By: Malik Abrar Altaf
Lecturer, Management
Dr.S.M.Iqbal Business School.
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Demand.
Desire.
Need.
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“ A person when desiring is willing and able to pay for
what he/she desires , the desire is changed into demand.
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Demand is always: @ Price , Per Unit Time.
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Demand refers to the quantity of a good or service that
buyers are willing to buy during a particular period at a
given price.
Bober’s Definition:
“ By Demand we mean the various quantities of a given
commodity or a service which consumers would buy in one
market in a given period of time at various prices , or at
various incomes, or at various prices of related goods”.
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Demand in economics means desire to buy
backed by Purchasing Power. Mere wish
or desire cannot buy goods.
Seller’s point of view : Demand price is
the average revenue or income he expects
to earn from the sale of a unit of a
commodity.
“Demand price is identical with Average
Revenue(AR).”
1. Price Demand.
It refers to various quantities of a commodity or service
that consumer would purchase at a given time in a market
at various hypothetical prices.
It shows the relation between Price & Quantity Demanded.
2.Income Demand.
It refers to various quantities of a commodity or service
that consumer would purchase at a given time in a market
at various income levels.
It shows the relation between income & Quantity Demanded.
3.Cross demand.
It refers to the quantities of a commodity or a service
which will be purchased with reference to change in price
not of this good but of the inter -related goods.
E.g.: Demand for Tea and Coffee.
The relationship of Price to Sales or Demand or
alternatively , the Price Quantity Relationship , is
shown arithmetically in the form of a table showing
prices & corresponding quantities. This table is known
as Demand Schedule.
Demand Schedule
Price
Quantity Demanded
5
80
4
100
3
150
2
200
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Income of the consumer is given and constant.
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No change in tastes, preference, habits etc.
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Constancy of the price of other goods.
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No change in the size and composition of
population.
These Assumptions are expressed in the phrase “other things remaining equal”.
“More the price of the commodity or Service less is the quantity demanded
and
Vice Versa.”
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The Law of Demand states that there
is an inverse relationship between the
price of a good and the quantity
demanded of that good (other things
being equal) .
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Inverse Relation between Price & Quantity,
but may or may not be proportional.
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Price an independent variable and Demand a
dependable variable.
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Other things remain same: it is assumed
that there should be no change in other
factors ( Income, Substitute’s Price, Consumer’s Tastes &
Preferences, Advertising Outlays) influencing demand
except price.
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Substitution effect.
Income effect.
Substitution effect:
When the commodity becomes cheaper , it
tends to be substituted wholly or partly for
other commodities.
Income effect:
A unit of money goes farther and a
consumer can afford to buy more . He is able
& willing to purchase the thing being cheaper,
his real income increases.
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Giffen Paradox:
In case of Inferior goods,“Demand is
Strengthened with a rise or weakened with a
fall in the price”.
 Cases of Upward Rising Demand Curve:
(Benham);
1. Serious Shortage .
2. If Commodity confers distinction.( Conspicuous
Consumption).
3. Ignorance Effect.
4. If the commodity is a necessity of life.
“Man tries to give the least & wants the maximum in return”.
“Man tries to weigh between what he is giving & what he is
getting in return”
Unit of measurement is Money and the Utility.
G = what he is giving.(In terms of money).
R =
what he is receiving .(In terms of goods & their
marginal utilities).
If G<R, R>G (Trade or exchange goes on).
If G=R, (Point where trade stops or Equillibrium Point).
If G>R ,(Will there be trade?)
Income.
Population.
Tastes & Habits.
Other Prices.
Advertisement.
Fashion.
Variations in demand refer to those which occur due
to changes in the price of a commodity.
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Extension of Demand:
 This refers to rise in demand due to a fall in price of the
commodity. It is shown by a downwards movement on a
given demand curve.
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Contraction of Demand:
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This means fall in demand due to increase in price and can
be shown by an upwards movement on a given demand curve.
Extension (Q to Q2) & Contraction ( Q to Q1) of Demand.
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Changes in demand imply the rise and fall due
to factors other than price.
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Increase in Demand:
 This refers to higher demand at the same price
and results from rise in income, population etc.,
this is shown on a new demand curve lying above
the original one.
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Decrease in demand:
 It means less quantity demanded at the same
price. This is the result of factors like fall in
income, population etc. This is shown on a new
demand lying below the original one.
Increase ( D to D1) & Decrease ( D to D2) in Demand
Law of demand explains the functional relationship between price and
demand.( Other things Being Equal).
The law of demand explains the direction of a change as it states that with
a rise in price the demand contracts and with a fall in price it expands.
The law of demand fails to explain the extent or magnitude of a change in
demand with a given change in price.
The law of demand merely shows the direction in which the demand changes
as a result of a change in price, but does not throw any light on the
amount by which the demand will change in response to a given change in
price.
The law of demand explains the qualitative but not the quantitative aspect
of price- demand relationship.
It explains the degree of responsiveness of demand to a change in price.
It elaborates the price-demand relationship.
E.O.D “ means the sensitiveness or responsiveness of demand to a change
in price.”
According to Marshall,
“the elasticity (or responsiveness) of demand in a
market is great or small accordingly as the demand changes (rises or
falls) much or little for a given change (rise or fall) in price.”
Elasticity of demand is a measure of relative changes in the amount
demanded in response to a small change in price.
Elastic Demand: when a small change in price brings about considerable
change in demand.
Inelastic Demand : when a change in price fails to bring about significant
change in demand.
Ep = Percentage change in quantity demanded /
Percentage change in the price.
Perfectly inelastic demand (ep = 0)
Inelastic (less elastic) demand (ep < 1)
Unitary elasticity (ep = 1)
Elastic (more elastic) demand (ep > 1)
Perfectly elastic demand (ep = ∞)
This describes a situation in which demand shows no response to a
change in price.
In other words, whatever be the price the quantity demanded
remains the same.
It can be depicted by means of the alongside diagram.
In this case the proportionate change in demand
is smaller than in price.
When the percentage change in price produces equivalent
percentage change in demand, we have a case of unit
elasticity.
In case of certain commodities the demand is
relatively more responsive to the change in price. It
means a small change in price induces a significant
change in, demand.
This is experienced when the demand is extremely
sensitive to the changes in price. In this case an
insignificant change in price produces tremendous change
in demand.
Nature of the Commodity:
The demand for necessities is inelastic and for comforts and luxuries it is
elastic.
Number of Substitutes Available:
The availability of substitutes is a major determinant of the elasticity of
demand. The large the number of substitutes, the higher is the elastic. It
means if a commodity has many substitutes, the demand will be elastic.
Number Of Uses:
If a commodity can be put to a variety of uses, the demand will be more
elastic. When the price of such commodity rises, its consumption will be
restricted only to more important uses and when the price falls the
consumption may be extended to less urgent uses, e.g. coal electricity, water
etc.
Range of prices:
The demand for very low-priced as well as very high-price commodity is
generally inelastic. When the price is very high, the commodity is
consumed only by the rich people. A rise or fall in the price will not have
significant effect in the demand. Similarly, when the price is so low that
the commodity can be brought by all those who wish to buy, a change,
i.e., a rise or fall in the price, will hardly have any effect on the demand.
Proportion of Income Spent:
Income of the consumer significantly influences the nature of demand. If
only a small fraction of income is being spent on a particular commodity,
say newspaper, the demand will tend to be inelastic.
According to Taussig, unequal distribution of income and wealth makes
the demand in general, elastic.
Demand for durable goods, is usually elastic.
The nature of demand for a commodity is also influenced by the
complementarities of goods.
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In this method, the percentage change in demand and
percentage change in price are compared.
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ep = [Percentage change in demand / Percentage change in
price]
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In this method, three values of ‘ep’ can be obtained. Viz.,
ep = 1, ep > 1, ep < 1.
 If 5% change in price leads to exactly 5% change in demand,
i.e. percentage change in demand is equal to percentage
change in price , e = 1, it is a case of unit elasticity.
 If percentage change in demand is greater than percentage
change in price, e > 1, it means the demand is elastic.
 If percentage change in demand is less than that in price, e
< 1, meaning thereby the demand is inelastic.
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The elasticity of demand can be measured
by considering the changes in price and
the consequent changes in demand causing
changes in the total amount spent on
the goods.
The change in price changes the demand
for a commodity which in turn changes
the total expenditure of the consumer or
total revenue of the seller.
 If a given change in price fails to bring about any change in the total
outlay, it is the case of unit elasticity. It means if the total revenue
(price x Quantity bought) remains the same in spite of a change in
price, ‘ep’ is said to be equal to 1.
 If price and total revenue are inversely related, i.e., if total revenue
falls with rise in price or rises with fall in price, demand is said to be
elastic or e > 1.
 When price and total revenue are directly related, i.e. if total
revenue rises with a rise in price and falls with a fall in price, the
demand is said to be inelastic pr e < 1.
 Another suggested by Marshall is to measure elasticity at a point on a
straight line is called Point Method
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The income effect suggests the effect of change
in income on demand.
The income elasticity of demand explains the
extent of change in demand as a result of change
in income.
In other words, income elasticity of demand
means the responsiveness of demand to changes in
income.
Income elasticity of demand can be expressed as:
EY = [Percentage change in demand / Percentage
change in income]
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Income Elasticity of Demand Greater than One:
 When the percentage change in demand is greater than
the percentage change in income, a greater portion of
income is being spent on a commodity with an increase
in income- income elasticity is said to be greater than
one.
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Income Elasticity is unitary:
 When the proportion of income spent on a commodity
remains the same or when the percentage change in
income is equal to the percentage change in demand,
EY = 1 or the income elasticity is unitary.
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Income Elasticity Less Than One (EY< 1):
 This occurs when the percentage change in demand is
less than the percentage change in income.
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Zero Income Elasticity of Demand (EY=o):
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Negative Income Elasticity of Demand (EY< o):
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is the case when change in income of the
consumer does not bring about any change in the
demand for a commodity.
 It is well known that income effect for most of the
commodities is positive. But in case of inferior goods,
the income effect beyond a certain level of income
becomes negative. This implies that as the income
increases the consumer, instead of buying more of a
commodity, buys less and switches on to a superior
commodity. The income elasticity of demand in such
cases will be negative.
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The demand for a commodity depends not only on the
price of that commodity but also on the prices of other
related goods. Thus, the demand for a commodity X
depends not only on the price of X but also on the
prices of other commodities Y, Z….N etc.
The concept of cross elasticity explains the degree of
change in demand for X as, a result of change in price
of Y.
This can be expressed as:
EC = [Percentage Change in demand for X / Percentage
change in price of Y]
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The relationship between any two goods is of two types. The
goods X and Y can be complementary goods (such as pen and
ink) or substitutes (such as pen and ball pen).
In case of complementary commodities, the cross elasticity will
be negative. This means that fall in price of X (pen) leads to
rise in its demand so also rise in its demand for Y (ink) .
On the other hand, the cross elasticity for substitutes is
positive which means a fall in price of X (pen) results in rise
in demand for X and fall in demand for Y (ball pen).
If two commodities, say X and Y, are unrelated there will be
no change i. Demand for X as a result of change in price of Y.
Cross elasticity in cad of such unrelated goods will then be
zero.