CHAPTER NO.3 Demand • Meaning of Demand: Demand of commodity refers to the quantity of a commodity which a consumer is willing to buy at a given price, and time. • Demand Function: Demand Function is the functional relationship between demand and factors affecting demand. • Dx = f (Px, Po, Y, T, E) INDIVIDUAL DEMAND or FUNCTION • Individual demand Function shows how demand for a commodity, demanded by individual consumer in the market. It is related to its various determinants: Dx = f ( Px, Pr, Y, T E ) Factors effecting Individual demand • 1. Own price of the commodity. • 2. Price of the related goods:(i) Substitute goods. ( Tea & Coffee) (ii) Complementary goods ( Petrol & Car) 3. Income of the consumer. (i) Normal Goods (ii) Inferior goods 4. Taste and preferences. 5. Expectations Market Demand Function • Market Demand: Market Demand refers to the sum total of the quantities demanded by all the individual households in the market at various prices in given time. Mkt. Dx = f ( Px, Pr, Y, T, E, P, D ) Factors affecting Demand Following are the factors which affect the Demand. • • • • • • • • • • • • Price of Commodity: When the price of commodity rises demand of commodity will decrease and viceversa. Price of other related commodity: Price of other commodity affect the demand of commodity in two ways: Substitute Goods:- In the case of substitute goods, the demand for a commodity rises with a rise in the Price and fall with the fall in price. Example- Tea and coffee Complementary Goods:- In case of complementary goods, the demand for a commodity rises with fall in the Price and decreases with the rise in the price of complementary goods. Example: Car and Petrol, Ink and Pen, Bread and Butter. Income of Consumer:- When the Income of Consumer rises the demand of normal goods increases and if the income decreases the demand of normal good decreases. In case of Inferior good the demand will decrease with rise in income and increase with decrease in income. Taste and Preference: - If the taste and preference of consumer develop for a commodity the demand will rise. Expectation: - If the consumer expects that price in future will rise the demand will rise and vice-versa Population:- More population, more demand, less population less demand. Climate: - The demand of commodity changes according to the climate. Law of Demand Other things are equal, the demand for a good rises with a decrease in price and decreases with increase in price. Px Qx Y Price D 10 100 P1 9 150 P P2 8 200 Q1 O Q Demand Q2 D X ASSUMPTION OF LAW OF DEMAND • 1. Price of related goods should not be change. • 2. Income of the consumer should not change. • 3. Taste and preferences should not be change. • 4. No change in price in future. EXCEPTIONS OF LAW OF DEMAND. • • • • • • 1. Inferior good or Giffen goods. 2. Goods become scarce in future. 3.Articles of social distinctions. 5. Necessities. 6. Ignorance. 7. Emergency. Demand curve upward When Law of demand fails. • When Law of demand fails Demand curve does not slope downward . Its slope upward: - MIND MAP OF MOVEMENT IN DEMAND CURVE. MOVEMENT ALONG DEMAND CURVE CHANGE IN QUANTITY DEMANDED Extension in demand Caused by decrease in own price of the commodity Contraction in demand Caused by increase in own price of the commodity Mind map Shift in demand curve SHIFT IN DEMAND CURVE CHANGE IN DEMAND Decrease in demand or Backward shift in demand curve ( Demand Curve shift to left ) Increase in demand or Forward shift in demand curve ( Demand Curve shift to Right) Caused by change in factors other than own price of the commodity. Extension in demand (Downward movement along the demand curve) • Extension of demand also called expansion in demand. Movement along the demand curve refers to extension and contraction in demand. Both are caused by change in own price of the commodity. Contraction in Demand Curve. • Contraction in demand refers to decrease in quantity demanded due rise in own price of the commodity. Change in Demand It is also called shift in demand curve. When quantity of commodity changes due to change in factor other than price. It has two types: 1. Rightward shift in demand. 2. Leftward shift in demand. Rightward shift in demand. – or Increase in demand. • It means that quantity demanded of a commodity increases even than price of the commodity remains constant. OR When quantity of a commodity increases due to other factors and price of the commodity remains constant. Right ward shift in demand PRICE DEMAND 20 20 100 150 FACTORS SHITING DEMAND RIGHTWARD. • • • • 1. When income of the consumer increases. 2. When price of substitute good increase. 3. When price of complementary good falls. 4. When taste of the consumers shifted in favour of the commodity due to change in fashion and climate. LEFTWARD SHIFT IN DEMAND PRICE DEMAND 20 20 70 100 FACTORS SHIFTING DEMAND CURVE LEFTWARD. • 1. When income of the consumer’s falls. • 2. When price of the substitute goods decrease. • 3. When price of the complementary goods increases. • 4. When taste of the consumer shifts against the commodity due to change in fashon or climate Elasticity of Demand The elasticity of demand measures the responsiveness of the quantity demanded due to change in price of the commodity Measurement of elasticity of demand Total Expenditure Method/Total outlay method If no change in total expenditure as change in price than Ed=1 If total expenditure and price changes in opposite direction Ed>1 If total expenditure and price changes in same direction Ed<1 Proportionate or Percentage Method Under this method elasticity of demand is measured by the ratio of the percentage change in quantity demanded to the percentage in price. Ed = Percentage change in Quantity Demanded Percentage change in Price Geometric Method/ Point Elasticity Method If elasticity of demand is to be measured on the point of demand curve following formula is to be used. ed = Lower segment from the point Upper segment from the point Factors effecting elasticity of Demand • • • • • • Nature of Goods Availability of Substitutes Postponement of Consumption Number of Uses Time period Habit of consumer Degrees of elasticity of Demand Perfectly elastic Demand Perfectly Inelastic Demand Elastic Demand Price Flatter Demand Curve E > 1 D Quantity Thanks • Prepared by:• HANS RAJ MEENA • K.V. BSF POKARAN
