise in the
price of a commodity,
other things being
equal.
It is expressed by a
movement from a lower
point to a higher point
along the same demand
curve.
Decrease in demand
 Fall in demand in
response to change
in determinants of
demand, other than
the price.
 It is expressed by the
downward shift of
the entire demand
curve.
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