The “Demand” for a commodity, at a given price, is the quantity of it which will be bought per unit of time at that price.
In economics, demand refers to the buying behavior of a household. When desire is backed by willingness and ability to pay for a good or service then it becomes Demand for the good or service.
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Contents
Introduction and Definitions
Determinants of Demand
Demand Function
Law of Demand
Shifts in Demand Curve
Elasticity of Demand
3. Introduction
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Utility analysis and “LAW OF DEMAND” are the who concepts that we have to
study in connection with each other, which are part and parcel of life.
But before we analyze them, it is essential to understand the nature of the
term “Demand” in economics.
The “Demand” for a commodity, at a given price, is the quantity of it
which will be bought per unit of time at that price.
In economics, demand refers to the buying behavior of a household. What does
this mean?
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Basically, economists try answering the following
three phenomenon
1. Why people buy what they buy
2. How much they're willing to pay
3. How much they want to buy
4. Introduction
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Thus, demand for a commodity or service is dependent upon
a. Its utility to satisfy want or desire
b. Willingness to pay
c. Capability of the prospective consumer to pay for the good or
service.
In nutshell therefore we can state that -
When desire is backed by willingness and ability to pay for a good or
service then it becomes Demand for the good or service.
Conceptually, demand is nothing but consumer’s readiness or ability
to satisfy desire by paying for goods or services. A desire accompanied by
ability and willingness to pay makes a real or effective demand.Part 6
5. Definitions
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"The various quantities of goods that would be purchased
per time period at different prices in a given market."
– Prof. Hibdon
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The demand for anything, at a given price, is the amount of
it, which will be bought per unit of time at that price”. The
term has no significance unless a price is stated or implied.
– Prof. Lee Benham, Washington University
"Demand in Economics means demand backed by
enough money to pay for the goods demanded."
– Prof. Dauglaus Hague, Manchester Business School.
6. Determinants of Demand
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Other factors such as
Class, Group, Education,
marital status, consumer’s
expectations with regards to
future price and weather
conditions, also play an
important role in influencing
household demand.
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Priceof the
commodity
Priceof
related
commodity
Tastes and
preferences
of
consumers
Level of
incomeof
the
household
Size,
Composition
& income
of the
population
Demand
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7. Demand function
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The theory of consumption deals with concepts and functions.
A function expresses the relationship between two or more variables,
such as, prices and the physical quantities demanded.
In a given market, in a given period of time, the demand function for a
commodity is the relation between the various quantities of the
commodity that might be bought and the determinants of those
quantities.
D= f (P, Y, Pr, T, A, U)
Where,
D= demand P = price
Y= income Pr= prices of related goods
T= tastes and preferences A= advertisements
U= unknown factorsPart 6
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8. Law of demand
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The Law of demand is also known as the “FIRST LAW OF
PURCHASE”.
It indicates the relationship between the price of the commodity
and the quantity demanded in the market. This law is directly
deduced from the law of diminishing marginal utility, as the
demand side of the price is governed by the utility of the
commodity to the consumer. The law of demand is widely used and
it is a common concept while purchasing a commodity in the
market. This law is inversely related to price and the quantity
demanded. The people everywhere would purchases more quantity
of a commodity at lower price and less quantity at higher price.
The founder of this law is Prof. Alfred Marshall.Part 6
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9. Law of demand
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Assumptions:
1. People’s income being unchanged
2. People’s tastes remain unchanged
3. Prices of other related goods remain the sam
4. No substitutes for the commodity
5.No expectations of further changes in the
price of the commodity
10. Demand Schedule
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0
2
4
6
8
10
12
1 2 3 4 5
QuantitydemandedinUnits
Price per Unit
Demand Schedule
A demand schedule is a list of various quantities of a commodity demanded at
different prices. Demand schedule may be the ‘Individual demand schedule or a
Market demand schedule. The graphical representation of the demand schedule is
known as a demand curve.
According to the demand
schedule and graph
More units are demanded
at lower prices and less
units at higher price.
Thus, this demand
schedule shows an inverse
relation between the price
and quantity demanded.
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11. Types of Demand
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1. Price demand: The
various quantities of a
commodity that
consumers demand per
unit of time at different
prices, assuming that
their incomes, tastes,
fashions and prices of
related commodities
remain unchanged. X
0
Price Demand
Quantity demandedPrice
Y
D
D
10
8
6
4
2
1 2 3 4 5 6
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12. Types of Demand
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2. Income demand: The different quantities of a
commodity which consumers will buy at different
levels of income, while other things such as tastes
and preferences, remaining the same. The income-
demand curve represents the income-quantity
relationship in the same manner in which the price-
demand curve shows the price- quantity
relationship.
As the consumer’s income increases, they buy
greater quantity of the commodity and vice-versa.
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13. Types of Demand
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X
0
Quantity demanded
Income
Income Demand
(Demand for Inferior Good)
R1
R
M1 M
Y
D
D
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2. Income demand
a. Giffen goods or Inferior
goods: Consumer tend to buy
these in large quantity when their
income is less whereas small
quantity when their income is
more. It has negative slope. for
example, more demand for plastic
when income is less and when
there is an increase in income,
demand shifts towards
Tupperware rather than plastic.
14. Types of Demand
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2. Income demand
b. Normal or Superior
goods: It has positive slope.
Demand increases
proportional as there is a rise
in income, Stating income
elasticity of demand is always
greater than one. Superior
goods are always expensive,
and often are relatively scarce
or harder to come by.
X
0
Quantity demanded
Income
Income Demand
(Demand for Superior Good)
R1
R
M M1
D
D
Y
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15. Types of Demand
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3. Cross demand: The different quantities of a commodity
that consumers purchase per unit of time at different prices
of a related commodity, while tastes and preferences remain
the same. The correlation between the demand of one
commodity and the price of another may be positive or
negative according to the manner in which the two
commodities are related to each other. Commodities may
either be
1) Substitutes or 2) ComplementsPart 6
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16. Types of Demand
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3. Cross demand:
a) Substitutes have positive
slope where complements have
negative slope.
A product or service that satisfies
the need of a consumer, that
another product or service fulfils. A
substitute can be perfect or
imperfect depending on whether the
substitute completely or partially
satisfies the consumer.
Ex: A consumer might consider Tea
to be a perfect substitute for Coffee.
X
0
Quantity demanded of Coffee
PriceofTea
Cross Demand
(Demand for Substitute Good)
P1
P
Q Q1
D
D
Y
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17. Types of Demand
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3. Cross demand:
b) Complement good can be
considered a complement when it
shares a beneficial relationship
with another product offering. In
an economic sense, when the
price of a good rises, the demand
for its complement will fall
because consumers don't want to
use the complement alone.
Ex: coffee with sugar, Bread with
Butter, DVD player with DVD
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X
0
Quantity demanded of Butter
PriceofBread
Cross Demand
(Demand for Complement Good)
P1
P
Q1 Q
Y
D
D
20. Elasticity of Demand
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The concept of elasticity of demand is generally associated with the
name of Alfred Marshall.
The quantity demanded for some commodities are more responsive
to a given change in price than the quantity demanded of other
goods.
In other words, the demand for certain goods are more elastic than
demands of other goods.
“The elasticity of demand in a market is great or small according as
the amount demanded increases much or little for a given fall in the price
and diminishes much or little for a given rise in price”. – Prof. Alfred
Marshall
Today, we have concepts of price elasticity, income elasticity, cross
elasticity and substitution elasticity.
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Numerical measure Description Terminology
Zero
Quantity demanded does not change as
price changes
Perfectly
inelastic
Greater than Zero,
but less than one
Quantity demanded changes by a smaller
percentage than low price
Inelastic
One
Quantity demanded changed by exactly the
same percentage as low price
Unit elastic
Greater than one but
less than infinity
Quantity demanded changes by a larger
percentage than low price
Elastic
Infinity
Purchases are prepared to buy all they can
obtain at some price and none at all an
even slightly higher price.
Perfectly elastic
Classification of Price elasticity of Demand
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2. Income elasticity:
Elasticity of demand is a general concept.
It determines the relationship between two variables.
Income elasticity of demand shows the extent to which a
consumer’s
demand for that commodity changes as a result of changes in his
income.
The ratio of proportionate change in the quantity demanded of the
commodity to a given proportionate change in the income of the
consumer.
Elasticity of Demand
1
/
*
/
n
i
dQ Q dQ Y
Ey
dy Y dY Q
% Change in the Quantity Demanded of a Commodity
Income Elasticity
% Change in the Level of Income of a Consumer
% Change in the Quantity Demanded of a Commod
Income Elasticity
% Change in the Level of Income of a Consume
% Change in the Quantity Demanded of a Commodity
Income Elasticity
% Change in the Level of Income of a Consumer
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The relationship between income elasticity for a good and
proportion of income spent on it is described in the following three
propositions:
1. If the proportion of income spent on good remains the same
as income increases, then income elasticity for the good is
equal to one.
2. If the proportion of income spent on good increases as
income increases, then income elasticity for the good is
greater than one.
3. If the proportion of income spent on good decreases as
income increases, then income elasticity for the good is less
than one.
Elasticity of Demand
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Numerical measure Description Terminology
Zero The quantity bought of the commodity remains
constant with increase in consumer’s income Ei=0
Negative
Increase in the consumer’s money-income by fall
in the quantity demanded of the commodity;
Inferior goods.
Ei<0
Unitary
The consumer’s income spent on the commodity
is exactly same both before and after the increase
in income.
Ei=1
Greater than
unity
Consumer spends a greater proportion of his
money-income on the commodity; Luxury goods. Ei>1
Less than unity Consumer spends a smaller proportion of his
money-income on the commodity; Necessities. Ei<1
Classification of Income elasticity of Demand
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3. Cross elasticity: The two goods can either be substitutes of each
other, or complementary to each other, or completely independent
of each other.
The ratio of proportionate change in the quantity demanded of a
commodity to a given proportionate change in the price of the
related commodity.
Percentage Change in the Quantity Demanded of a Commodi
Cross Elasticity
Proportionate Change in the Price of Related Comodity
1 2
*
2 1
Q P
Ec
P Q
Percentage Change in the Quantity Demanded of a Co
Cross Elasticity
Proportionate Change in the Price of Related Com
1 2
*
2 1
Q P
Ec
P Q
Elasticity of Demand
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Q1 P2
*
P2 Q1
Ec
% Change in the Quantity Demanded of a Commodity
% Change in the Price of Related Comodity