Demand

Syed Azhar
• Meaning and Definition of Demand
• Determinants of Demand
• Change in Demand
• Demand Distinctions / Classification
Meaning of Demand
• Want: Economic wants are desires that can be satisfied by consuming
a good, service, or leisure activity.

• Willingness to pay: willingness to pay (WTP) is the maximum amount

an individual is willing to sacrifice to procure a good or avoid
something undesirable.
Definition of Demand
• The demand for a product refers to the amount of it which will be
bought per unit of time at a particular price.
Demand Schedule and Curve
Quantity demanded(
Million of boxes per
Price ($ per Box
year) • There exists a definite
60 5
relationship between the market
50 10 price of a good and the quantity
40 20 demanded of that good, other
30 30 things being equal.
20 40
• This relationship between price
and quantity bought is called as
demand schedule and when it is
graphically presented it is called
as demand curve
Market Demand
• It represents the sum total of all individual demands in the market.
• The market demand curve is found by adding together the quantities
demanded by all individuals at each price.
Demand Function
• Dx = f (Px, M, Py, Pc, T, A)
• Where, Px = Price
• M = Consumer’s income • Dx = f (Px)
• Py = Price of substitutes • Where, Dx= dependent variable
• Pc = Price of complementary goods • Px = independent variable
• T = Consumer’s taste
• A= Advertisement expenditure

• It can be interpreted from the preceding equation that quantity demanded (Dx) is the
function of price (Px) for product X. This states that if there is any change in the price of
product X, then the demand of product X would also show changes. However, the
demand function does not interpret the amount of change produced in demand due to
change in the price of the commodity
Shift in Demand
• Shift in demand can be due to
Increase and decrease in
Demand
• The shift in demand curve
because the increase in quantity
demanded reflects factors other
than the goods own price.
• Eg: The quantity demanded for
pizza increased With rise in
income of consumers, but not
due to rise in price of pizza.
Questions: Shift in Demand
• What will happen to the demand for base ball, if young people lose
interest in baseball and watch basketball?
• What will a sharp fall in the price of personal computers do to the
demand for type writers?
Difference between
Determinants of Demand
Determinants of Demand
 Price
• A consumer usually decides to buy with consideration.
• More quantity is demanded at low prices and less is purchased at
high prices.
 Income
• A buyers income determines his purchasing capacity.
• With increase in income, the consumers to buy more goods.
• Therefore rich consumers purchase more goods than poor ones.
• Demand for luxuries and expensive goods is related to income.
 Prices of substitutes and complementary
goods
• How much a consumer is willing to purchase also depends on the
price of related goods.
• Eg: The demand of tea also depends upon the prices of coffee in the
market. Because both these goods are substitute in nature.
• While in increase in prices of one complementary good will decrease
the demand for other complementary goods. Eg: with the increase in
prices of milk, the demand for tea powder, sugar will decrease.
Tastes and Preferences of Consumers
• Demand for many goods depends upon the tastes, preferences and
habits of a person.
• Demand for goods such as ice cream, chocolates depends on the
tastes of the consumers.
• Eg: a strict vegetarian will not have demand for meat.
• If jeans catch the fancy of consumers, the firm selling jeans will have greater
demand now than before. Opposite will be the case if jeans go out of fashion.
• Demand for tea, cigarette, alcohol etc. depends on the habits.
Consumer Expectations
• The consumer makes two kinds of expectation:
• Related to their future income and
• Related to future prices of the goods and its related.

In case the consumer expects a increase in income in future, he spends more at

present, and thereby the demand for the good increases and vice versa.

If conusmers expects increase in the future price of the goods, he would purchase
more and more of commodities now and in case expects to decrease the price in
future, the consumers will buy less of now.
Factors Influencing Market Demand
• Price of the product
• Distribution of income in the community
• Community common habits and scale of preferences
• General standard of living
• Spending habits
• Age structure and sex ratio
• Future expectations
• Level of taxations
• Inventions and innovations
• Fashions
• Customs
• Advertisement and sales propaganda
Examples:
Demand Distinctions / Classification
• Consumer and producer demand
• Autonomous and derived demand
• Durables and non durables demand
• Company and industry demand
• Price, income and cross demand
 Consumers and producer goods
Consumer Goods Producer Goods

They are directly consumables goods Producer goods are goods which undergoes
processing for producing other goods

In case of consumer goods, buyers may or may In case of producer’s goods buyers are
not be professionals. experienced professionals who consider both
price and substitutes of goods
Consumers goods are purchased only for The producer goods are purchased with profit
satisfying the basic needs of an individual motive
Consumer goods are used for direct Producer goods are used to manufacturing
consumption goods
The demand for consumers goods is constant as The demand for producers goods is flexible as it
it is based on the needs and preferences of the is a derived demand
customers
Advertisement mainly influences the buyers of Advertisements does not influence the buyers of
consumers goods producer’s goods
Autonomous and derived demand
 Durable Goods and Non-durable Goods (perishable)

Durable Goods Perishable

Durable goods are those goods which can be Non- durables goods are those goods which
stored for future need cannot be stored and must be used for fulfilling
the daily requirements of customers
Durable goods are used for satisfying both Non-durables goods are used only to satisfy the
current and future requirements. current requirements
The demand for durables goods is highly The demand for non-durables goods is fixed and
fluctuating requirements inelastic
Examples for durable goods are clothes, house, Examples for non-durables goods are eatables,
electrical and electronic appliances beverages etc.
Cont..
• Non durable goods are also called as perishable goods. They give one short
service. Eg: fish, milk, meat, vegetables
• The existing conditions of style, convenience and the income of the buyers
usually govern the demand for non durables goods.

• The demand for durables depends on the current trends, the state of
optimism, the rate of obsolescence, the life time of the products,
improvements in product design, apart from prices and incomes and such
other considerations.
• Demand for durables goods is more volatile in relation to business
condition.
 Company Demand and Industry Demand

Company Demand Industry Demand

The demand of customers about the specific The demand for the products of all companies
products produced by a specific firm is known as producing the same products in an industry is
company demand known as industry demand

In forecasting the demand company demand is In forecasting the demand, industry demand is
forecasting after industry demand forecasted before the company demand

It is more price elastic It is less price elastic than to company demand

In monopolistic competition company’s demand In monopolistic competition industry demand is

is more flexible less volatile compare to company’s demand
 Price demand, income demand and cross demand
• Price Demand:
• it refers to the various quantities of a product purchased by the consumer at
alternative prices.
• Usually the price demand function has a inverse relationship between the
price of the product and demand
• It is assumed that all other determinants of demand remain constant.
Income demand
• It refers to the various quantities of a commodity demanded by the
consumer at alternative levels of his changing money income.
• The income demand function has a direct relationship between
income and quantity demanded.
• It indicates that demand extends with the rise in income and demand
contracts with the fall in income of a consumer.
• The income effect varies for different goods namely inferior and
normal goods.
 Normal and inferior goods
• For normal good, the demand increases
as the income increases and the demand
decreases as the income level decreases.
• The income demand curve for normal
goods has a positive slope.
• For inferior goods, the demand increases
as income decreases and vice versa.
• The income demand curve for inferior
goods has negative slope
Cross Demand
• It refers to the various quantities of a commodity purchased by the
consumer in relation to changes in the price of a related commodity.
• Eg: Change of price of y and its effect on X commodity demanded
• The cross demand is different for substitutes and complementary
goods.
Substitutes and Complementary Goods
• When the price of a given • When the price of a given
commodity increases, the commodity increases, the
demand for its substitutes quantity demanded of tis
increases and vice-versa. complementary goods decreases
• The demand curve for and vice versa.
substitutes goods slope upwards • Eg: Milk and sugar
to right and has a positive slope. • The demand curve for
complementary goods slopes
downward to the right and has a
negative slope.
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.
 Assumptions of the law of demand
1. Assumes that the consumer’s income remains same.
2. Assumes that the preferences of consumer remain same.
3. Considers that the fashion does not show any changes, because if fashion
changes, then the people will not purchase the products that are out of
fashion.
4. No change in the price of related goods.
5. No expectations of future changes or shortages.
6. No change in the age structure, size, and sex ratio of population. This is
because if population size increases, then the number of buyers increases,
which, in turn, affect the demand for a product directly
7. No inventions or innovations. Restricts the innovation and new varieties of
products in the market, which can affect the demand for the existing product.
8. No change in government policies. No change fiscal policies of the government
of a nation, which reduces the effect of taxation on the demand of product.
Exceptions to law of Demand

• Giffen Goods
• Conspicuous goods
• Future expectations of consumers
1 Giffen goods or Giffen products
• A Giffen good, in economic theory, is a good that is in greater demand as its
price increases. For example, if the price of an essential food staple, such as
rice, rises it may mean that consumers have less money to buy more
expensive food.

• They are inferior goods whose demand varies directly with the variation in
price, i.e there exist a direct relationship between the quantity demanded
and the price of the commodity.
• Eg: bajra, barley, vegetable ghee
Assumptions of Giffen paradox
• There are three basic assumptions for a good to be considered as a
giffen good.
• The good under consideration should be an inferior good
• It should not have any close substitutes.
• It should constitute a substantial percentage of the buyers income.
2 Conspicuous goods or Goods of Status
• In some situations, certain goods are demanded just because they are
expensive or prestige goods and are usually used as status symbol to
display ones wealth.
• Eg: cars, houses
• As the price of these goods rise, they are considered as status symbol
and hence their demand gets raised.
3 Consumers Expectations
• If the consumer expects the future price to be increased, he may start
purchasing greater amount of the commodity even at the present
increasing price.
Why does demand curve slope downward
• When the prices of a commodity
is raise, other things being equal,
the buyer tends to buy less of
the commodity.
• The quantity demanded tends to
fall as price rises for two reasons
• Substitution effect: when the prices
rises, I will substitute other similar
goods for it. Eg: instead of mutton, I
buy more chicken.
• Income Effect: When the price of the
commodity rises, my purchasing
power decrease. Now I buy less
commodity with the increase in
price. Now I feel more poorer than I
was before.