Determinants of demand and Law of Demand

Dr. Anand Gupta

DEMAND

 Demand for a commodity refers to the desire to buy a

commodity backed with sufficient purchasing power and the
willingness to spend.
 For Example: You desire to have a Car, but you do not have
enough money to buy it. Then, this desire will remain just a
wishful thinking, it will not be called demand.
 Demand for a commodity refers to the quantity of the
commodity which a consumer is willing and able to purchase at
any Price and a Specific time period.
 Law of Demand
 The Law of Demand States that, other things being constant
(Ceteris Paribas), the demand for a good extends with a
decrease in price and contracts with an increase in price.
 Acc. to Dr. Marshall, “The law of demand states that amount
demanded increases with a fall in price & diminishes with a
rise in price.”
 In other words, there is an inverse relationship between
quantity demanded of a commodity and its price.
 The term other thing being constant implies that income of the
consumer, his taste and preferences and price of other
related goods remains constant.
Assumptions of Law of Demand
 No change in the income of the consumer.
 No change in the price of related goods.
 There should be no expectation of any change in the future
price of the commodity.
 Consumer tastes, preferences & choices remains constant
 No Substitutes for the commodity are available.
 There is no change in the distribution of incme and wealth of
the community.
Demand Schedule & Demand Curve
Demand Schedule is that schedule which expresses the relation between different
quantities of the commodity demanded at different price.

According to Samuelson, “The table relating to price and quantity demanded is called the
demand schedule.

Demand Curve is simply a graphic representation of demand schedule.

According to Leftwitch, “The Demand Curve represents the maximum quantities per unit
of time that consumer will take at various prices.

Demand Schedule and Demand Curve are of two types

1)Individual Demand Schedule & Individual Demand Curve
2)Market Demand Schedule & Market Demand Curve
Individual Demand Schedule & Individual Demand Curve
• It is defined as the table which shows quantities of a given commodities which an
individual consumer will buy at different possible prices at a given time.
• Individual demand curve is a curve that shows different quantities of a commodity
demanded by an individual consumer.
• The slope of an individual demand curve is downward from left to right that
indicates the inverse relationship of demand with price.

Price. (in Rs.) Quantity Demanded of

commodity x (in units)
5 1
4 2
3 3
2 4
1 5
Market Demand Schedule & Market Demand Curve
 Market demand schedule shows total demand of all the consumers in
the market at different prices of the commodity.
 Market demand curve is a curve that represent the aggregate demand of
all the consumers in the market at different prices of a particular
commodity
Price Individual Demand (in units) Market Demand (in
(Rs.) units) {DA + DB}

Household A Household B
(DA) (DB)
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
Why does demand curve slope downward

 Law of Diminishing Marginal Utility

 Income Effect

 Substitution Effect

 New Buyers

 Different Uses
Demand Function
Demand Function shows the relationship between demandfor a commodity
and its various determinants.
It shows how demand for a commodity is related to, say price of the
commodity or income of the consumer or other determinants.
It is Expressed as: Dx = f (Px, Pr, Y, T, E)

Here, Dx: Quantity Demanded of commodity X

Px : Price of the Commodity X
Y : Consumer’s Income
T : Consumer’s Taste & Preferences
E: Consumer’s Expectations
N : Population Size
Yd : Distribution of Income
Exception to the Law of Demand

In certain cases, the demand

curve slopes up from left to right,
i.e., it has a positive slope.

Under certain circumstances,

consumers buy more when the
price of a commodity rises, and
less when price falls. Many causes
are attributed to an upward
sloping demand curve.
Exception to the Law of Demand

1) Articles of Distinction: This exception was first of all

discussed by Veblen. According to him, articles of distinction
have more demand only if their prices are sufficiently high.

Diamond, jewellery, etc; have more demand because their

prices are abnormally high.

If their prices fall, they will no longer be considered as articles

of distinction and so their demand will decrease.
Exception to the Law of Demand
2) The Giffen Goods
A study of poor farmers of Ireland by Sir Giffen in the 19th century
revealed that the major portion of their income was spent on potatoes
and only a small amount was spent on meat.
Potatoes were cheap but meat was costly. When the price of potatoes
tend to increase consumption of meat was curtailed to economies their
expenditure and as a result of this they saved money and spent more on
potato to meet their food deficiency.
In this way quantity purchase rises even when prices of potatoes rises.

Giffin goods are highly inferior goods, showing a very high negative
income effect
Exception to the Law of Demand
3) Highly Essential Good: In case of certain highly essential items such as life-
saving drugs, people buy a fixed quantity at all possible price. Heart patients will
buy the same quantity of ‘medicine’ whether price is high or low. Their response to
price change is almost nil.
4) 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.
5) Bandwagon Effect: (The bandwagon effect is a psychological phenomenon in
which people do something primarily because other people are doing it).
This is the most common type of exception to the law of demand wherein the
consumer tries to purchase those commodities which are bought by his friends,
relatives or neighbors.
. For example, if the majority of group members have smart phones then the
consumer will also demand for the smart phone even if the prices are high.
6) Speculative Effect
Determinants of Demand / Factors Affecting Demand

1) Price of the Commodity: The law of demand states that other things being constant
the demand of the commodity is inversely related to its price. It implies that rise in
price of commodity brings about a fall in its purchase and vice versa.
Determinants of Demand / Factors Affecting Demand
2) Price of Related Goods: Demand for a commodity is also influenced
by change in price of related goods. These are of two types:

a)Substitute Goods: These are the goods which can be substituted for
each other, such as tea and coffee, or ball pen and ink pen.
In case of such goods, increase in the price of one causes increase in the
demand for the other and decrease in the price of one causes decrease in
the demand for the other.

b) Complementary Goods: Complementary goods are those which

complete the demand for each other, and therefore, demanded together.
For Example Pen and ink, Car and Petrol.
In case of complementary goods, a fall in the price of one causes increases
in the demand for the other and rise in the price of one causes decrease in
the demand for others.
Determinants of Demand / Factors Affecting Demand

3) Income of the Consumer: The ability to buy a commodity

depends upon the income of the consumer. When the income
of the consumer increases, they buy more and when the
income falls they buy less.

4) Expectations: If the consumer expects that price in future will

rise, he will buy more quantity in present, at the existing price.
likewise, if he hopes that price in future will fall, he will buy less
quantity in present, or may even postpone his demand.
Determinants of Demand / Factors Affecting Demand

5) Taste and Preferences: Taste and preferences include

fashion, custom etc. Taste and preferences can be influenced
by advertisement, change in fashion, climate, new inventions,
etc.
Other thing being equal, demand for those goods increases for
which consumer develop tastes and preferences.
Contrary to it, if a consumer has no taste or preference for a
product, its demand will decrease.
Determinants of Demand / Factors Affecting Demand
6) Population Size: Demand increases with the increase in population
and decreases with decrease in population.
Composition of population (male, female ratio) also affects the
demand.
E.g. Female population increases, demand for goods meant for women
will go up.

7) Distribution of Income: if income is equally distributed, there will be

more demand. If income is not equally distributed, there will be less
demand.
In case of unequal distribution, most will not have enough money to
buy things.
Increase In Demand
Increase and decrease in demand are referred to change in demand due to
changes in various other factors such as change in income, distribution of income,
change in consumer’s tastes and preferences, change in the price of related goods,
while Price factor is kept constant Increase in demand refers to the rise in demand
of a product at a given price.
Decrease In Demand
Extension and Contraction of Demand
• The variations in the quantities demanded
of a product with change in its price, while
other factors are at constant, are termed
as expansion or contraction of demand.

• Expansion of demand refers to the period

when quantity demanded is more because
of the fall in prices of a product. However,
contraction of demand takes place when
the quantity demanded is less due to rise
in the price o a product.

• For example, consumers would reduce

the consumption of milk in case the prices
of milk increases and vice versa.
Consumer Equilibrium- IC