Introduction
Goods are demanded because they have the capacity to satisfy our wants. But, every want of a consumer cannot be called a demand. Demand does not mean mere desire for a commodity.
Generally, desire, want and demand are interchangeably used in day-to-day life. But in economics, all these terms have different meanings.
Let us understand the 3 different terms:
Concept - Desire
Desire means a mere wish to have a commodity. For example, desire of a poor person for a car with just 200 in his pocket. So, desire is just a wish to possess something.
Concept - Want
Want is that desire which is backed by the ability and willingness to satisfy it. Every desire is not a want. But, a desire can become a want, if the person is in a position to satisfy it. For example, in the above example, if the poor person wins a lottery and now he has enough money to buy a car, then his desire for car will now be termed as want.
Concept - Demand
Demand is an extension to want as it has two more characteristics:
Demand is always defined with reference to price: The demand for a commodity is always stated with reference to its price. With a change in price, quantity demanded may also change as more is demanded at lower price and less at higher price. Therefore, demand is meaningless without reference to price.
Demand is always with respect to a period of time: Demand is always expressed with reference to time. Even at the same price, demand may change, depending upon the time period under consideration. For example demand for umbrellas is more in rainy season as compared to other seasons. The time frame might be of an hour, a day, a month or a year.
Definition
Demand is the quantity of a commodity that a consumer is willing and able to buy, at each various possible price during a given period of time.
The definition of demand highlights four essential elements of demand:
Concept - Individual Demand & Market Demand
Demand for a commodity may be either with respect to an individual or to the entire market.
Individual demand refers to the quantity of a commodity that a consumer is willing and able to buy, at each possible price during a given period of time.
Market demand refers to the quantity of a commodity that all consumers are willing and able to buy, at each possible price during a given period of time.
Concept - DETERMINANTS OF DEMAND (INDIVIDUAL DEMAND)
Demand for a commodity increases or decreases due to a number of factors. The various factors affecting demand are discussed below:
Price of the Given Commodity: It is the most important factor affecting demand for the given commodity. Generally, there exists an inverse relationship between price and quantity demanded. It means, as price increases, quantity demanded falls due to decrease in the satisfaction level of consumers.
For example, If price of given commodity (say, tea) increases, its quantity demanded will fall as satisfaction derived from tea will fall due to rise in its price.
The following determinants are termed as other factors or factors other than price.
Price of Related Goods: Demand for the given commodity is also affected by change in prices of the related goods. Related goods are of two types:
Substitute Goods: Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand for given commodity and vice-versa.
For example, if price of a substitute good (say, coffee) increases, then demand for given commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given commodity is directly affected by change in price of substitute goods.
Complementary Goods: Complementary goods are those goods which are used together to satisfy a particular want, like tea and sugar. An increase in the price of complementary good leads to a decrease in the demand for given commodity and vice versa.
For example, if price of a complementary good (say, sugar) increases, then demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods together. So, demand for a given commodity is inversely affected by change in price of complementary goods.
Examples of Substitute and Complementary Goods
Substitute Goods
1. Tea and Coffee
2. Coke and Pepsi
3. Pen and Pencil
4. CD and DVD
5. Ink pen and Ball Pen
6. Rice and Wheat
Complementary Goods
1. Tea and Sugar
2. Pen and Ink
3. Car and Petrol
4. Bread and Butter
5. Pen and Refill
6. Brick and Cement
Income of the Consumer Demand for a commodity is also affected by income of the consumer. However, the effect of change in income on demand depends on the nature of the commodity under consideration.
If the given commodity is a normal good, then increase in income leads to rise in its demand, while a decrease in income reduces the demand.
If the given commodity is an inferior good, then an increase in income reduces the demand, while a decrease in income leads to rise in demand.
Example: Suppose, income of a consumer increases. As a result, the consumer reduces consumption of toned milk and increases consumption of full cream milk. In this case, Toned Milk' is an inferior good for the consumer and 'Full Cream Milk' is a normal good.
Tastes and Preferences: Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits, etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.
Expectation of Change in the Price in Future. If the price of a certain commodity is expected to increase in near future, then people will buy more of that commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in future and change in demand in the current period.
For example, if the price of petrol is expected to rise in future, its present demand will increase.
Concept - Change in Quantity Demanded Vs Change in Demand
Change in Quantity Demanded: Whenever demand for the given commodity changes due to change in its own price, then such change in demand is known as "Change in Quantity Demanded". For example, If demand for Pepsi changes due to change in its own price, then such change in demand for Pepsi is known as change in quantity demanded.
Change in Demand: Whenever demand for the given commodity changes due to factors other than price, then such change in demand is known as "Change in Demand". For example, If demand for Pepsi changes due to change in price of Coke or due to change in income or due to a change in taste, then such change in demand for Pepsi is known as change in demand.
Test Yourself
Identify the following as change in quantity demanded (Delta QD) or change in demand (Delta D) :
1. People buy more ice-creams during summer than during winter.
Ans:- Delta D
2. Consumer income falls and the number: automobiles purchased declines.
Ans:- Delta D
3. LG reduces the price of its TV set by 10 percent and hence its sales increases.
Ans:- Delta QD
4. A college raises its tuition fee and as a result, the number of student enrollment forms falls.
Ans:- Delta QD
Concept
DETERMINANTS OF MARKET DEMAND
There are certain special features of market demand, which are not observed in case of individual demand. Market demand is influenced by all the factors affecting individual demand for a commodity In addition, it is also affected by the following factors:
Size and Composition of Population: Market demand for a commodity is affected by size of population in the country. Increase in population raises the market demand, while decrease in population reduces the market demand. Composition of population, Le. ratio of males, females, children and number of old people in the population also affects the demand for a commodity. For example, if a market has larger proportion of women, then there will be more demand for articles of their use such as lipstick. sarees, etc.
Season and Weather: The seasonal and weather conditions also affect the market demand for a commodity. For example, during winters, demand for woollen clothes and jackets increases, whereas, market demand for raincoat and umbrellas increases during the rainy season.
Distribution of Income: If income in the country is equitably distributed, then market demand for commodities will be more. However, if income distribution is uneven, i.e. people are either very rich or very poor, then market demand will remain at lower level.
Concept - DEMAND FUNCTION
Demand function shows the relationship between quantity demanded for a particular commodity and the factors influencing it. It can be either with respect to one consumer (individual demand function) or to all the consumers in the market (market demand function).
Individual Demand Function
Individual demand function refers to the functional relationship between individual demand and the factors affecting individual demand.
It is expressed as: Dx = f (Px, Pr, Y, T, F)
Where,
Dx = Demand for Commodity x: Px = Price of the given Commodity x:
Pr = Prices of Related Goods; Y = Income of the Consumer;
T = Tastes and Preferences; F = Expectation of Change in Price in future
Demand function is just a short-hand way of saying that quantity demanded (D), which is on the left hand side, is assumed to depend on the variables that are listed on the right-hand side.
Market Demand Function:
Market demand function refers to the functional relationship between market demand and the factors affecting market demand.
As mentioned before, market demand is affected by all factors affecting individual demand. In addition, it is also affected by size and composition of population, season and weather and distribution of income.
So, market demand function can be expressed as: Dx = f(Px, Pr, Y, T, F, Po, S, D)
Where.
Dx = Market demand of commodity x Px = Price of given commodity x:
Pr = Prices of Related Goods; Y = Income of the consumers
T = Tastes and Preferences; F = Expectation of Change in Price in future
Po = Size and Composition of population; S = Season and Weather,
D = Distribution of income.
Example
There are only 3 consumers (X,Y and Z) in a market and there demand functions are given as:
Qx = 30 - 2P ; Qy =40-3P; Qz =50-4P
From the given individual demand functions, determine the market demand function. Also, calculate the market demand at a price of 10 unit.
Solution:
Market demand function can be determined through summation of individual demand function, i.e. Qmd =Q X +Q Y +Q Z =(30-2P)+(40-3P)+(50-4P)=120-9P
Market Demand at a price of 10 per unit: QMD = 120-9P = 120-9 x 10 = 30 units.
Concept
DEMAND SCHEDULE
Demand schedule is a tabular statement showing various quantities of a commodity being demanded at various levels of price, during a given period of time. It shows the relationship between price of the commodity and its quantity demanded.
A demand schedule can be determined both for individual buyers and for the entire market So, demand schedule is of two types:
Individual Demand Schedule
Individual demand schedule refers to a tabular statement showing various quantities of a commodity that a consumer is willing to buy at various levels of price, during a given period of time. Table shows a hypothetical demand schedule for commodity 'x',
Individual Demand Schedule
As seen in the schedule, quantity demanded of 'x increases with decrease in its price. The consumer is willing to buy 1 unit at Rs.5. When price falls to Rs. 4, demand rises to 2 units.
A Demand Schedule' states the relationship between two variables: price and quantity. It shows that more is demanded at lower prices & vice -versa.
Market Demand Schedule
Market demand schedule refers to a tabular statement showing various quantities of a commodity that all the consumers are willing to buy at various levels of price, during a given period of time. It is the sum of all individual demand schedules at each and every price.
Market demand schedule can be expressed as: Dm = DA + DB +….
Where D is the market demand and DA + DB + …… are the individual demands of Household A, B and so on.
Let us assume that A and B are two consumers for commodity x in the market. Table shows that market demand schedule is obtained by horizontally summing the individual demands:
Market Demand Schedule
As seen in Table market demand is obtained by adding demand of households A and B at different prices. At Rs. 5 per unit, market demand is 3 units. When price falls to Rs. 4, market demand rises to 5 units. So, market demand schedule also shows the inverse relationship between price and quantity demanded.
Examples:-
Example 1 The following table shows the expenditure, which Amit is willing to spend on commodity 'x' at various levels of price. Prepare demand schedule of Amit.
Example 2 The demand function of a commodity x is given by Q_{x} = 12 - 2P. Prepare the demand schedule, if its price varies from 6 to Re. 1:
Solution:
Values of demand (Qx) are calculated after putting the values of price (P) in the demand function:
Qx = 12 - 2Px
Concept
Demand Vs Quantity Demanded
Before we proceed further, it is important to understand the following observations:
Demand
Demand is not a particular quantity. It describes the behaviour of buyers at every possible price. For example, there is a demand of 5 units at Rs. 1 per unit; demand is 4 units at Rs. 2 per unit and so on. It means:
Demand is not a fixed quantity, rather it changes with change in price. For example, there will be more demand for movie tickets at a price of Rs. 50 per ticket than at Rs. 150 per ticket.
Quantity Demanded
It refers to specific quantity of the demand schedule that is demanded against a specific price, l.e. it makes sense only in relation to a particular price. For example, 2 units are demanded at 4 per unit.
It is not the actual quantity purchased. Rather, it is the desired quantity which the consumers wish to purchase and not necessarily how much they actually succeed in purchasing.
Concept - DEMAND CURVE
Demand curve is a graphical representation of demand schedule. It is the locus of all the points showing various quantities of a commodity that a consumer is willing to buy at various levels of price, during a given period of time, assuming no change in other factors.
It shows the inverse relationship between the quantity demanded of a commodity with its price, keeping other factor constant.
It can be drawn for any commodity by plotting each combination of demand schedule on a graph.
Like demand schedules, demand curves can also be drawn both for individual buyers and for the entire market. So, demand curve is of two types:
Individual Demand Curve
Individual demand curve refers to a graphical representation of individual demand schedule.
With the help of Table (Individual demand schedule), the individual demand curve can be drawn as shown in Fig.
As seen in the diagram, price (independent variable) is taken on the vertical axis (Y-axis) and quantity demanded (dependent variable) on the horizontal axis X-axis). At each possible price, there is a quantity, which the consumer is willing to buy. By joining all the points (P to T), we get a demand curve 'DD'.
The demand curve DD slopes downwards due to inverse relationship between price and quantity demanded.
Market Demand Curve
Market demand curve refers to a graphical representation of market demand schedule. It is obtained by horizontal summation of individual demand curves.
The points shown in Table (Market demand schedule) are graphically represented in Fig. DA and DB are the individual demand curves. Market demand curve (DM) is obtained by horizontal summation of the individual demand curves (DA and DB).
Market demand curve 'D' also slope downwards due to inverse relationship between price and quantity demanded.
Market Demand Curve is Flatter
Market demand curve is flatter than the individual demand curves. It happens because as price changes, proportionate change in market demand is more than proportionate change int individual demand.
Concept
Slope of Demand Curve
Slope of a curve is defined as the change in the variable on the Y-axis divided by the change in the variable on the X-axis. So, the slope of the Demand Curve equals the Change in Price divided by the Change in Quantity.
i.e. Slope of Demand Curve = Change in Price (▲P) / Change in Quantity (▲Q)
:- Due to inverse relationship between price and demand, the demand curve slopes downwards. So, slope is Negative.
:- Slope of the demand curve measures the flatness or steepness of the demand curve. So, it is based on the absolute change in price and quantity.
Let us calculate the slope of demand curve with the help of following diagram:
In the given diagram, when price falls from 8 to ₹ 4, then quantity demanded increases from 2 units to 4 units. In such a case, the slope of demand curve will be :-
Slope of demand curve = ▲P / ▲Q
= 4 – 8 / 4 – 2
= – 4 / 2
= – 2
Concept
LAW OF DEMAND
In our daily life, it is normally observed that decrease in price of a commodity leads to increase in its demand. Such behaviour of consumers has been formulated as Law of Demand'.
Law of demand states the inverse relationship between price and quantity demanded, keeping other factors constant (ceteris paribus). This law is also known as the First Law of Purchase.
Concept
Assumptions of Law of demand
While stating the law of demand, we use the phrase keeping other factors constant or ceteris paribus. This phrase is used to cover the following assumptions on which the law is based:
Law of demand can be better understood with the help of Table and Fig.
Table : Demand Schedule
Table clearly shows that more and more units of commodity are demanded, when price of the commodity falls. As seen in Fig., demand curve DD slopes downwards from left to right, indicating an inverse relationship between price and quantity demanded.
Why Other Factors are kept Constant?
The quantity demanded of a commodity depends on many factors, besides price of the given commodity. If we want to understand the separate influence of one factor, it is necessary, that all other factors are kept constant. Therefore, while discussing the Law of Demand, it is assumed that there is no change in the other factors.
Concept
Important Facts about Law of Demand
Inverse Relationship It states the inverse relationship between price and quantity demanded It simply affirms that an increase in price will tend to reduce the quantity demanded and a fall in price will lead to an increase in the quantity demanded.
Qualitative, not Quantitative: It makes a qualitative statement only, i.e. it indicates the direction of change in the amount demanded and does not indicate the magnitude of change.
No Proportional Relationship: It does not establish any proportional relationship between change in price and the resultant change in demand. If the price rises by 10%, quantity demanded may fall by any proportion.
One-Sided: Law of demand is one sided as it only explains the effect of change in price on the quantity demanded. It states nothing about the effect of change in quantity demanded on the price of the commodity.
Concept
Reasons for Law of Demand
Let us now try to understand, why does the law of demand operate, i.e. why does buy more at lower price than at a higher price.
The various reasons for operation of Law of Demand are: consumer
Law of Diminishing Marginal Utility: Law of diminishing marginal utility states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. So, demand for a commodity depends on its utility. If the consumer gets more satisfaction, he will pay more. As a result, consumer will not be prepared to pay the same price for additional units of the commodity. The consumer will buy more units of the commodity only when the price falls.
Substitution Effect: Substitution effect refers to substituting one commodity in place of other when it becomes relatively cheaper. When price of the given commodity falls, it becomes relatively cheaper as compared to its substitute (assuming no change in price of substitute). As a result, demand for the given commodity rises.
For example, if price of given commodity (say, Pepsi) falls, with no change in price of its substitute (say, Coke), then Pepsi will become relatively cheaper and will be substituted for coke, e demand for Pepsi will rise.
Income Effect: Income effect refers to effect on demand when real income of the consumer changes due to change in price of the given commodity. When price of the given commodity falls, it increases the purchasing power (real income) of the consumer. As a result, he can purchase more of the given commodity with the same money income.
For example, suppose Isha buys 4 chocolates @Rs. 10 each with her pocket money of Rs. 40. If price of chocolate falls to Rs. 8 each, then with the same money income, Isha can buy 5 chocolates due to an increase in her real income.
Price Effect' is the combined effect of income Effect and Substitution Effect Symbolically Price Effect Income Effect +Substitution Effect.
Additional Customers: When price of a commodity falls, many new consumers, who were not in a position to buy it earlier due to its high price, starts purchasing it. In addition to new customers, old consumers of the commodity start demanding more due to its reduced price.
For example, if price of ice-cream family pack falls from Rs. 100 to Rs. 50 per pack, then many consumers who were not in a position to afford the ice-cream earlier can now buy it with decrease in its price. Moreover, the old customers of ice-cream can now consume more. As a result, its total demand increases.
Different Uses: Some commodities like milk, electricity, etc. have several uses, some of which are more important than the others. When price of such a good (say, milk) increases, its uses get restricted to the most important purpose (say, drinking) and demand for less important uses (like cheese, butter, etc.) gets reduced. However, when the price of such a commodity decreases, the commodity is put to all its uses, whether important or not.
Concept
Exceptions to Law of Demand
As a general rule, curve slopes downwards, showing the inverse relationship between price and quantity demanded. However, in certain special circumstances, the reverse may occur, i.e a rise in price may increase the demand. These circumstances are known as Exceptions to the Law of Demand.
Some of the Important Exceptions are:
Giffen Goods: These are special kind of inferior goods on which the consumer spends a large part of his income and their demand rises with an increase in price and demand falls with decrease in price.
For example, in our country, it is often seen that when price of coarse cereals (motte anaaz) like jowar and bajra falls, the consumers have a tendency to spend less on them and shift over to superior cereals like wheat and rice. This phenomenon, popularly known as Giffen's Paradox was Giffen's Paradox was first observed by Sir Robert Giffen.
History
In the early 19th century. Sir Robert Giffen observed that when price of bread increased, then the low-paid British wage earners bought more of bread, and not less. These wage earners used to live mainly on the diet of bread. With rise in its price, they were forced to cut down their consumption of meat and other expensive food items. To maintain their intake of food, they bought more bread at higher prices. This phenomenon was referred to as 'Giffen's Paradox as it went against the law of demand.
Status Symbol Goods or Goods of Ostentation: The exception relates to certain prestige goods which are used as status symbols. For example, diamonds, gold, antique paintings, etc. are bought due to the prestige they confer upon the possessor. These are wanted by the rich persons for prestige and distinction. The higher the price, the higher will be the demand for such goods.
Fear of Shortage: If the consumers expect a shortage or scarcity of a particular commodity in the near future, then they would start buying more and more of that commodity in the current period even if their prices are rising. The consumers demand more due to fear of further rise in prices. For example, during emergencies like war, famines, etc., consumers demand goods even at higher prices due to fear of shortage and general insecurity.
Ignorance: Consumers may buy more of a commodity at a higher price when they are ignorant of the prevailing prices of the commodity in the market.
Fashion related goods: Goods related to fashion do not follow the law of demand and their demand increases even with a rise in their prices. For example, if any particular type of dress is in fashion, then demand for such dress will increase even if its price is rising.
Necessities of Life: Another exception occurs in the use of such commodities, which become necessities of life due to their constant use. For example, commodities like rice, wheat, salt, medicines, etc. are purchased even if their prices increase.
Change in Weather: With change in season/weather, demand for certain commodities also changes, irrespective of any change in their prices. For example, demand for umbrellas increases in rainy season even with an increase in their prices.
It must be noted that in normal conditions and considering the given assumptions, Law of Demand is universally applicable.
Concept
MOVEMENT ALONG THE DEMAND CURVE (CHANGE IN QUANTITY DEMANDED)
When quantity demanded of a commodity changes due to a change in its price, keeping other factors constant, it is known as change in quantity demanded. It is graphically expressed as a movement along the same demand curve.
There can be either a downward movement (Expansion in demand) or an upward movement (Contraction in demand) along the same demand curve. Let us understand the movement along demand curve with the help of Fig.
In Fig. , OQ quantity is demanded at a price of OP. Change in price leads downward movement along the same demand curve:
Upward Movement: When price rises to OP₂, quantity demanded falls to OQ₂ (known as contraction in demand) leading to an upward movement from A to C along the same demand curve DD.
Downward Movement: On the other hand, fall in price from OP to OP1 leads to an increase in quantity demanded from OQ to OQ1 (known as expansion in demand), resulting in a downward from A to B along the same demand curve DD.
Let us now understand the meaning of Expansion and Contraction in demand.
Expansion in Demand
Expansion in demand refers to a rise in the quantity demanded due to a fall in the price of commodity, other factors remaining constant.
It leads to a downward movement along the same demand curve.
It is also known as Extension in Demand' or 'Increase in Quantity Demanded".
It can be better understood from Table 3.4 and Fig. 3.5.
Table 3.4: Expansion in Demand
As seen in the given schedule and diagram, the quantity demanded rises from 100 units to 150 units with a fall in the price from Rs. 20 to Rs. 15, resulting in a downward movement from A to B along the same demand curve DD.
Contraction in Demand
Contraction in demand refers to a fall in the quantity demanded due to a rise in commodity, other factors remaining constant.
It leads to an upward movement along the same demand curve.
It is also known as 'Decrease in Quantity Demanded".
It can be better understood from Table 3.5 and Fig. 3.6.
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Table 3.5: Contraction in Demand
As seen in the given schedule and diagram, the quantity demanded falls from 100 units to 70 units with a rise in the price from 20 to 25, resulting in an upward movement from A to B along the same demand curve DD.
Concept
SHIFT IN DEMAND CURVE (CHANGE IN DEMAND)
Demand curve is drawn to show the relationship between price and quantity demanded of a commodity, assuming all other factors being constant. However, other factors are bound to change sooner or later. A change in one of 'other factors' shifts the demand curve.
For example, suppose income of a consumer increases. Now, the consumer may increase the demand for the product, even though the price has not changed. Such increase in demand of any product. whose price has not changed, cannot be represented by the original demand curve. It will shift the demand curve.
When the demand of a commodity changes due to change in any factor other than the own price of the commodity, it is known as change in Demand. It is expressed as a shift in the demand curve.
Let us understand the concept of shift in demand curve with the help of a diagram.
Increase in Demand is shown by rightward shift in demand curve from DD to D1D1 Demand res from oq to OQ1 due to favourable change in other factors at the same price OP.
Decrease in Demand is shown by leftward shift in demand curve from DD to D2D2 Demand falls from OQ to OQ2, due to unfavourable change in other factors at the same price OP.
In Fig. 3.7, demand for the commodity is OQ at a price of OP. Change in other factors leads to a rightward or leftward shift in the demand curve:
Rightward Shift: When demand rises from OQ to OQ1 (known as increase in demand) at the same price of OP, it leads to a rightward shift in demand curve from DD to D1D₁.
Leftward Shift: On the other hand, fall in demand from OQ to OQ2 (known as decrease in demand) at the same price of OP, leads to a leftward shift in demand curve from DD to D₂D₂.
Let us now understand the meaning of Increase and Decrease in demand.
Increase in Demand
Increase in Demand refers to a rise in the demand of a commodity caused due to any factor other than the own price of the commodity. In this case, demand rises at the same price or demand remains same even at higher price.
For example, suppose a research reveals that people who regularly eat green vegetables live longer. This will raise the demand for green vegetables even at the same price and it will shift the demand curve of vegetables towards right.
Increase in demand leads to a rightward shift in the demand curve as seen in Fig. 3.8.
Table 3.6: Increase in Demand
As seen in the given schedule and diagram, demand rises from 100 units to 150 units at the same price of Rs. 20, resulting in a rightward shift in the demand curve from DD to D1 D₁.
Decrease in Demand
Decrease in Demand refers to a fall in the demand of a commodity caused due to any factor other than the own price of the commodity. In this case, demand falls at the same price or demand remains same even at lower price. It leads to a leftward shift in the demand curve. It can be better understood from Table 3.7 and Fig. 3.9.
Table 3.7: Decrease in Demand
As seen in given schedule and diagram, demand falls from 100 units to 70 units at same price of Rs. 20, resulting in a leftward shift in the demand curve from DD to D₁D₁.
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