a2 IntrooetOry Microeea, 3.1. MEANING OF DEMAND becanse they have the capacity to satisfy our wants. hyp, nd Dery Goods are demande FH does not im want of a consumer cannot be called a dem Vinere ay tor a commodity Generally, desire, want and demand are interchangeably used in day-to. day tite py " in economics, all these terms have different meanings. " Let us understand the 3 different terms: * Desire means a mere wish to have a commodity. For example, desire of (person for a car with just & 200 in his pocket. So, desire is just something * Want is that desire which is backed by the abi lity and willingness to sati it, Every desire is not a want. But, a desire can become a want, if the Person is 3 Position to satisfy it. For example, in the above example, if the poor Person win, a lottery and now he has enough money to buy a car, then his desire for car wil} now be termed as want. a Poy a wish to POsse5., Demand is an extension to want as it has two more characteristics: 1. Demand is always defined with reference to price: The demand for commodity is always stated with reference fo its price. With a change in Price, quantity demanded may also change as more is demanded at lower price and less at higher price. Therefore, demand is meaningless without teference to price. 2, Demand is always with respect to a period of time: Demand is always expressed with reference to time. Even at the same price, demand may change, depending upon the time period under consideration. For example, demand for umbrellas is more in rainy season as compared to other seasons. The time frame might be of an hour, a day, a month or a year. To sum up: 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. bas S ‘The definition of demand highlights four essential elements of demand: (i) Quantity of the commodity (ii) Willingness to buy (iii) Price of the commodity (iv) Period of time Demand for a commodity may be either with respect to an individual or to the entire market 1. Individual demand refers to the quantity of a commodity that a consumer is willing and able to buy, at each possible price during a given period of time. Market demand refers to the quantity of a commodity that all consumers are willing and able to buy, at each possible price during a given period of time.» = rd i DETERMINANTS OF DEMAND (Noivinua 92 for a commodity increas DEMAND) pane TARE pen i factors affecting, slemand yy qh ha ‘ ee cussed be J 9 ce ofthe Given COMMY: 1h Ahe yyy 1 Pree given somimetty Genera _remtant facta allecting oh . Nee exists at i ‘ hipibet Moe anal quantity eMAN TW yyegy ue to decrease iN the salsfacion lee afeaniae, Nath ee el of consumer falls sorevanple price oF Riven comity (4,4) ip all as Satisfaction detived from tea willl teas kee all ice bo sine bof pitt pemand (0) is a function of price (P) and can b inverse relationship between price and demand, kun ne a nano the mmoussed in SeCtON 3.7 known as Law st Demand. i8 | ze following determinants are termed as ‘other factors’ or ‘factors other than price 2, Price of Related Goods: Demand for the given commodity is also affected by change in prices of the related goods, Related goods are of two types i) Substitute Goods: Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee. ‘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, coffee) increases, then demand for given commodity (say,_tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given conimiodity is directly affected by change in price of substitute goods. (ii) Complementary Goods: Complementary goods are those goods which are used together to satisfy a particular want, like tea and sugar.’An increase in the price of complementary good leads to a decrease in the demand for given commodity and vice-versa. For example, if price of a complementary good (cay, sugar) increases, then demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods together. So, demand for a given commodity is inversely affected by change in price of complementary goods. | Examples of Substitute and Complementary Goods Substitute Goods 1. Tea and Coffee 2. Coke and Pepsi 3. Pen and Pencil 4. CD and DVD 5, Ink pen and Ball Pen 6. Rice and Wheat Complementary Goods 1. Tea and Sugar 2. Pen and Ink 3. Car and Petrol 4, Bread and Butter 5. Pen and Refill 6. Brick and Cement ds, refer For detailed discussion on substitute goods and complementary goo i Section 3.11., aa a INOBUCHONY Mictoe oy ora commentity ts abe atterted by inc), the mart the omni se consi . aver commodity isa normal good, then an incre “ incom leads tise in its demand, while a decrease in income ne : demand * Ifthe given commodity ts an injfermor good, then an increase in income rede, nv income leads to rise in demand. the demand, while a decr Evample: Suppose, income of a consumer increases. As a real the consiing, ae ' ‘i o an of P, reduces consumption of toned milk and increases consumption of full crear yn, Toned Milk’ is an inferior good for the consumer and “Pull Cy. In this eas Milk’ is a normal good. For detailed discussion on normal goods and inferior goods, refer Section 3.12 Logical Analysis — Inferior Goods No commodity is inferior. If any commodity is purchased by a consumer just because of his low income level, then this commodity is termed as an inferior commodity for that person. For example, Bajfa is a normal commodity for a rich Person. But, if low income of a poor person forces him to consume bajra every day, then bajra will be an inferior commodity for him. So, inferiority is a relative concept. Tastes and Preferences: Tastes and preferences of the consumer 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 for such a commodity rises. On the other hand, demand for a commodity falls i the consumers have no taste for that commodity. ow Expectation of Change in the Price in Future: Ifthe price of a certain commodity is expected to increase in near future, then people wll buy more of that commodity than what they 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. _-Chiange in Quantity Demanded Vs Change in Demand 2 1 \ Shange in Quantity Demanded: Whenever demand for the given commodity changes due to change in its own price, then such change in demand is known a4 “Change in Quantity Demanded”. For example, If demand for Pepsi changes due to change in its own price, then such change in demand for Pepsi is known as change in quantity demanded. Change in Demand: Whenever demand for the given commodity changes due to factors: othéF than price, then such change in demand is known as “Change in Demand”. For example, If demand for Pepsi changes due to change in price ofrel coke ar due 18 ARE H ACOME OF ued ear for Pept #8 RWI ay cf Test Yourset igonty the following Ax change ay quantity de areied 1 change #1 demand 1 People buy MorM 1Co-creAME AtINg summer than during wet 2 Consumer income falls and the number of mutornotiies purchased Jlectines 3, LG reduces the price ofits TV set by 10 percent and hen alan ne renee 4 Acollege raises its tuition fae and as a result, the number of student enralinent forms falls, (Ana: Chango in quantity demanded 4 Change «servant 43 DETERMINANTS OF MARKET DEMAND There are certain special features of market demand, which are not ubserved in Co of individual demand. Markel demand is influenced by all the factors affecting indivdual demand for a commodity. In addition, itis also affected by the following, factors 1. Size and Composition of Population: Market demand for a commodity! affected by size of population in the country. Increase in population raises the market demand, while decrease in population reduces the market demand | Composition of population, 1.e. ratio of males, females, children and number of old people in the population also affects the demand for a commodity. For example, if a market has larger proportion of women, then there will be more demand for articles of their use such as lipstick, sarees, etc. 2. Season and Weather: The seasonal and weather conditions also affect the market demand for a commodity. For example, during winters, demand for woollen clothes and jackets increases, whereas, market demand for raincoat and umbrellas increases during the rainy season. 3, Distribution of Income: If income in the country is equitably distributed, then market demand for commodities will be more. However, if income distribution is uneven, ie. people are either very rich or very poor, then market demand will remain at lower level. 2) Ricks BRE Determinants of Market Demand “ The various factors affecting market demand of a commodity are: 1. Price of the given commodity 2. Price of Related goods 3, Income of the Consumers 4, Tastes and Preference 5. Expectation of Change in Price in Future 6. Size and Composition of population 7. Season and Weather 8. Distribution of Incomea Introductory Min 0 a *oRoM, 3.4 DEMAND FUNCTION Demand function shows the relationship between quantity demanded for * partic, i commodity and the factors influencing if. can be either with respect to one cq sunt *Cimarket dem? function), Nd (individual demand function) or to all the consumers in the marke Individual Demand Function Individual demand function refers to the functional relationship between indivig, ; demand and the factors affecting individual demand, a Iis expressed as: Dy Where, D, = Demand for Commodity x; P, = Price of the given Commodity P, = Prices of Related Goods; Y = Income of the Consumer. T =Tastes and Preferences; F = Expectation of Change in Price in future AP, Py Y, TE Py 9) D) larket demand of commodity x; P, = Price of given commodity x; Prices of Related Goods; Y = Income of the consumers; a ‘ Expectation of Change in Price in future: Po = Size and Composition of Population; S = Season and Weather; D = Distribution of income. _— 3.5 DEMAND SCHEDULE Demand schedule is a tabular statement showing Various quantities of a commodity being demanded at Parious levels of price, during a Siven period of time. Ieshows the relationship between price of the commodity and its quantity demanded, A demand schedule can be determined b oth for individual buyers and for the entire market. So, demand schedule is of two types: A Individual Demand Schedule 2. Market Demand ScheduleDemand a7 Individual Demand Schedule Individual demand schedule refers to a 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. Table 3.1 shows a hypothetical demand schedule for commodit ie : Individual Demand Schedule Price. Quantity Demanded of (in ®) commodity x (in units) | 5 | 4 3 2 Tl _ fe 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. A ‘Demand Schedule’ states the relationship between two variables: price and ‘quantity. It shows that more is demanded at lower prices than at higher prices ~ just as you will probably buy more DVD's when they are offered at a price less than the normal price. Market Demand Schedule Market demand schedule refers to a 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. Itis the sum of all individual demand schedules at each and every price. Market demand schedule can be expressed as: Where D,, is the market demand and D, + Dg + .. of Household A, Household B and so on. Let us assume that A and B are two consumers for commodity x in the market. Table 3.2 shows that market demand schedule is obtained by horizontally summing the individual demands: . are the individual demands Table 3.2: Market Demand Schedule Price __ Individual Demand (in units) ‘Market Demand (in units) | ® Household A (0,) | Household B (D3) {D,+Ds} oasanae Introductory Microeconomieg As seen in Table 3.2, market demand is obtained by adding, demand of households A and B at different prices. ALT 5 per unit, market demand is 3 units. When price falls to T4, market demand rises to 5 units, So, market demand schedule also shows the inverse relationship between price and quantity demanded Demand Vs Quantity Demanded Betore we proceed further, itis important to understand the following observations: Demand * Demand is not a particular quantity. It describes the behaviour of buyers at Svery Possible price. For example, there is a demand of 5 units at % 1 per unit; demand is 4 units at % 2 per unit and so on. It means: Demand is not a fixed quantity, rather it changes with change in price. For example, there will be more demand for movie tickets at a price of € 50 per ticket than at & 150 per ticket. Quantity Demanded * Itreters to specific quantity of the demand schedule that is demanded against & specific price, i.e. it makes sense only in relatin to a particular price. For example, 2 units are demanded at & 4 per unit. It is not the actual quantity purchased. Rather, which the consumers wish to purchase and not ne actually succeed in purchasing. it is the desired quantity lecessarily how much they 3.6 DEMAND CURVE Demand curve is a graphical representation of demand schedule. t the points showing various quantities of a commodity that a c buy at various levels of price, during a given period of time, other factors. is the locus of all ‘onsumer is willing to assuming no change in It shows the inverse relationship between the commodity with its price, keeping other factor constant. * It can be drawn for any commodity by plotting each combination of demand schedule on a graph. quantity demanded of a (i) Individual Demand Curve (ii) Market Demand Curve Individual Demand Curve Individual demand curve refers to a schedule. With the help of Table 3.1 (Individual demand curve can be drawn as shown in Fig, 31. Sraphical representation of individual demand schedule), the individual demandpemand 4 iasseen in the diagram. price indepyidint voile | ams Curve jaken on the vertical ass (Y-agis) and quantity F demanded (dependent variable) on the horizontal asi (ans). Ateach possible prin, there is 9 quantity, 4) hich the consumer is willing to buy. By joining all § | f the points (P to T), we get a demand curve DD | : The demand curve DD'slopes downwards du to inverse | : relationship between price and quantity demanded Cee road market Demand Curve ty arate Fig 34 Market demand curve refers to a graphical representation of market demand schedule. It is obtained by horizontal summation of indiv idual demand curves. ¥ Market Demand Curve The points shown in Table 3.2 are graphically > Dy i ator than represented in Fig. 32. D, and D, are the individual 04 and Op demand curves. Market demand curve (Dy) is obtained by horizontal summation of the individual is ‘Oy demand curves (D, and D,). nM ex Market demand curve ‘also slope downwards que ° 7 ta amanoed nvr) to inverse relationship between price and quantity Fig. 32 demanded. Market Demand Curve is Flatter Market demand curve i later than the individual demand curves. rappens because as price changes, proportionate change in market demand is more than proportionate change in individual demand. 3.7 LAW OF DEMAND In our daily life it is normally observed that decrease in price of a commodity leads to increase in its demand. Such behaviour of consumers has been formulated as ‘Law of Demand’. Law of demand states the inverse relationship between price and quantity demanded, stant (ceteris paribus). This law is also known as the ‘First keeping other factors con: Law of Purchase’. Assumptions of Law of demand While stating the law of demand, we use the phrase ‘eping other factors constant or ceteris paribus’. Ths phrase is used to cover the following assumptions on which the law is based: 1. Prices of substitute goods do not change. 2. Prices of complement js remain constant.Introductory Nay 310 1 Income of the consumer remains the same , 4 There is no expectation of change in price inthe future t 1 preferences of the consumer remain the san 5. Tastes and preference . w help of Table 4.4 an, Law of demand can be better understood with the hely Fig 4, Table 3.3: Demand Schedule Price (in %) Quantity demanded (in units) 5 1 A oO ‘ | i eat \ : a 2 ; | 2 | 4 a : , 1 5 ' mt Table 3.3 clearly shows that more and more units of Quanity Demanded nny “ommodity are demanded, when price of the Fig. 3.3 commodity falls. As seen in Fig. 33, demand curve DD slopes downwards from left to right, indicating an inverse relationship between price and quantity demanded. Why Other Factors are kept Constant? The quantity demanded of a commodity depends on many factors, besides price of the given commodity. If we want to understand the Separate influence of one factor, it is necessary, that all other factors are kept constant. Therefore, while discussing the ‘Law of Demand’, it is assumed that there is no change in the other factors. a Jmportant Facts about Law of Demand 1. Inverse Relationship: It states the inverse relationship between price and quantity demanded. It simply affirms that an increase in price will tend to reduce the Guantity demanded and a fall in price will lead to an increase in the quantity demanded. 2. Qualitative, not Quantitative: It makes a qualitative statement only, ie. it indicates the direction of change in the amount demanded and does not indicate the magnitude of change. 3. No Proportional Relationship: It does not establish any proportional relationship between change in price and the resultant change in demand. If the price rises by 10%, quantity demanded may fall by any proportion. 4. One-Sided: Law of demand is one sided as it only explains the effect of change in Price on the quantity demanded. It states nothing about the effect of change in quantity demanded on the price of the commodity. /