Acknowledgement

I would like to express my special thanks of

gratitude to my teacher (Mr.S.K,Singh) as well as
our principal (Mr.A.Sandhu)who gave me the golden
opportunity to do this wonderful project on the topic
(Elementary Theory Of Demand), which also helped me
in doing a lot of Research and i came to know about
so many new things I am really thankful to them.
Secondly i would also like to thank my parents and
friends who helped me a lot in finalizing this project
within the limited time frame.
 Elementary Theory Of Demand
Meaning of demand
Demand is the number of goods that the customers are ready and
able to buy at several prices during a given time frame. The
association between price and quantity demanded is also called
a Demand curve. Preferences and choices, which are the basics
of demand, can be depicted as the functions of cost, odds,
benefit and other variables.
The amount of a good that the customer picks up modestly,
relies on the cost of the commodity, the cost of other
commodities, the customer’s earnings and his or her tastes and
proclivity. The amount of a commodity that a customer is ready
to purchase and is able to manage and afford, provided prices of
goods and customer’s tastes and preferences are known as
demand for the commodity.
In our daily life, we often see that a consumer’s preferences for
product change according to their preferences, income, and the
prices of the goods or prices of other goods.
Here, the demand of a product can be defined as the quantity of
a product that a consumer is eager to purchase, can afford at a
given price, and is according to his/her preferences and taste.
Whenever there is a change in any of those variables than the
demand and supply of a product starts changing.

Types of Demand:
 Market or Individual Demand- Here, the individual
demand is defined as the demand for products or services
 by an individual consumer. And the market demand can be
defined as a demand for a product made by a bunch of
consumers who buy that product. Therefore, the market
demand is a collective demand of each individual’s
demand.
 Director Derived Demand: The direct demand is defined
when goods manufactured is related to the demand for
another product is known as the derived demand. For
example; the demand for a silk yarn is the result of the
demand for silk cloth. However, direct demand for goods
can be defined when the demand for a product is
independent. For example, there is an autonomous demand
for cotton cloth.
 Price Demand- The price demand refers to the number of
goods or services an individual is eager to buy at a given
price.
 Income Demand- The income demand means the
eagerness of a person to buy a definite quantity at a given
income level.
 Cross Demand: This is one of the important types of
demand where the demand of a product is not subject to its
own price, but the price of other similar products is known
as the cross demand.

Determinants of Demand
Some of the important determinants of demand are as follows,

1. Price of the Product: The price of a product is the most

important determinant of market demand in the long-run and the
 only determinant in the short-run. As per the law of demand,
the price of a product and its quantity demanded are inversely
related, i.e. the quantity demanded increases when the price falls
and decreases when the price rises, other things remaining the
same.
Here, other things imply that the income of the consumer, the
price of the substitute and complementary goods, tastes and
preferences and the number of consumers, all remains constant.
The price-demand relationship has more significance in the
oligopolistic market structure in which the result of a price war
among the firm and its rival decides the level of success of the
firm.

2. Price of the Related Goods: The market demand for a

commodity is also affected by the changes in the price of the
related goods. The related goods may be
the substitute or complementary goods. Two commodities are
said to be a substitute for one another if they satisfy the same
want of an individual and the change in the price of one
commodity affects the demand for another in the same
direction. Such as, tea and coffee, Maggi and Yippie, Pepsi and
Coca-Cola are close substitutes for each other. The increase in
the price of either commodity the demand for the other also
increases and vice-versa.
A commodity is said to be a complement for another if the use
of two goods goes together such that their demand changes
(increases or decreases) simultaneously. For example, bread
and butter, car and petrol, mattress and cot, etc. are
complementary goods. The increase in the price of either
commodity the demand for another decreases and vice-versa.
3. Consumer’s Income: The income is the basic determinant
of the quantity demanded of a product as it decides the
purchasing power of the consumers. Thus, people with higher
disposable income spend a larger amount of income on
consumer goods and services as compared to those with lower
disposable income. Consumer goods and services can be
grouped under four categories: essential goods, inferior goods,
normal goods, and prestige or luxury goods. The relationship
between the consumer’s income and these goods is explained
below:
 Essential Consumer Goods: The essential goods are
the basic necessities of the life and are consumed by all the
persons of the society. Such as food grains, salt, cooking oil,
clothing, housing, etc., the demand for such commodities
increases with the increase in consumer’s income but only up
to a certain limit, although the total expenditure may increase
with respect to the quality of goods consumed, other things
remaining the same.
 Inferior Goods: A commodity is deemed to be inferior if
its demand decreases with the increases in the consumer’s
income beyond a certain level of income and vice-versa. For
example, Bajra, millet, bidi are the inferior goods.
 Normal Goods: The normal goods are those goods
whose demand increases with the increase in the
consumer’s income, such as clothing, household furniture,
automobiles, etc. It is to be noted that, demand for the normal
goods increases rapidly with the increase in the consumer’s
income but slows down with a further increase in the income.
  Luxury Goods: The luxury goods are those goods which
add to the prestige and pleasure of the consumer without
enhancing the earnings. For example, jewelry, stone, gem,
luxury cars, etc. The demand for such goods increases with
the increase in the consumer’s income.
4. Consumers’ tastes and preferences: Consumer’s Tastes
and preferences play a vital role in determining a demand for a
product. Tastes and preferences often depend on the lifestyle,
culture, social customs, hobbies, age and sex of the consumers
and the religious sentiments attached to a commodity. The
change in any of these factors results in the change in the
consumer’s tastes and preferences, thereby resulting in either
increase or decrease in the demand for a product.
5. Advertisement Expenditure: Advertisement is done to
promote sales of a product. It helps in stimulating demand for
a product in four ways; by informing the prospective
consumers about the availability of a product, by showing its
superiority over the competitor’s brand, by influencing the
consumer’s choice against the rival product and by setting new
fashion and changing tastes of the consumers. The effect of
advertisement is said to be fruitful if it leads to the upward shift
in the demand curve, i.e. the demand increases with the increase
in the advertisement expenditure, other things remaining
constant.
6. Consumers’ Expectations: In the short run, the
consumer’s expectation with respect to the income, future
prices of the product and its supply position plays a vital role
in determining the demand for a commodity. If the consumer
expects a high rise in the price of the commodity, shall purchase
it today at a high current price so as to avoid the pinch of the
 high price in the future. On the contrary, if the prices are
expected to fall in the future the consumer will postpone their
purchase with a view to avail benefits of lower prices in the
future, especially in case of nonessential goods.
Likewise, an expected increase in the income increases the
demand for a product and vice-versa. Also, in the case of scarce
goods, if its production is expected to fall short in the future, the
consumer will buy it at current higher prices.

7. Demonstration Effect: Often, the new commodities or

new models of an existing product are bought by the rich people.
Some people buy goods due to their genuine need for them or
have excess purchasing power. While some others do so because
they want to exhibit their affluence. Once the commodity is in
very much fashion, many households buy them not because they
have a genuine need for them but their neighbors have
purchased it. Thus, the purchase made by such people arises out
of feelings as jealousy, equality in society, competition, social
inferiority, status consciousness. The purchases made on the
account of these factors results in the demonstration effect, also
called as Bandwagon Effect.
8. Consumer-Credit Facility: The availability of credit to
the consumer also determines the demand for a product. The
credit extended by sellers, banks, friends, relatives or from other
sources induces a consumer to buy more than what would have
not been possible in the absence of the credit. Thus,
the consumers with more borrowing capacity consumes
more than the ones who borrow less.
9. Population of the Country: The population of the country
also determines the total domestic demand for a product of mass
consumption. For a given level of per capita income, tastes and
preferences, price, income, etc., the larger the size of the
population the larger the demand for a product and vice-
versa.
10.Distribution of National Income: The national income is
one of the basic determinants of the market demand for a
product, such as the higher the national income, the higher
the demand for all the normal goods. Apart from its level,
the distribution pattern of the national income also determines
the overall demand for a product. Such as, if the national income
is unevenly distributed, i.e., the majority of the population falls
under the low-income groups, then the market demand for the
inferior goods will be more than the other category goods.

Different types of economic demand

Companies and corporations put plenty of their budget into
understanding the demand for their products. This enables them
to push their product to consumers or other businesses without
losing money due to overproduction or other factors. As an
employee, understanding what type of demand your company
falls under is a good business practice. Here’s a glance at the
different types of economic demand.
1. Market and individual demand: Individual demand is the
economic demand for a product at a certain price by one
consumer. Customer tastes, perceived quality and brand
loyalty all affect individual demand. Market demand, also
known as aggregate demand, is the total economic demand
of all individual demand in a particular market.
2. Company and industry demand: The demand for
products at a certain price over a period of time from a
single entity is known as company demand. Industry
demand is the total aggregate demand for products in an
industry. Company demand is often expressed as a
percentage of industry demand in order to measure market
share. For example, the demand for Pepsi products is the
company demand, but it only makes up a percentage of the
total industry demand for beverages.
3. Short-term and long-term demand: As the name implies,
short-term demand for a product is the economic demand
over a shorter duration of time. Short-term demand is
elastic, meaning that it reflects price changes, fads and
necessity more drastically than longer-term demand. For
example, winter clothing is only worn during the colder
months, making the demand short-term in comparison to
clothes that are worn year-round. Price makes short-term
demand fluctuate drastically. 
Long-term demand refers to consumers’ demand for
products over a lengthier stretch of time. This demand
doesn’t change nearly as much with respect to price.
Instead, long-term demand changes based on promotion and
advertising by a company, the availability of substitutes and
competition.
4. Market and market segment demand: Market demand is
the aggregate demand of all consumers who purchase the
same type of product. Market segment demand, on the other
hand, refers to a particular subset of market demand,
 namely age, race, gender and a variety of other
demographic factors.
5. Perishable and durable goods demand: Durable goods
are any products that can be used more than once in their
life cycle. Perishable goods are items that only have a single
use. While both types of goods satisfy the demands of
consumers, durable items have more perceived value over
the long-term. In addition, durable goods also need
replacement over time (cars, shoes, clothing), so a market
demand still exists for them after an initial purchase.
6. Derived and autonomous demand: Autonomous demand,
also known as direct demand, is when the demand for a
product is independent of all other goods in the market.
Derived demand is an economic demand that directly
correlates with the demand for another product. For
example, if the demand for tires goes up, the demand for
rubber will increase proportionately.
7. Income demand: Income is a determinant of economic
demand, so it’s easy to understand why it has it’s its own
type of demand. Income demand is the willingness of a
consumer to buy a certain product at a given income level
and price. If income goes down, demand goes down. If
income goes up, demand goes up. 
8. Price demand: Price demand refers to the quantity of a
certain good that a consumer will buy at a certain price.
Unlike income demand, price demand has an inverse
relationship between price and overall demand. As the price
goes up, demand falls and vice-versa.
 9. Cross demand: This type of economic demand centers on
the number of substitutes and related products in a
particular market. When the price of a certain product goes
up, cross demand dictates that its substitute will see an
increase in demand. An example of cross demand is if the
price of cow’s milk skyrockets, the demand for almond
milk, soy milk and other milk substitutes will increase.
Types of demand vary by industry and company, but a vested
knowledge and interest in the types of economic demand will
help you understand the mission and goals of your department,
company or potential employer. However, You don’t have to
become an expert on all types of demands. Instead, focus your
energy and study on those that impact your industry.

Law of Demand
In economics, the law of demand states that, "conditional on all
else being equal, as the price of a good increases (↑), quantity
demanded decreases (↓); conversely, as the price of a good
decreases (↓), quantity demanded increases (↑)". In other words,
the law of demand describes an inverse relationship between
price and quantity demanded of a good. Alternatively, other
things being constant, quantity demanded of a commodity is
inversely related to the price of the commodity. For example, a
consumer may demand 2 kilograms of apples at $70 per kg; he
may, however, demand 1 kg if the price rises to $80 per kg. This
has been the general human behaviour on relationship between
the price of the commodity and the quantity demanded. The
factors held constant refer to other determinants of demand, such
as the prices of other goods and the consumer's income. There
are, however, some possible exceptions to the law of demand,
such as  and Veblen goods.

For example, airlines want to lower costs when oil prices rise to
remain profitable. They also don't want to cut flights. Instead,
they buy more fuel-efficient planes, fill all seats, and change
operations to improve efficiency. The law of demand would
describe this as the quantity of fuel required by the airlines
dropped as the price rose. 
Of course, all other things are not equal during these periods. In
fact, demand for jet fuel can be further lessened because airlines'
income also drop at the same time. The 2008 global financial
crisis meant that travelers cut back on their demand for air
travel. The airlines' expectations about the price of jet fuel also
changed. They realized it would probably continue to rise over
the long term. The other two determinants of airline's demand
for jet fuel stayed the same. They couldn't switch to another fuel,
and their tastes or desire to use jet fuel didn't change.
Retailers use the law of demand every time they offer a sale. In
the short-term, all other things are equal. Sales are very
successful in driving demand. Shoppers respond immediately to
the advertised price drop. It works especially well during
massive holiday sales, such as Black Friday and Cyber Monday.

Assumptions under which law of demand is valid

This law will be applicable only if the below mentioned points
are fulfilled.

1. No change in price of related commodities.

2. No change in income of the consumer.
3. No change in taste and preferences, customs, habit and
fashion of the consumer.
4. No change in size of population
5. No expectation regarding future change in price.

Demand Schedule
The Law of Demand states that when the price of a commodity falls,
its demand increases and when the price of a commodity rises, its
demand decreases; other things remaining constant. Thus, there exists
an inverse relationship between price and quantity demanded of a
commodity. The functional relationship between price and quantity
demanded can be represented as Dx = f(Px). Now let us discuss the
Demand Schedule in detail.

There are two types of Demand Schedules:

1. Individual Demand Schedule

2. Market Demand Schedule

Individual Demand Schedule

It is a demanding schedule that depicts the demand of an
individual customer for a commodity in relation to its price. Let
us study it with the help of an example.
 Price per unit of Quantity demanded of
commodity X (Px) commodity X (Dx)

100 50

200 40

300 30

400 20

500 10

The above schedule depicts the individual demand schedule. We

can see that when the price of the commodity is ₹100, its demand
is 50 units. Similarly, when its price is ₹500, its demand
decreases to 10 units.
Thus, we can conclude that as the price falls the demand increases
and as the price raises the demand decreases. Hence, there exists
an inverse relationship between the price and quantity demanded.

Market Demand Schedule

It is a summation of the individual demand schedules and depicts
the demand of different customers for a commodity in relation to
its price. Let us study it with the help of an example.

Quantity Quantity
Price per unit Market
demanded by demanded by
of commodity Demand         
consumer A consumer B
X QA + QB
(QA) (QB)

100 50 70 120

200 40 60 100

300 30 50 80

400 20 40 60
 500 10 30 40

The above schedule shows the market demand for commodity X.

When the price of the commodity is ₹100, customer A demands
50 units while the customer B demands 70 units.

Thus, the market demand is 120 units. Similarly, when its price is
₹500, Customer A demands 20 units while customer B demands
30 units.

Thus, it’s market demand decreases to 40 units. Thus, we can

conclude that whether it is the individual demand or the market
demand, the law of demand governs both of them.

Demand Curve

The demand curve is a graphical representation of the

relationship between the price of a good or service and the
quantity demanded for a given period of time. In a typical
representation, the price will appear on the left vertical axis, the
quantity demanded on the horizontal axis. 

Market Demand Curve Definition

The market demand curve is the summation of all the
individual demand curves in a given market. It shows the
quantity demanded of the good by all individuals at varying
price points. For example, at $10/latte, the quantity demanded
by everyone in the market is 150 lattes per day. At $4/latte, the
quantity demanded by everyone in the market is 1,000 lattes per
day. The market demand curve gives the quantity demanded by
everyone in the market for every price point. The market
demand curve is typically graphed and downward sloping
because as price increases, the quantity demanded decreases. It
can also be provided as a schedule, which is in table format.

Equation
To determine the market demand curve of a given good,
you have to sum all the individual demand curves for the
good in the market. Here is the algebraic equation for
market demand. The quantity demanded (Q) is a function
of price (P), and it is summing all the individual demand
curves (q), which are also a function of price. The
subscripts one through n represent all the individuals in
the market.

Examples of Market Demand Curves

let's assume we have two people in the market for lattes Jack
and Jill. This table shows the individual demand schedules for
lattes. The column on the far right is the summation of the
individual demand curves, which becomes the market demand
curve.
At $3 per latte, Jill would buy 24 lattes a month and Jack would
buy 15. Therefore, the market demand at $3 per latte is 39 per
month. You can also graph the market demand curve, which is
the most common method of presenting a demand curve. This
graph shows the same market demand curve as the table.

Changes in Demand
The change means an increase or decrease in the volume of
demand and supply from its equilibrium. There exist some
determinants other than the price of the commodity which affects
the quantity of demand, like the income of consumers, the taste of
consumers, preference of consumers, population, technology, etc.
Due to the effects of these determinants, demand or supply of a
product changes and demand and supply curve shifts. Such shifts
affect the equilibrium price and quantity. Here now we are going
to discuss changes in demand.

Changes in demand include an increase or decrease in demand. Due

to the change in the price of related goods, the income of
consumers, and the preferences of consumers, etc. the demand for
a product or service changes.

So there are two possible changes in demand:

 Increase (shift to the right) in demand

 Decrease (shift to the left) in demand

I) Increase in demand (Shift to the Right)

Suppose, the income of the consumer increases. The price of the
product and supply of the product remain the same. Due to an
increase in income of the consumer, the purchasing power of
consumption increases.

So the demand for the product in the market will also increase.

Resultantly demand will change even if the price and supply of the
product remain the same. This is called an increase in demand.
Since supplies are short, the price of the product will increase. Now
due to the higher price, manufacturers of the product also increase
their supply to cover extra demand in the market. Ultimately
new equilibrium between demand and supply will be established.

Now we can conclude, due to an increase in demand, there is an

increase in the equilibrium price. Resultantly quantity supplied also
rises because quantity sold and purchases have increased. The
Demand curve will shift rightward. Keep in mind the following
points:

 No change in the price of the product

 No change in the supply of product
 Income of Consumer is increasing
 Demand is increasing

II) The Decrease in Demand (Shift to the Left)

Now, let’s think of the opposite of the above situation. Suppose
the Income of the consumer decreases. But, the price of the
product and the supply of the product remains the same. Due to
the decrease in income of the consumer, the purchasing power of
the consumer will also decrease.

So the demand for the product in the market will also decrease.
Resultantly demand will change even if the price and supply of
the product remain the same. This is called a decrease in demand.
Since supplies are excess in comparison to demand, the price of
the product will decrease to OP1. Now due to the lower price,
manufacturers of the product also decrease their supply to align
with demand in the market. Ultimately new equilibrium between
demand and supply will be E1. At new equilibrium E1, OP1 is the
price and OQ1 is the quantity which is demanded and supplied.

Now we can say that due to the decrease in demand, there is also
a decrease in the equilibrium price. Resultantly quantity supplied
also decreases because the quantity sold and purchases have
decreased. The demand curve will shift leftward. Keep in mind
the following points:

 No change in the price of the product

 No change in the supply of product
 Income of Consumer is decreasing
 So demand for product decreasing

Shift in Demand Curve

A shift in the demand curve is when a determinant of
demand other than price changes. It occurs when demand for
goods and services changes even though the price didn't.
To understand this, you must first understand what the demand
curve does. It plots the demand schedule. That is a chart that
details exactly how many units will be bought at each price. It's
guided by the law of demand which says people will buy fewer
units as the price increases. That's as long as nothing else
changes, an economic principle known as ceteris paribus. That
means all determinants of demand other than price must stay the
same.
A shift in the demand curve is the unusual circumstance when
the opposite occurs. Price remains the same but at least one of
the other five determinants change. Those determinants are:
1. Income of the buyers.
2. Consumer trends and tastes.
3. Expectations of future price, supply, needs, etc.
4. The price of related goods. These can be substitutes, such
as beef versus chicken. They can also be complementary,
such as beef and Worcestershire sauce.
5. The number of potential buyers. This determinant applies
to aggregate demand only.
Factors That Cause a Demand Curve to Shift
When the demand curve shifts, it changes the amount purchased
at every price point. For example, when incomes rise, people
can buy more of everything they want. In the short-term, the
price will remain the same and the quantity sold will increase.
The curve shifts to the left if the determinant causes demand to
drop. That means less of the good or service is demanded
at every price. That happens during a recession when buyers'
incomes drop. They will buy less of everything, even though the
price is the same.
Here are examples of how the five determinants of demand other
than price can shift the demand curve.
1. Income of the buyers: If you get a raise, you're more likely
to buy more of both steak and chicken, even if their prices
don't change. That shifts the demand curves for both to the
right.
2. Consumer trends: During the mad cow disease scare,
consumers preferred chicken over beef. Even though the
price of beef hadn't changed, the quantity demanded was
lower at every price. That shifted the demand curve to the
left.
3. Expectations of future price: When people expect prices to
rise in the future, they will stock up now, even though the
price hasn't even changed. That shifts the demand curve to
the right. For this reason, the Federal Reserve sets up an
expectation of mild inflation. Its target inflation rate is 2%. 
4. The price of related goods: If the price of beef rises, you'll
buy more chicken even though its price didn't change.
The increase in the price of a substitute, beef, shifts the
demand curve to the right for chicken. The opposite occurs
with the demand for Worcestershire sauce, a
complementary product. Its demand curve will shift to the
left. You are less likely to buy it, even though the price
didn't change, since you have less beef to put it on. 
5. The number of potential buyers: This factor affects
aggregate demand only. When there's a flood of new
consumers in a market, they will naturally buy more
product at the same price. That shifts the demand curve to
the right. That happened when standards were lowered for
mortgages in 2005. Suddenly, people who hadn't been
eligible for a home loan could get one with no money
down. More people bought homes until the demand
outpaced supply. At that point, prices rose in response to
the shift in the demand curve. 
 Bibliography
1. ECONOMICS Book
2. Google.com
3. Youtube