LAW OF DEMAND
Consumption & Wants
In economics, by consumption we mean an activity which aims at
satisfaction of human wants.
The word ‘want’ ordinarily means a wish or a desire. However,, mere wish
or desire to have a thing is not want in the economic sense.
Wants which play a vital role in the economic life are those which have an
effort and which find their satisfaction through that effort.
Wants can be classified into three groups as follows:
1. Necessaries – these wants are for those goods on which the very
existence of life depends, e.g. food, shelter, clothing, etc.
2. Comforts – the goods which provide us with facility and pleasure, but
in absence of which there is no unbearable pain.
3. Luxuries – those goods which contribute to the fuller enjoyment of
life.
Concept of Demand
The word demand has a particular meaning in economics that differs fro its
ordinary use.
We may demand for a good as “the amount of the good which will be bought
at a certain time at a given price”.
Different concepts of Demand
1. Price Demand – Price demand refers to the different quantities of
commodities which shall be bought at a certain time in a market at a
certain price.
2. Income Demand – It refers to the different quantities of a commodity
which shall be bought at different levels of money income.
3. Cross Demand – It refers to the different quantities of a commodity
which will be bought as a result of change in the price of related
goods.
4. Autonomous Demand – It is also known as direct Demand. When a
commodity is demanded for itself, it is direct demand.
5. Derived demand – when the demand for a commodity depends on the
demand for its parent product or final product, it is known as derived
demand.
6. Composite demand – when a commodity can be put to several uses, it
is said to possess composite demand. For example, the demand for
steel is a composite demand which can be used for manufacturing
machines, tools, motor cars, etc.
7. Joint demand – when several things are needed to make a commodity,
it is called joint demand. For example, the demand for a hot cup of tea
is also the demand for tea leaves, milk, sugar and boiled water.
Factors on which the demand for a commodity depends
OR
Determinants of Demand
Demand Function – a demand function explains the relationship between
demand for a commodity and various determinants of demand.
We have 2 types of demand functions:
1. Individual demand function- looks at only those determinants of
demand that influence an individual household’s demand for a
commodity.
2. Market demand function – includes all those factors that influence the
demand for a commodity in a market.
Individual Demand function –
The determinants of individual demand are :
 Price of the commodity
 Price of other related commodities
 Level of income and wealth
 Tastes and preferences of consumers
1. Price of the commodity - Lower price of a commodity attracts
more consumers, higher price reduces the number of consumers
of the commodity
2. Price of related commodities – there are 2 types of related
commodities, viz., complementary goods and substitute goods.
Complementary goods are those wherein one commodity possesses
utility and is demanded only when the second related commodity is
also available.
Complementary goods
price of film rolls
5
4
3
2
1
0
quantity of cameras
the graph shows the inverse relation between the price of the film
rolls and quantity demanded of cameras.
Substitute goods are those goods where one can be consumed with
equal ease and satisfaction in place of another.
substitute goods
Price of tea
5
4
3
2
1
0
Demand for coffee
3. Income of the consumer – Increase in income of an individual
or an household, demand for goods increases. But this is not
always true. We can distinguish between three types of
commodities to study this determinant further.
Necessaries are those goods which are essential for human
existence, e.g, food, cloth, etc.
Comforts and luxuries are those goods which make our life more
enjoyable. For example, a simple meal is necessary for existence,
but a four-course meal is a luxury.
Inferior goods are those goods which are rated very low in the
consumer’s estimation and for which better substitutes may be
available. For example, black & white television sets.
RELATIONSHIP OF DETERMINANTS WITH DEMAND
Change in :
1. Price of a commodity
- Inverse relationship
2. Price of complementary goods – Inverse relationship
3. price of substitute good - Direct relationship
4. Income of consumer
 Necessaries – Independent
 Comforts and luxuries – Direct relationship
 Inferior goods – Inverse relationship
5. Tastes and preferences - direct relationship
Market demand function –
The important determinants of market demand are all the factors that
affect individual demand for goods and the following:
1. Size of population – a large population will provide more
demand for goods.
2. Composition of population – If there are more children,
demand for such goods as toys, biscuits, etc. will be large.
3. distribution of income – If income is distributed more equally
among the different sections of the society, all of them will be
in a position to demand goods.
4. sociological factors- Household’s purchases are influenced by
such sociological factors as class-groups, background,
education, age, place of residence, etc.
5. Weather conditions – changes in the weather conditions also
influence consumer’s demand. For example, a sudden rainfall
on a hot summer day will bring down the demand for ice.
THE LAW OF DEMAND
“The law of demand states that, other things being equal, at a higher price,
consumers will purchase less of a commodity, and at a lower price,
consumers will purchase more of it”.
Demand schedule and demand curve
A demand schedule is a tabular statement that states the different quantities
of a commodity that would be demanded at different prices. We have 2 types
of demand schedules.
1. Individual demand schedule – It states the quantities of a commodity
that a consumer or a household will buy at various prices.
2. Market demand schedule – It is an aggregate of the individual demand
schedules.
Assumption of the law of demand –
A demand curve is based on the assumption of ‘other things being equal’.
By ‘other things being equal’ , we mean that the income, tastes and
preferences of the consumers, and prices of other related commodities
remain unchanged.
A demand curve generally slopes downwards indicating that more of a good
is purchased at lower prices, and vice-versa.
Why Demand curve slopes downwards?
law of demand operate?
OR
Why does the
1. the earlier economists like Alfred Marshall had explained the law of
demand with the help of the law of diminishing marginal utility,
2. the modern economists like J.R. Hicks and R.G.D. Allen have
explained this law in terms of what they called ‘income effect’ and
‘substitution effect’.
The Modern approach –
1. Income effect- any change in the price of a commodity affects the
purchasing power (real income) of the household. With a fall in prices
the real income of the household is increased and vice-versa.
2. Substitution effect – when the price of a commodity rises, the relative
price of its substitutes automatically diminishes.
EXCEPTIONS TO THE LAW OF DEMAND
1. Giffen goods – Giffen goods are a special type of inferior goods
(named after the economist, Sir Robert Giffen who made this
proposition popular) such that a rise in their prices leads to an increase
in demand for these goods, and vice-versa.
2. Conspicuous necessities – another exception occurs in case of such
commodities as through their constant use, because of fashion or
prestige value attached to them, have become necessities of life.
3. Conspicuous consumption – a few goods like diamonds, etc. are
purchased by rich and wealthy sections of the society because the
prices of these goods are so high that they are beyond the reach of the
common man.
4. Future changes in prices – Households also act as speculators. When
the prices are rising, households tend to purchase larger quantities of
the commodity, out of the apprehension that the prices may go up
further.
5. Emergencies – like war, famine, etc. negate the operation of the law
of demand. At such times, households behave in an abnormal way
6. Change in fashion – a change in fashion and tastes affects the market
for a commodity. When a broad toe shoe replaces a narrow-toe shoe,
no amount of reduction in price of the latter is sufficient to clear the
stocks.
7. Ignorance – consumer’s ignorance is another factor that at times
induces him to purchase more of a commodity at a higher price.
CHANGE IN DEMAND
Change in demand
Movement along a
demand curve
Extension in demand
Contraction in
demand
It is caused by change
in the price alone.
Shift in the demand
curve
Increase in demand
Decrease in demand
It is caused by
changes in factors
other than the price.
1. Movement along a demand curve : It means that the consumer
moves upwards or downwards along the same demand curve. It is
caused by the change in the price of the product (all other factors
remaining unchanged). If price rises, the consumer will buy less. This
is called ‘contraction in demand’. If the price falls, the consumer will
buy more. This is called ‘extension or expansion in demand’.
Movement along the demand curve is also called ‘change in quantity
demanded’.
Contraction of demand due to rise in
price of product
Expansion of demand due to fall in
price of product
Pric
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2. Shift in the demand curve : It means the rightward or leftward shift
of the demand curve from its original position. It is caused by factors
other than the price. Increase or decrease in demand or (change in the
level of demand) is due to factors other than price of the product.
Change in other factors include money income, size of family, tastes,
fashions, weather conditions, etc.
A rightward shift of the demand curve
due to increase in income of the
consumer.
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A leftward shift of the demand curve due
to decrease in income of the consumer.
Pric
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Quantit
y
Increase in demand results from :
 Increase in income
 Rise in the price of a competitive good
 Fall in the price of a complementary good
 Favorable change in other factors
Decrease in demand results from:
 Decrease in income
 Fall in the price of a competitive good
 Rise in price of a complementary good
 Adverse changes in other factors.