Demand is the desire backed by the ability and willingness to buy that commodity.
Ex. Household purchases 5 kgs of sugar per day @ Rs. 20 per kg.
Or. Demand for any commodity refers to the amount of that commodity that will be purchased
at a particular price during a particular period of time.
Ex. Household purchases 5 kgs of sugar per day @ Rs. 20 per kg.
Types of demand.
Joint Demand: A demand is said to be joint when the demand of two commodities is needed to
satisfy one need.
For example, Demand for fountain pen and ink. Therefore, both demands are said to be joint
or complementary since one complements the other.
Composite Demand: If a particular goods or service demanded can be put to several uses it is
said to be composite demand. That is deriving different satisfaction from a particular
commodity.
Ex. Coal can be used for heating, cooking, operating railway engine, etc.
Derived demand: When a commodity is demanded for the satisfaction of another commodity,
that demand is said to be derived.
Ex. Demand for steel ,bricks, cement, stones, wood etc is a derived demand from the demand
for houses and other buildings.
Individual demand and market demand :It is the quantity of a commodity that an individual
consumer is willing to purchase at a given price during a given period of time is known as the
individual demand.
Market demand: it refers to the total quantity that all total quantity of a commodity that all the
households are willing to buy at a given price during a given period of time.
Ex ante and Ex post: Ex ante demand refers to the amount of goods that consumers want to
plans to purchase during a particular time period.
Ex post refers to the amount of goods that the consumers actually purchases during a specific
period.
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2. Price of related goods.
A change in price of one good affects the demand for another good. Related goods can be
classified as substitute goods and complementary goods.
Cross demand shows the functional relation between the price of a commodity and demand for
some other related commodity.
Ex. Substitute goods and complementary goods
Substitute goods-
Are goods which can satisfy the same type of demand and hence can be used in place of one
another.
Ex. When there is rise in price of tea demand for coffee will increase because
Coffee has become relatively cheaper. Hence ,demand for coffee will increase and that of tea
will reduce.
[there is a direct relationship between the demand for a product (tea)and the price of its
substitute (coffee)]
Price of Tea
Demand of Coffee
Complementary goods.
Those goods which are complementary to one another in the sense that they are jointly or
consumed together.
Ex. If price of petrol will go up demand for car will decrease.
[there is an inverse relationship between the price for a product (petrol)and the demand for
car]
Price of Petrol
Demand of Cars
3. Income of the consumer.
Income of the consumer also affects demand (Income demand)
Normal goods
They are those goods, the demand for which increases with the increase in income of the
consumer. Ex. Furniture, Refrigerator.
Inferior goods
They are those goods, the demand for which falls as income of the consumer increases. Ex
.Jowar, maize
Inexpensive necessities of life
Goods whose quantity purchased increases with the increase in income upto a certain level and
thereafter remains constant irrespective of the level of income .Ex. salt and matchboxes.
Demand Function
Demand function states the relationship between the demand for a product and its
determinants.
Dn=f (Pn, P1…Pn-1, Y, T, E, H, Y, G…)
Where
Pn = price of the commodity
T= Taste and Preference
G = Government Policy
Law of Demand
The law of demand holds that other things being equal, as the price of a good or service rises,
its quantity demanded falls. The reverse is also true as the price of a good or service falls, its
quantity demanded increases.
Following are the assumptions of the law of demand or other things being equal
Habits, tastes and fashions remain constant
Income of the consumer does not change.
Prices of related goods remain constant
Distribution of income should not change
No change in population
The commodity should be a normal commodity.
Demand schedule is a table that shows different quantities of a commodity that would be
demanded at different prices
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The graphical representation of the demand schedule is called demand curve. It is the curve showing
different quantities demanded at various alternative prices during a given period.
Individual curve Market curve
It is the curve that shows different It is the curve that shows different quantities of the good
quantities of the good which a which all consumers in the market are willing to buy at
consumer is willing to buyat different different prices during a given period of time.
prices during a given period of time.
Reasons for downward slope of the demand curve to the right/Reasons for the operation of law
of demand.{LIVES}
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demand will go down. On the other hand, when price falls, the commodity will be put to more uses
where it was not being used earlier and its demand will go up.
Following are the exception to the law of demand/ Reasons for upward slope of the demand curve to
the right
Price
Quantity
1. Giffen’s goods:
There are certain goods which are inferior from the consumer’s viewpoint. A fall in the price of such
goods may not increase its demand because consumers start diverting their extra or saved purchasing
power to buy superior commodities. Consequently, demand for inferior goods fall.
Sir. Giffens, was the first who attracted our attention towards these goods. Therefore, these goods are
also known as Giffen goods Ex. Bajra to wheat, maize to rice
(As the price of maize falls real income of the consumer increases, now the consumer may afford to
purchase superior goods like wheat and rice)
2. Abnormal conditions/Emergencies: During emergencies like floods, hurricanes, earthquakes, etc. the
consumer behaves in an abnormal way .Even when the prices are high the demand is still high as people
expect shortage of goods and hoard them.
3. Articles of distinction/article of snob effect: There are some commodities or services which are
considered as a sign of elevated status or status symbol by those who possess them. For example, cars,
jewellery, etc. are some commodities which are used to showcase one's wealth. Veblen has termed
these goods as conspicuous consumption.
4. Expectations regarding future prices:
If a household expects the price of a commodity to increase, it may start purchasing greater amount of
the commodity even at the presently increased price. Similarly, if the house hold expects the price of
the commodity to decrease, it may postpone its purchases. Thus, law of demand is violated in such
cases.
5. Quality-Price Relationship:
When the consumer judges the quality of commodity from its price. They regard high-priced
commodities are better in quality as compared to low –priced commodities in such cases the law will
not apply. This is known as Veblen effect.
Change in quantity demanded/movement along the same demand curve ( change in its own
price)-
When the amount demanded of a commodity changes (rises or falls) as a result of changes in its own
price, while other determinants of demand (Income, prices of related goods) remain constant, it is
known as change in quantity demanded.
Extension in demand.
When the quantity demanded of a commodity rises due to fall in its price, other things remaining the
same. It is called rise in quantity demanded or extension of demand.
Contraction in demand.
When the quantity demanded of a commodity decreases due to fall in its price, other things remaining
the same. It is called fall in quantity demanded or contraction of demand
Change in demand/shifts in demand ( due to change in other factors)
When the amount purchased of the commodity rises or falls because of change in factors other than the
own price of the commodity, it is called change in demand.
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Increase in demand
It refers to a situation when the consumers buy larger amount of a commodity at the same price.
Decreases in demand.
It refers to a situation when the consumers buy smaller amount of a commodity at the same price.
Extension of Demand Increase in Demand
Other things being equal, with the fall in An increase in demand implies that at a
price, demand for a commodity rises, it is given price a larger quantity is purchased
called extension of demand. due to change in other factors.
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Contraction of Demand Decrease in Demand
Other things being equal, with the rise in An increase in demand implies that at a given price
price, demand for a commodity falls, it is a smaller quantity is purchased due to change in
called contraction of demand. other factors.
There is a upward movement along the Consumers demand curve shifts leftward
same demand curve
It occurs due to rise in price of a Fall in consumer’s income.
commodity Decrease in population
When price of the commodity is expected to fall in
near future.
Rise in the price of complementary goods
Fall in price of substitute goods
Unfavorable change in taste and preference
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