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# Consumer Demand

## • “ Units of a commodity demanded by an individual at a

certain price & at certain period of time”

Desire

Demand Need

Willingness to Want/
pay/ backed by Willingness
: Individual Demand

Market Demand

Industry Demand

## Aggregate demand of a commodity of all the firms in an industry

Drawing demand curve
• Economics tradition: Put quantity on
horizontal axis, price on vertical axis.
• Typically demand curve slopes down: Higher
price means lower quantity demanded.
P
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Quantity
Individual Demand Curve with
reservation price Rs200

Price

\$200

1 Quantity
A Market demand Curve
Price Number of
Demanders
Rs300 10
Rs200 25
Rs300 35

Price

300

200

100

10 25 35 Quantity
Market demand
• For any price, market demand is sum of
quantities demanded by individuals.

Person 1 Person 2
Demand Curve Demand Market demand
Curve Curve
Price
 Law Of Demand: Other things being the same, increase in
price of commodity decreases the demand of that commodity.

## Factors behind law of demand:

I. Substitution effect: When the price of a commodity falls, being the
substitute’s price remaining constant, the substitute become relatively costlier.
Example: Fall in price of coffee will make its substitute tea relatively costlier
though there is no change in price of tea.

II. Income effect: When the price of a commodity falls, other things remaining
constant, then the real income of a consumer increases inducing him to buy more
quantities of the product.
Example: Price of sugar falls from Rs 50 to Rs 30 per kg. consumer buying one kg
a month will now be buying 1.5kg being the proportion of expenditure decreased
and letting the consumer to buy more quantities of sugar if he is willing to spend
the same budget of Rs 50.
III. Utility Maximizing behavior: Consumer continues to buy more quantities
of a product so long the marginal utility of money(MUM) is equal to marginal
utility of the commodity(MUX).
Example: MUX increases with the fall in price of commodity X. To bring
equilibrium in consumer utility, he will buy more quantities of X to bring down the
marginal Utility derived from X so long to bring its utility equal to MUM.
Exceptions To Law Of Demand
Some times, we find that with a fall in the price demand also falls and with
a rise in price demand also rises. These cases are referred to as exceptions
to the general law of demand. The demand curve in these cases will be an
upward sloping. Some of these exceptions are:
• Inferior goods/Giffen Goods:
Some goods are of lowest quality generally consumed by poor households &
are called inferior goods. In the case of these goods with the rise in its prices,
even then also its demand increases( income being constant) as the increased
price is much lesser than switching cost of inferior goods to superior goods.
Example: Price of Bajra increased from Rs 5/KG to Rs 6/KG & Price of Wheat
Rs10/KG. Poor consumer buying 20kg of Bajra & 10kg of Wheat @ the budget
of Rs 2000 will now be buying 25kg of Bajra & 5kg of Wheat to make the
budget constant.

## • Expectations and speculations:

When people expect a rise or fall in price in the near future, the law of demand
does not hold good. If a price rise is expected by next week, then they will buy
more now itself though at present the prices are quite high.
• Price illusion:
There are certain consumers those who are always guided by the price of the
commodity. They always believe that higher the price, better the quality.
Hence they purchase larger quantities of high priced goods.
• Demonstration effect:
It refers to a tendency of low income groups to imitate the consumption
pattern of high income groups. They will buy a commodity to imitate the
consumption of their neighbors even if they don't have the purchasing power.
• Quality and Branded Goods:
Commodities of good standard and quality give proper value for money. They
last long and give good service. So people prefer to buy them even at a higher
price.
• Snob effect - some buyers have a desire to own unusual or unique products to
show that they are different from others
• Life saving drugs or emergency products: Consumer will go on purchasing
emergency products even at higher prices for the sake of necessity of his life.
• Prestige goods:
Rich people like to show off their economic status. So they buy prestige goods
like color T.V., diamond etc. even at a higher price.