WHAT IS DEMAND?

Demand for a commodity refers to the amount of a commodity that the consumer is ready to buy at different prices of a commodity. A readiness to buy or demand implies that the consumer is both: willing to consume because he derives utility from it, and has the sufficient amount of money (ability to buy), needed to buy the commodity at its prevailing price in the market.

DETERMINANTS OF DEMAND The demand for a commodity, say CocaCola, by a consumer depends upon several factors. These are: the price of the commodity in question (p) called the own price of the commodity; the income of the consumer (M); the prices of the other related goods (pi, pj, _ _ _, pn ) called the cross price

OWN PRICE AND LAW OF DEMAND

The relationship between the quantity demanded for a commodity (q) and the price of the same commodity (p, the own price) is inverse/negative/opposite. That is, the higher the price of the commodity, the lower is the quantity demanded of the commodity (the amount that the consumer is ready to buy) at that price, and vice versa. This opposite relationship between quantity demanded and own price can be summarised in the form of a law, called the Law of Demand, which states that: Every thing else held constant, an increase in the own price leads to a decrease in the quantity demanded of the commodity, and vice versa.

CONSUMER INCOME the relationship between demand (q) and the income (M) of the consumer can be either direct (positive) or inverse (negative/opposite), depending upon the nature of the commodity whose demand is being considered. That is, the relationship between the demand for a commodity and the income of the consumer depends upon whether the commodity is a normal good or an inferior good. Normal good: A normal good is one whose demand rises as the income of the consumer rises, since the consumer's capacity to buy/pay increases. The relation between the demand for a normal good and income is therefore direct. Inferior good: Inferior goods are those, the demand for which decrease when the income of the consumer increases. The relation between the demand for an inferior good and income is therefore inverse.

CROSS PRICE While buying a commodity a consumer is not only concerned about his income and the own price of the good, but also about the prices of other related goods (cross price). The related commodities can be broadly classified into two types, substitutes and complements. The relationship between the demand for a commodity and the price of related goods depends upon whether the related good is a substitute or a complement. Substitutes or Competing Goods: Substitutes or competing goods are those related goods that are consumed in place of one another. The demand for a commodity is therefore, directly/positively related to the price of the substitutes. Complements: Complements are those related goods that have to be consumed together/jointly i.e. in conjunction with one another. Therefore, the lower the price of the complements, the greater is the demand for the commodity in question. That is, relationship is inverse/negative.

DEMAND SCHEDULE The tabular representation of the inverse relationship between quantity demanded and the own price of a commodity is called a demand schedule. DEMAND CURVE Plotting the demand schedule on a graph between the own price (p) on the y-axis and the quantity demanded (q) on the x-axis yields a negatively (or downward) sloped curve, called the demand curve. Thus: The demand curve is a graphical relationship between the own price and the quantity demanded of a commodity.

REASON FOR THE LAW OF DEMAND OR NEGAIVELY SLOPED DEMAND CURVE The increase in the quantity demanded in response to a decrease in price occurs due to two independent effects: The substitution effect The income effect That is, the total increase in the quantity demanded is partly due to the substitution effect and partly due to the income effect. The total increase in the quantity demanded due to a price decrease is called the price effect. Therefore, the price effect is the joint result of the substitution effect and the income effect. THE SUBSTITUTION EFFECT The substitution effect refers to the change in the quantity demanded due to the replacement/substitution of one commodity by the other, in response to a change in the relative price of the commodity. THE INCOME EFFECT The income effect refers to the increase in quantity demanded due to an increase in the real income (and not money income) of the consumer, when the own price of a good falls. When a good becomes cheaper due to a fall in its price, the purchasing power of the same money income of the consumer increases, which increases the ability of the consumer to buy more of the good.

FEATURES OF A DEMAND CURVE

SHAPE OF THE DEMAND CURVE It is not necessary for the demand curve to be a straight line (linear in shape). It can also be curved and can assume different shapes depending upon the nature of the commodity.

Nevertheless, the most commonly used demand curve is the linear one and hence it is also called a linear or a straight line demand curve

If we temporarily ignore the other variables affecting demand such as income, cross price etc., then the linear demand curve can be represented by a linear equation such as: q=abp

SLOPE OF THE DEMAND CURVE A linear demand curve can have any slope i.e. it can be either very steep (close to being vertical, such as d1d1 in figure 4.5) or very flat (close to being horizontal, such as d2d2) depending upon the nature of the commodity. A steep demand curve such as d1d1 represents the case of a necessity (essential food, clothing etc.), while a relatively flat demand curve such as d2d2 represents a luxury good (laptops, cars etc.). DEMAND CURVE IS CONSUMER SPECIFIC There is a different/separate demand curve for a commodity for each consumer. DEMAND CURVE IS COMMODITY SPECIFIC There is a different/separate demand curve for different commodities demanded by a given consumer.

SHIFT OF THE DEMAND CURVE 1. CHANGE IN INCOME A change in the income of the consumer shifts the demand curve for a commodity parallely either leftwards or rightwards, depending upon whether the commodity is a normal good or an inferioir good. a. Normal Good: An increase in the income of the consumer shifts the demand curve of a normal good to the right, and vice versa. b. Inferior Good: An increase in the income of the consumer shifts the demand curve of a inferior good to the left and vice versa.

2. CHANGE IN CROSS PRICE A change in the price of related goods (cross price) shifts the demand curve for a commodity parallely, either leftwards or rightwards depending upon whether the related commodity whose price has changed is a substitute or a complement, for the commodity whose demand is being considered.. a. Substitute Good: A fall in the price of a substitute (cross price) shifts the demand curve of the given commodity to the left, as the demand for the commodity decreases at every price, while a rise in the cross price shifts the demand curve to the right. b. Complement: A fall in the price of a complement (cross price) shifts the demand curve of the given commodity to the right, as the demand for the commodity increases at every price, and vice versa.

3 CHANGES IN OTHER FACTORS The demand curve also shifts in response to changes in the other factors such as the social and cultural characteristics of the consumer, fashions and trends, advertising etc. For instance, the demand curve for commodities shifts to the right in response to an increase in the preference for the commodity, the emergence of fashion and trends for the commodity, an increase in advertisements etc. and vice versa.

CHANGE IN QUANTITY DEMANDED VS. CHANGE IN DEMAND