Ch 3: Demand

By Disha Mendiratta
 Learning Outcomes
After this chapter, the learners will be able to:

 To understand the meaning of demand and its types – individual demand and
market demand

 To analyse the factors which influence the individual demand and market demand
of a commodity

 To draw the individual and market demand schedules

 To comprehend the “Law of Demand” – How Quantity Demanded of a Commodity

responds to Changes in its own Price

 To understand the mathematical meaning of slope and thereafter determine the

slope of a demand curve
Essential elements of demand

Quantity of
Price of commodity
commodity

Willingness to buy
Period of time
  Demand: Demand is the quantity of a commodity
that a consumer is willing and able to buy, at each
possible price during a given period of time.

 Individual demand: It refers to the quantity of a

Definitions commodity that a consumer is willing to buy, at
each possible price during a given period of time.

 Market demand: It refers to the quantity of a

commodity that all consumers are willing to buy, at
each possible price during a given period of time.
 1. Own price of the good
 𝐷=𝑓 𝑝

 Generally, there exists an inverse relationship between price and quantity

demanded

 It means as price increases, the quantity demanded falls due to decrease in the

satisfaction level of consumers.

 For example, If the price of given commodity (say tea) increases , it’s quantity

demanded will fall as satisfaction derived from tea will fall due to rise in price.
2. Price of other goods

Other goods?

Complementary
Substitute goods Unrelated goods
goods
 2. a) The effect of change in price
of a substitute good
 Two goods are said to be substitutes if one can be used in place
of the other for satisfaction of a particular want.

 For example, Pepsi and Coke, Starbucks coffee and Costa

Coffee, Pizza from Domino's and pizza from Pizza Hut!

 An increase in the price of substitute leads to an increase in the

demand for given commodity and vice-versa.

 For example, if price of a substitute good (say, coca cola) rises,

then demand for given commodity (say, Pepsi) will rise as Pepsi
will become relatively cheaper in comparison to Coca-Cola.

 So, there is a positive relation between the price of a substitute

and the demand for the given good.
 2. b) The effect of change in price
of a complementary good
 Two goods are complementary to each other when they are
used jointly to satisfy a particular want.

 For example, CD player and CD, car and petrol, Tennis balls and
tennis rackets, iPhone and Apps to use with an iPhone.

 An increase in the price of complementary good leads to a

decrease in the demand for given commodity and vice-versa.

 For example, suppose price of petrol rises. Rise in price of petrol

reduces the demand for car as it will be relatively costlier to use
both the goods together.

 So, there is an inverse relation between the price of a

complementary good and the demand for the given good.
 2. c) Unrelated goods
 If a good is neither substitute nor complementary of
the given good, it is categorized as unrelated good.

 For example, petrol and tea are unrelated goods. A

change in the price of petrol has no direct effect on
the demand for tea.
 3. Income of the consumer
 For studying the influence of income on demand, distinction is made between Normal
good and Inferior good
 Normal Good: A good whose demand by a consumer rises with rise in income of that
consumer is called a normal good.
 For example, if a consumer buys more of toned milk for his family as his income rises, then
toned milk will be called a normal good.
 Demand for a normal good increases with increase in income and falls with fall in
income.
 Inferior good: A good whose demand by a consumer falls with the rise in income of that
consumer is called an inferior good.
 For example, if the consumer reduces the consumption of toned milk when his income
rises then toned milk is an inferior good for that consumer. At lower income levels it may
be a normal good. Like this, no good is always normal or always inferior. It is the income
level of the individual consumer that makes a good normal or inferior for him.
  The distinction between normal good and inferior good is
not based on the quality of the good but on the basis of
liking and disliking for the good that develop with the
change in income level.
 For example, at low income level consumer buys coarse
cloth because he cannot afford fine cloth. At low income
level, coarse cloth is a perfectly normal good for him. But
when his income rises, the consumer may reduce or give up
the consumption of coarse cloth and instead buy fine cloth.
Now at higher income level coarse cloth becomes an
Inferiority is inferior good for him
a relative  No good is inferior at all times and for all. It is the income
level that makes a good inferior for an individual.
concept  So whether a good is inferior or normal does not depend on
the quality or utility content of the good but on the income
level of a consumer.
 For example, bajra is a normal commodity for a rich person.
But if low income of a poor person forces him to consume
bajra everyday, then bajra becomes an inferior commodity
for him
4. Tastes and preferences

 This is the basic factor behind the demand for a good by

an individual consumer.
 Tastes and preferences directly influence the demand for a
commodity. They include changes in fashion, customs,
habits etc.

 If a commodity is in fashion or is preferred by the consumers

then demand to such a commodity rises
 On the other hand, demand for a commodity falls of the
consumers have no taste for that commodity.
5. Expectation of change in price
in future
 If price of a certain commodity is expected to increase in near
future, then people will buy more of that commodity than they
would normally buy.

 There exists a direct relationship between expectation of

change in the prices in future and change in demand in the
current period.

 For example if the price of petrol is expected to rise in future, its

present demand will increase.
 Change in quantity demanded vs Change
in demand
Change in quantity demanded Change in demand
Whenever demand for the given Whenever demand for the given
commodity changes due to change in its commodity changes due to factors other
own price, then such a change is known than price, then such a change is known
as ‘change in quantity demanded.’ as ‘change in demand.’

For example, if demand for Pepsi changes For example, if demand for Pepsi changes
due to change in its own price, then this is due to change in the price of coke, or
known as change in quantity demanded. due to change in income or due to
change in the taste and preferences of
people, then this is known as change in
demand.
 Let's test ourselves…
Ques. Identify the following as change in quantity demanded or change in demand.
1. People buy more ice creams during summer than during winter.
2. Consumer income falls and the number of automobiles purchased declines.
3. LG reduces the price of its TV by 10% and hence its sales increase.
4. A college raises its tuition fee and as a result the number of student enrollment forms
falls.
5. A report released by the WHO claims that Pepsi has a high pesticide content and
consequently Pepsi sales fall.
Ques. True/False
1. Demand for a good increases with increase in income of its buyer.
2. Demand of a given commodity can be specified irrespective of its price.
 Let's test ourselves…
Ques. What do you mean by substitutes ? Give examples of two goods
which are substitutes of each other.

Ques. What do you mean by complements? Give examples of two goods

which are complements of each other

Ques. Does a fall in income have the same effect on the demand for the
given commodity?
.
Determinants of market demand

1. Size and composition of population

 More the population, more likely the number of consumers
of a good.

 Not only the total population, but its composition, like age
also influences the demand for a good.

 This is because the needs of children, young and old are

different
 Needs of female and male population are also different.
Determinants of market demand

2. Season and weather

 Season and weather conditions also affect the
market demand for a commodity

 For example, during winters demand for woolen

clothes and jackets increases whereas during rainy
season market demand for raincoat and umbrellas
increases
Determinants of market demand

3. Distribution of income
 If income in the country is equitably distributed, then
market demand for commodities will be more
 If income distribution is uneven, that is, if people are either
very rich or very poor then market demand will remain at
lower level.
 If income distribution is more in favor of the rich, comforts
and luxuries will be more in demand
 if income distribution is more in favor of the poor, necessities
would be more in demand.
 https://www.youtube.com/watch?v=Enz6z9jGmsk (Video
on factors affecting demand)
 Demand function
 Demand function shows the relationship between quantity
demanded for a particular commodity and the factors
influencing it .
 It can be either with respect to one consumer (individual demand
function) or with respect to all the consumers in the market
(market demand function)

 Individual demand function

𝑫𝒙 = 𝒇 (𝑷𝒙 , 𝑷𝒓 , 𝒀, 𝑻, 𝑭)

𝑫𝒙 : Demand for commodity x

Px : Price of the given commodity X
Pr : price of related goods
Y: income of the consumer
T:Taste and preferences
F: Expectation of change in price in future
 Demand function
 Market Demand Function

𝑫𝒙 = 𝒇 (𝑷𝒙 , 𝑷𝒓 , 𝒀, 𝑻, 𝑭, P, S)

𝑫𝒙 : Demand for commodity x

Px : Price of the given commodity X
Pr : Price of related goods
Y: income of the consumer
T: Taste and preferences
F: Expectation of change in price in future
P: Size and composition of population
S: Season and weather
 Individual Demand Schedule
 Individual demand schedule refers to tabular statement showing various quantities of a
commodity that a consumer Is willing to buy at various levels of price, during a given period
of time.
PRICE (in rupees) Quantity demanded of a commodity X
5 1
4 2
3 3
2 4
1 5

 As seen in the schedule, quantity demanded of X increases with decrease in its price. the
consumer is willing to buy 1 unit at ₹5. When price falls to ₹4, demand rises to 2 units
Individual
Demand Curve
 Individual demand curve
refers to a graphical
representation of individual
demand schedule
 We plot price on Y axis and
quantity demanded on X axis
 The demand curve slopes
downward due to inverse
relationship between price
and quantity demanded.
 Market Demand Schedule
 Market demand schedule refers to tabular statement showing various quantities of a
commodity that all the consumers are willing to buy at various levels of price, during a
given period of time.

 It is this sum of all individual demand schedules at each and every price.

 It is expressed as: Dm = DA + DB + DC + ------

Where Dm is the market demand and DA + DB + DC + ------ Are the individual demands of
household A, household B and so on.
 Market Demand Schedule

Price Household A Household B Market demand

5 1 2 1+2=3
4 2 3 2+3=5
3 3 4 3+4=7
2 4 5 4 + 5 =9
1 5 6 5 + 6 = 11

Market demand is obtained by adding demand of households A & B at different

prices. At ₹5 per unit market demand is 3 units. when price falls to ₹4 market demand
rises to 5 units. So, market demand schedule also shows the inverse relationship
between price and quantity demanded.
Market demand
curve
 Market demand curve refers to a graphical
representation of market demand
schedule.
 Market demand curve is obtained by
horizontal summation of individual demand
schedules
 https://www.youtube.com/watch?v=dGjPg
uqHBXE (Video on the derivation of Market
demand curve from individual demand
curve)
 Slope of demand curve
 Slope is defined as the change in the variable on the Y -axis divided by change in the
variable on the X-axis.
 So, the slope of demand curve equals the change in price divided by change in
quantity.
 Due to the inverse relationship between price and demand, the demand curve slopes
downward. So slope is negative.
 Slope of demand curve measures the steepness or flatness of the demand curve.

Slope = Change in price ∆P/ Change in quantity ∆Q

Slope of
demand curve
 In the given diagram when price
falls from ₹8 to ₹4, then quantity
demanded increases from 2 units to
4 units

 Slope = ∆P/ ∆Q

 Slope = 4 – 8/ 4 – 2 = -2
Thank you