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Meaning of Demand
Demand means desire/want for something ,but in
economics demand refers to effective demand ie; the
amount buyers are willing to purchase at a given price
over a given period of time.
Demand is -:
•Demand is desire/want backed by money
(Demand=desire+ ability to pay+ will to pay)
•Demand is always related to price and time (example
:demand for oranges by a household at a price of Rs.50/kg
is 5kg oranges /week)
•Demand maybe viewed as Ex Ante (intended/potential
demand)or Ex Post (amt actual purchased/actual
quantity demanded)
Definition of demand
The demand for a product refers to the amount of it which
Individual demand/Market demand
Individual demand :It refers to demand from the individuals /family/house-
hold. It is a single consuming entity’s demand.
Market demand: It refers to the total demand of all buyers ,taken together.
It is the aggregate of the quantities of a product demanded by all the
individuals buyers at a given price over a given period of time-it is the sum
total of individual demand function
Market demand is more important from the business point of view, sales
depends on market demand ,so does planning future marketing strategy
Prices are determined on the basis of demand for the product etc.
The following table shows individual demands for eggs and how the market
demand eggs at various prices is derived from it :
Price A B C D E Total dd
/doz Rs for eggs
10 1 3 0 0 0 4
9 2 4 1 0 0 7
8 3 5 3 1 0 12
7 4 6 5 2 1 18
6 5 7 6 3 2 23
5 6 8 7 4 3 28
4 7 9 8 5 4 33
Determinants of Demand
INDIVIDUAL DEMAND MARKET DEMAND
• Price of the product
• Price of the products
• Distribution of wealth and
• Income income in the community
• Tastes, Habits, Preferences • Community’s common habits
and scale of preferences
• Relative price of other • General standard of living and
goods-substitutes and spending habits of the people
complementary goods • Growth of the population
• • Age structure/sex ratio of the
Consumers Expectations population
• Advertisement Effect • Future Expectations
• Level of taxation and tax
structure
• Fashions/inventions/innovations/
customs/weather/climate
• Advertisement/sales
propaganda
DEMAND FUNCTION
At any point of time, the quantity of a given product(good/service)
that will be purchased by the consumers depends on a number
of key variables/determinants.
The most important variables are listed below:
• The ‘own price’ of the product (P)
• The price of the substitute and complementary goods(Ps or Pc)
• The level of disposable income(Yd) with the buyers(ie; income
left after direct taxes)
• Change in the buyers’ taste and preferences(T)
• The advertisement effect measured through the level of
advertising expenditure(A)
• Changes in the population number or number of buyers(N)
Using the symbolic notations, the demand function can expressed
as follows:
Demand Equation
A linear demand function may be stated as
D = a – bP
Where, D –amount demanded
a - is a constant parameter which signifies
initial price
irrespective of price
b- denotes functional relationship b/w (P)
&(D)
b – having a minus sign denotes a negative function, ie; demand
for a commodity is a decreasing function of its price.
To illustrate a demand equation & the computation of demand schedule
assuming estimated demand functions, as Dx = 20 - 2Px, where
Dx = Amount demanded for the commodity X
Px = Price of X
Suppose, the given prices per unit of the commodity X are: Rs.1,2,3,4 and 5
alternatively.
In relation to these prices, a demand schedule may be constructed as below
1 18
2 16
3 14
4 12
5 10
LAW OF DEMAND
The law of demand expresses the nature of functional
relationship b/w two variables of the demand relation viz; the
price and the quantity demanded.
It simply states that demand varies inversely to change in price.
Statement of law of demand
Ceteris paribus, the higher the price of a commodity the
smaller is the quantity demanded and lower the price ,larger
the quantity demanded
Other things remaining unchanged ,demand varies inversely
with price
so, D= f (P)
Price of commodity X Quantity demanded
(in Rs) (units per week)
5 100
4 200
3 300
2 400
1 500
The schedule for commodity X, as price falls demand raises so there is an inverse
relationship b/w price and quantity demanded.
Assumptions of law of demand
The law of demand is based on certain assumptions
• No change in consumer’s income
• No change in consumer’s preferences
• No change in fashion
• No change in the price of related goods
• No expectation of future price changes or shortages
• No change in government policy etc.
Exceptions to the law of demand
The upward sloping curve is contrary to the law of demand, where there is
a direct relationship b/w price and demand (as shown in fig-2)
These exceptional cases can be listed as
• Giffen goods : In the case of certain inferior goods called Giffen
goods(named after Sir Robert Giffen), in spite of price rise, demand will
also rise. It was seen in Ireland in 19th . Century people were so poor
that they spent a major part of income on potatoes and a small part on
meat, as price of potatoes, rose the demand also rose since they could
not substitute it for meat which was very expensive. Giffen’s paradox is
seen the case of inferior goods like potatoes, cheap bread etc.
• Speculation : when people speculate about prices on the commodity in
the future they may not act according to the laws of demand.
Speculating the prices of the commodity will further increase they will
demand more of the commodity for hoarding etc. In the stock market,
people tend to buy more shares when prices are rising in the hope of bull
runs in anticipation of future profits.
• Article of snob appeal : Certain commodities are demanded
because they happen to be expensive or prestige goods or
snob value having a status symbol. So increase in price will
lead to increase in demand for such goods. E.g.
Diamonds ,exclusive cars etc.
• Consumer psychological Bias: when a customer is wrongly
biased against quality of a commodity a fall in price may
not lead to an increase in demand example clearance of
stock , discounted sale , etc.
Extension and contraction of demand
Bandwagon Effect
The demand for certain goods are determined not
by their usefulness/utility but mostly on account of the
bandwagon/ demonstration effect.
The demand of individuals is conditioned by the
consumption of others in the community (trendsetters/film
stars/models/friends/etc)
The figure shows the bandwagon effect and how due to this
the demand curve shifts to the right
D x = f (P y)
Where Dx –demand for X and Py –price of commodity Y