WHY OUR COURSE! 1) Save Videos offline 2) Downloadable & printable PDFs 3) Sectional Tests & Comprehensive Mocks with All E India Ranking System 4) We Check Your English Papers. English is the most scoring in Phase 2. DEMAND WWW.ANUJJINDAL.IN Sto RAN eM TNT)Contents Demand Demand function .. Demand curv Law of demand. Deriving a Demand Curve from Indifference Curves and Budget Constraints. Income and substitution effect... Relationship between consumer's demand for good and income of the consumer Exceptions to taw of demand... ‘Substitutes and complements .......+0 Shifts in the demand curve .. Movement along the demand curve. Market demand... NoyDemand The quantity of a commodity that a consumer is willing to buy and is able to afford, given Prices of goods and consumer's tastes and preferences is called demand for the commodity. Demand function Ifthe prices of other goods, the consumer's income and her tastes and preferences remain ‘unchanged, the amount of a good that the consumer optimally chooses, becomes entirely dependent on its price. The relation between the consumer's optimal choice of the quantity of a good and its price is very important and this relation is called the demand function. The consumer's demand for a good as a func of its price can be written as . x=f@) ‘Where, X denotes the quantity and P denotes the price of the good. Demand curve The graphical representation of the demand function is called the demand curve. The demand curve is a relation between the quantity of the good chosen by a consumer and the price of the good. The relation between the consumer's demand for a good and the price of the good is likely to be negative in general. Price 2 Quantity Courtesy and copyright - NCERT Law of demand Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price. In other words, when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors remaining the same. WWW.ANU TaN AAYBananas ‘Quantities of Bananas Courtesy and copyright - NCERT Consider an individual consuming bananas (X1) and mangoes (X2), whose income is Mand market prices of X1 and X2 are P's and P’2 respectively, Consumer is in equilibrium at point C and with the help of this point we plot P*y against X" which is the first point on demand curve. Ifthe price banana (P*)) decreases and P2 and M remains constant then the new: equilibrium point is D. Thus, the demand for bananas increases as its price falls. We plot Pi against X1 in panel (b) to get the second point on the demand curve for Xs. Similarly, third point will be plotted. ‘Therefore, we observe that a drop in price of bananas results in an increase in quality of bananas purchased by an individual who maximises his utility. The demand curve ‘for bananas is thus negatively sloped. Income and substitution effect The negative slope of the demand curve can also be explained in terms of the two effects namely, substitution effect and income effect that come into play when price of a commodity changes. Substitution effect: When bananas become cheaper, the consumer maximises his utility by substituting bananas for mangoes in order to derive the same level of satisfaction of a price change, resulting in an increase in demand for bananas. Income effect: As price af bananas drops, consumer's purchasing power increases, which further increases demand for bananas (and mangoes). Relationship between consumer's demand for good and income of the consumer The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the goodNature of goods Normal goods Inferior goods ‘a consumer’s demand for an inferior good moves in the opposite direction as the income of the consumer. a consumer’s demand for a normal good moves in the same direction as the Income of the consumer. Example, coarse cereals Exceptions to law of demand 1, Giffen goods: A rise in the purchasing power (income) of the consumer can sometimes induce the consumer to reduce the consumption of a good. a. Insuch a case, the substitution effect and the income effect will work in opposite directions, b, The demand for such a good can be inversely or positively related to its price depending on the relative strengths of these two opposing effects, c. Ifthe substitution effect is stronger than the income effect, the demand for the good and the price of the good would still be inversely related. However, if the income effect is stronger than the substitution effect, the demand for the good would be positively related to its price. Such a good is called a Giffen good. 2. Veblen goods: The second exception to the law of demand is the concept of Veblen goods. Veblen Goods is a concept that is named after the economist Thorstein Veblen. a, According to Veblen, there are certain goods that become more valuable as their price increases. Ifa product is expensive, then its value and utility are perceived to be more, and hence the demand for that product increases. This happens mostly with precious metals and stones such as gold and diamonds and luxury cars such as Rolls-Royce.Baa Bia a eS . Expectations of price change: There are times when the price of a product increases and market conditions are such that the product is expected to get even more expensive. In such cases, consumers may buy more of these products before the price increases any further. Consequently, when the price drops or may be expected to drop further, consumers might postpone the purchase to avail the benefits of a lower price. . Bandwagon effect: This is the most common type of exception to the law of demand ‘herein the consumer tries to purchase those commodities which are bought by his friends, relatives or neighbours and even try to imitate celebrities. a. Here, the person tries to emulate the buying behaviour and patterns of the ‘group to which he belongs irrespective of the price of the commodity. b. For example, if the majority of group members have smart phones then the consumer will also demand for the smartphone even if the prices are high. .. Emergencies: During emergencies such as war, natural calamity- flood, drought, earthquake, etc., the law of demand becomes ineffective. In such situations, people often fear the shortage of the essentials and hence demand more goods and services even at higher prices. Substitutes and complements Goods which are consumed together are called complementary goods. Examples of goods which are complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. In general, the demand for a good moves in the opposite direction of the price of its complementary goods. In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. Since tea is a substitute for coffee, if the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up. On the other hand, if the price of coffee decreases, the consumption of tea is likely to go down. The demand for a good usually moves in the direction of the price of its substitutes. | The demand fora good usually moves in the direction of the price of i] its substitutes.WANT TO PREPARE FOR FX sen RBI, SEBI & NABARO EXAMS = @ paste Ds) ag ue Shifts in the demand curve Given the prices of other goods and the preferences of a consumer, the demand for the good at each price changes, and hence, there is a shift in the demand curve. For normal goods Si If the income falls then demand curve shifts leftward for normal gootls and rightward for inferior goods. Given the consumer's income and her preferences, ite pice ofa elated good changes, the demand for a good at each level of its price changes, and hence, there is a shift in the demand curve. =a > ea If there is a decrease in the price of a substitute good then demand curve would shift leftward and {f there 1s a decrease in the price of complementary good then the demand curve would shift rightward. The demand curve can also shift due to a Chatige lin the tastesiand preferences of the consumer, If the consumer's preferences change in favour of a good, the demand curve for such a good shifts rightward. On the other hand, the demand curve shifis leftward due to an unfavotirable change in the preferences of the consumer. [ Consumer's preferences change in favour of a good aQuantity Quantity Courtesy and copyright -NCERT Conclusion: Shift in demand curve takes place when there is a change in some factor, other than the price of the commodity Movement along the demand curve ‘The demand curve is a graphical representation of the demand function. At higher prices, the demand is less, and at lower prices, the demand is more. Thus, any change in the price leads ‘to movements along the demand curve. O; a 7x Quantity demanded (en writs) Fig. 34 DEMANDaoa, ‘Ghani Demanded In Demand Curve Market demand The market demand for a good at a particular price is the total demand of all consumers taken together. The market demand for a good can be derived from the individual demand curves by adding up the individual demand curves horizontally (method known as horizontal summation) REMAADCURTOR —DEMANDCUMVTOF DEMAND CURVE OF Qiang T DEMAND CURVE RONWRAER SS" | RORTRRACT anion MARKET DEM) R os? 7 Foe Fo e GOALITY DOMANERORY A QUALITY BEMANDEDI HY A QUANTITY DEMANDED BY €”GuatrTy DEMANDED BN Ade o o “n Pig. 7. Derivation of Market Demand Curve