 DEMAND
Meaning of
Demand
 Meaning
and Definition of Demand
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b.
c.
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According to 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.”
According to Bobber, “By demand we mean the various quantities of a
given commodity or service which consumers would buy in one market in a
given period of time at various prices.”
Requisites:
Desire for specific commodity.
Sufficient resources to purchase the desired commodity.
Willingness to spend the resources.
Availability of the commodity at
(i) Certain price (ii) Certain place (iii) Certain time.
Kinds of Demand
1. Individual demand
2. Market demand
3.
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Income demand
Demand for normal goods (price –ve, income +ve)
Demand for inferior goods (eg., coarse grain)
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4. Cross demand
Demand for substitutes or competitive goods (eg.,tea & coffee, bread and rice)
Demand for complementary goods (eg., pen & ink)
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5. Joint demand (same as complementary, eg., pen & ink)
6. Composite demand (eg., coal & electricity)
7. Direct demand (eg., ice-creams)
8. Derived demand (eg., TV & TV mechanics)
9. Competitive demand (eg., desi ghee and vegetable oils)
10.Demand of unrelated goods
FACTORS AFFECTING DEMAND
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1. Prices of Goods
2.Income of Consumer
3.Prices of Related Goods
4.Population
5.Tastes,Habit
6.Expectation about future prices
7.Climatic Factors
8.Demonstration Effect
9.Distribution of national income
Demand Schedule
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Demand Schedule: a tabular presentation showing different quantities of a
commodity that would be demanded at different prices.
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Individual Demand schedule
Price
A
Types of Demand Schedules
Market Demand Schedule
Price A
B
C
M.S
1
50
1
50
45
40
135
2
40
2
40
30
38
108
3
30
20
30
85
20
35
4
3
4
20
15
25
60
Demand Curve
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The Graphical Representation of Demand Schedule is called a Demand Curve. It is of two
types:
Types of Demand Curve
Individual DC
Y
Price
O
Market DC
Y
Price
Less Flatter
Demand
X
O
More Flatter
Demand
X
Figure 2.1 Market demand for tomatoes
Demand, the assumed inverse relationship between price and quantity purchased, can be
represented by a curve that slopes down toward the right. Here, as the price falls from $11
to zero, the number of bushels of tomatoes purchased per week rises from zero to 110,000.
Figure 7.2 Market demand curve
The market demand curve for Coke, DA+B, is obtained by summing the quantities that
individuals A and B are willing to buy at each and every price (shown by the individual
demand curves DA and DB).
Demand Curve
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Movement along demand curve Vs. Shift in demand curve:
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Distinction between change in quantity demanded and change in demand.
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A. Change in quantity demanded – When quantity demanded changes ( rise or fall )
as a result of change in price alone, other factors remaining the same.
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Contraction/fall in quantity demanded
Extension/Rise in quantity demanded
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The change is depicted/ represented by the movement up or down on
a given demand curve. This does not require drawing a new demand
curve.
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Figure 2.2 Shifts in the demand curve
An increase in demand is represented by a rightward, outward, shift in the demand curve,
from D1to D2. A decrease in demand is represented by a leftward, or inward, shift in the
demand curve, from D1 to D3.
The Law of Demand
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Prof. Samuelson: “Law of demand states that people will buy more at lower price
and buy less at higher prices, others thing remaining the same.”
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Ferguson: “According to the law of demand, the quantity demanded varies inversely
with price”.
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Chief Characteristics:
1.
Inverse relationship.
2.
Price independent and demand dependent variable.
3.
Income effect & substitution effect.
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Assumptions:
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No change in tastes and preference of the consumers.
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Consumer’s income must remain the same.
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The price of the related commodities should not change.
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The commodity should be a normal commodity
The Law of Demand
EXPLAINERS:
Why demand curve slopes downwards?
1. Income effect
2. Substitution effect
3. Diminishing Marginal Utility
Law of Demand
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Exceptions:
Inferior goods
Articles of snob appeal. (exception: Veblen goods, eg., diamonds)
Expectation regarding future prices (shares, industrial materials)
Emergencies
Quality-price relationship
Conspicuous necessities.
Ignorance
Change in fashion, habits, attitudes, etc..
Importance:
Price determination.
To Finance Minister
To farmers
In the field of Planning.
Market Research and Law of
1. The more confidence a person has in price information as a predictor of
Demand
quality, the more likely he’ll be to choose a high-priced, rather than a
2.
3.
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low-priced item.
A person who perceived himself as experienced in purchasing a product
will generally choose a low-priced item, but an inexperienced person will
select a high-priced one.
A person who selects a high-priced item will (i) believe it’s more difficult
to judge product quality, and (ii) feel he has less ability to make accurate
quality judgments than one who chooses a low-priced item.
A person who purchases a high-priced product would perceive large
quality differentials. He would also feel that it is risky and uncertain to go
in for a low-priced product.
Business executives also disbelieve that the consumer is rational. (Eg.,
Yale – the under priced lock)
Purchasing behavior of the consumer is mostly repetitive.
The Law of Demand
P
P1
P
A
B
P2
D1
Q1
Q2
Q
CHANGE IN PRICE=
change in quantity
demanded
D2
Q
CHANGE IN OTHER=
change in demand
The Law of Demand
P
D1
D2
Q
CHANGE IN OTHER=
change in demand
Determinants of Demand
Things other than price that cause the whole
curve to shift
Increase: shift to the right
Decrease: shift to the left
Determinants of Demand
Change in consumer tastes
Change in people’s income
normal goods
inferior goods
What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(a) people change their preference from
hamburgers to hot dogs?
What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(b) U.S. negotiates a deal w/ China to trade
hot dogs for egg rolls?
What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(c) the price of ground beef plummets?
What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(d) the minimum wage rises?
What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(e) the MWU threatens a strike if owners
fail to meet their demands?
What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(f) unemployment hits an all-time high?
What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(g) the price of buns increases due to a
wheat shortage?
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Elasticity of demand
Definition: “Elasticity of demand is defined as the responsiveness of the quantity
demanded of a good to changes in one of the variables on which demand
depends.”
These variables are price of the commodity, prices of the related commodities,
income of the consumer & other various factors on which demand depends. Thus,
we have Price Elasticity, Cross Elasticity, Elasticity of Substitution & Income
Elasticity. It is always price elasticity of demand which is referred to as elasticity
of demand
A.Price Elasticity
Measures how much the quantity demanded of a good changes when its price
changes.
Or
It may be defined as “Percentage Change in Quantity demanded over percentage
change in price”
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Factors affecting Elasticity of
Availability of substitutes
Demandof consumption
Postponement
Proportion of expenditure (needles: inelastic; TV: elastic)
Nature of the commodity (necessity vs. luxury; durability/reparability eg., shoes)
Different uses of the commodity (paper vs. ink)
Time period (elastic in the long term)
Change in income (necessaries: inelastic; milk and fruit for a rich man)
Habits
Joint demand
Distribution of income
Price level (very costly & very cheap goods: inelastic)
Price Elasticity
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Price Elasticity
Elastic Demand or more than 1 – When quantity demanded responds greatly
to price changes
Inelastic Demand or less than 1 – When quantity demanded responds little
to price changes.
Unitary Elastic – When quantity demanded responds equally to the price
changes.
Perfectly inelastic or 0 elastic demand
Perfectly elastic or infinite elastic demand
Economic factors determine the size of price elasticity for individual goods.
Elasticity tends to be higher when the goods are luxuries, when substitutes
are available and when consumer have more time to adjust their behavior.
Calculating Price Elasticity
 PED = % Change in Qty Demanded

% Change in Price
 Points to Remember:
• We drop the minus sign from the numbers by
treating all % changes as positive. That means all
elasticity’s are positive, even though prices and
quantities move in the opposite direction because
of the law of downward sloping demand.
• Definition of elasticity uses percentage changes in
price and demand rather than actual changes.
That means that a change in the units of
measurement does not affect the elasticity. So
whether we measure price in Rupees or paisa, the
Some business applications of
Price Elasticity
Price discrimination
Public utility pricing (electricity, railway)
Joint supply (wool and mutton)
Super markets
Use of machines (lower cost of production for
elastic)
• Factor pricing (workers producing inelastic
demand products)
• International trade (devalue when exports are
price-elastic)
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Elasticity & Revenue:
• When demand is price inelastic, marginal revenue is
negative and a price decrease reduces total revenue.
• When demand is price elastic, marginal revenue is
positive and a price decrease increases total revenue.
• In the borderline case of unit elastic demand,
marginal revenue is 0 and a price change leads to no
change in the total revenue.
 B. Income Elasticity of Demand: Is the degree of
responsiveness of quantity demanded of a good to a
small change in the income of the consumer.
• If the proportion of income spent on a good remains
the same as income increases, then income elasticity
for the good is equal to one.
• If the proportion spent on a good increases, then the
income elasticity for the good is greater than one.
• If the proportion decreases as income rises, then
income elasticity for the good is less than one.
Income elasticity
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Types:
Zero
Negative
Positive (i) low (ii) unitary (iii) high
 Empirical evidence suggests that income elasticity falls as
income rises.
 Income elasticity and business decisions
1. If ei is >0 but <1, sales will increase but slower than the general
economic growth;
2. If ei is >1, sales will increase more rapidly than general
economic growth
 Corollary: in a growing economy while farmers suffer as their
products have low income elasticity, industrialists gain as their
products have high income elasticity.
 Cross Elasticity: A change in the demand for
one good in response to a change in the price
of another good represents cross elasticity of
demand of the former good for the latter
good.
• If two goods are perfect substitutes for each
other cross elasticity is infinite and if the two
goods are totally unrelated, cross elasticity
between them is zero.
• Goods between which cross elasticity is
positive can be called Substitutes, the good
between which the cross elasticity is negative
are not always complementary as this is found
when the income effect on the price change is
Degrees of Elasticity of
Demand
 1. Perfectly Elastic
 2. Perfectly Inelastic
 3. Unitary Elastic
 4. Relatively more elastic
 5. Relatively less elastic
1. Perfectly Elastic
Y
Ed = ∞
p
O
d
d1
X
2. Perfectly Inelastic
Y
p1
Ed = 0
p
O
d
X
3. Unitary Elastic
Y
p1
Ed = 1
p
O
d
d1
X
4. Relatively more
Elastic
Y
p1
Ed > 1
p
O
d
d1
X
5. Relatively less
Elastic
Y
p1
Ed < 1
p
O
d
d1
X
Figure 7.3 Elastic and inelastic demand
Demand curves differ in their relative elasticity. Curve D1 is more elastic than curve D2, in
the sense that consumers on curve D1 are more responsive to a given price change (P2 to
P1) than are consumers on curve D2.
Figure 7.4 Changes in the elasticity coefficient
The elasticity coefficient decreases as a firm moves down the demand curve. The upper half
of a linear demand curve is elastic, meaning that the elasticity coefficient is greater than
one. The lower half is inelastic, meaning that the elasticity coefficient is less than one. This
means that the middle of the linear demand curve has an elasticity coefficient equal to one.
Figure 7.8 Network effects and demand
As the price falls from P3 to P2, the quantity demanded in the short run rises from Q1 to Q2.
However, sales build on sales, causing the demand in the future to expand outward to, say,
D2. The lower the price in the current time period, the greater the expansion of demand in
the future. The more the demand expands over time in response to greater sales in the
current time period, the more elastic is the long-run demand.
Methods of measurement of
Elasticity
1. Percentage or Proportionate Method
 = Percentage change in demand or;
 Percentage change in price
 = Proportionate change in demand
 Proportionate change in price
 2. Total Outlay (Expenditure) Methods
 TO=TQ * P ; where,
 TO=total outlay; TQ=total quantity; P=price of
the commodity
 3. Geometric (Point) method – at any given point
on the curve
 = lower segment of demand curve
Figure 3.4 Maslow’s hierarchy of needs
The pyramid orders human needs by broad categories from the most prepotent needs on
the bottom to lesser and lesser prepotent needs as an individual moves up the pyramid.
According to Maslow, an individual can be expected to satisfy her needs in the order of
their prepotence, or will move from the bottom of the pyramid through the various levels
to the top, so long as the individual’s resources to satisfy her needs last.
Figure 3.5(a) Demand, price, and need
satisfaction
The extent to which needs are satisfied
depends, in the economists’ view of the world,
on
the nature of the need’s demand and its price.
Physiological needs may indeed be more
completely satisfied than other needs, but
that may only be because physiological needs
have relatively low prices (panel (a)). But
then, as shown in this figure (panel (b)), the
price of the means of satisfying physiological
needs might be higher than the prices of the
means of satisfying safety and love needs.