UNIT 3

Demand
Demand in economics is an economic principle that can be defined as the quantity of a product
that a consumer desires to purchase goods and services at a specific price and time. The demand
reflects the relationship between various possible prices of a product and the quantities purchased
by the buyer at each price. In this relationship, price is an independent variable and the quantity
demanded is the dependent variable.

Prof. Mill – “We must mean by the word demand the quantity demanded and remember that this
is not a fixed quantity but in general varies according to value.”

Waugh - “The demand for any commodity is the relationship between the price and the quantity
that will be purchased at that price.”

1. Individual Demand
Individual demand refers to the quantity of a good or service that a single consumer is willing
and able to purchase at various prices, given their preferences, income, and other factors
influencing demand.

2. Market Demand
Market demand is the total quantity of a good or service that all consumers in a market are
willing and able to purchase at various prices during a specific period. It is the aggregate of all
individual demands.

Key Differences Between Individual and Market Demand

Aspect Individual Demand Market Demand
Scope Single consumer All consumers in the market
Expression Individual demand schedule or curve Market demand schedule or curve
Aggregation N/A Sum of all individual demands
 Examples Demand for milk by one person Demand for milk by all households

Demand Schedules and Curves

Individual Demand Schedule: A table showing the quantity of a good an individual consumer
is willing to buy at different prices.
Price (₹) Quantity Demanded (kg)
50 2
40 3
30 5

Individual Demand Curve: Shows the relationship between price and the quantity demanded by
one consumer. It is typically downward-sloping, indicating the inverse relationship between
price and demand.

Market Demand Schedule

A table showing the total quantity demanded by all consumers at different prices.

Price (₹) Consumer A Consumer B Market Demand

50 2 3 5
40 3 5 8
30 5 7 12

Market Demand Curve: Derived by horizontally summing all individual demand curves. It also
slopes downward, reflecting the same inverse relationship.
Types of Demand with Examples
1. Price Demand: Demand for a product or service in relation to its price. It reflects the law of
demand: as the price decreases, demand increases (and vice versa), assuming other factors
remain constant.
Example: If the price of a movie ticket drops from ₹300 to ₹200, more people are likely to buy
tickets.

2. Income Demand: Demand influenced by the income level of the consumer.

• Normal Goods: Demand increases with rising income.
o Example: Higher income leads to greater demand for branded clothes.
• Inferior Goods: Demand decreases as income rises.
o Example: With an income increase, people may buy less of low-quality rice and
switch to premium rice.

3. Cross Demand: Demand for a product in response to changes in the price of a related product.
• Substitute Goods: Demand increases if the price of a substitute rises.
o Example: If the price of tea increases, the demand for coffee may rise.
• Complementary Goods: Demand decreases if the price of a complement rises.
o Example: If petrol prices increase, demand for cars may fall.
4. Direct Demand (Consumer Goods Demand): Demand for goods and services that directly
satisfy consumer needs and wants.
Example: Demand for food, clothing, smartphones, or household items like furniture.

5. Derived Demand (Industrial Demand): Demand for goods that are not directly consumed
but are used to produce other goods.
Example: The demand for steel depends on the demand for cars, as steel is used in car
manufacturing.

6. Joint Demand: Demand for two or more goods that are used together to satisfy a need.
Example: Cars and petrol have joint demand.

7. Composite Demand: Demand for a good that can be used for multiple purposes.
Example: Electricity: Used for lighting, cooking, and industrial purposes.

8. Competitive Demand: Demand for goods that are substitutes and compete for the same
consumer base.
Example: Demand for Pepsi and Coca-Cola.
9. Latent Demand: Demand that exists in theory but is not backed by purchasing power
(unrealized demand).
Example: A desire for luxury cars among low-income groups.

10. Autonomous Demand: Demand for a product that is independent of the demand for other
goods.
Example: Demand for medicines or life-saving drugs remains constant regardless of trends.

11. Perishable and Durable Goods Demand

• Perishable Goods Demand: For products consumed immediately or within a short
period.
o Example: Milk, vegetables, fruits.
• Durable Goods Demand: For long-lasting goods.
 o Example: Cars, furniture, electronic appliances.
12. Short-Run and Long-Run Demand
• Short-Run Demand: Immediate demand due to urgent needs or short-term market
conditions.
o Example: Demand for umbrellas during heavy rain.
• Long-Run Demand: Demand that develops over time as consumers adapt.
o Example: Demand for electric vehicles as people gradually shift to sustainable
transportation.
13. Seasonal Demand: Demand that fluctuates with seasons or festivals.
Example: Higher demand for air conditioners in summer.

14. Composite and Independent Demand

• Composite Demand: For goods used for multiple purposes.
o Example: Wood is demanded for furniture, construction, and paper-making.
• Independent Demand: For goods with no dependency on other products.
o Example: Demand for personal care items like soap or toothpaste.

Demand Function/Determinants of Demand

A demand function is a mathematical representation that shows the relationship between the
quantity demanded of a good or service and its various determinants, such as price, income, and
other factors. It expresses how changes in these variables influence consumer demand.
The general form of a demand function is:

Qd=f(P,I,Ps,Pc,T,E,N,O)
Where:
• Qd: Quantity demanded
• P: Price of the good or service
• I: Income of the consumer
• Ps: Price of substitute goods
• Pc: Price of complementary goods
 • T: Tastes and preferences of the consumer
• E: Expectations about future prices or income
• N: Population size or market size
• O: Other factors, such as government policies, seasons, etc.

Determinants of Demand
The factors that influence demand are called the determinants of demand. Each determinant
plays a role in shaping consumer behavior and demand patterns.
1. Price of the Product (P): There is an inverse relationship between the price of a product
and its quantity demanded, assuming other factors remain constant (ceteris paribus).
o Example: If the price of apples decreases from ₹100/kg to ₹80/kg, more
consumers are likely to buy apples.

2. Income of the Consumer (I)

• Normal Goods: Demand increases with rising income.
o Example: As income rises, demand for branded clothing increases.
• Inferior Goods: Demand decreases as income rises.
o Example: With higher income, demand for low-quality rice decreases.

3. Prices of Related Goods

• Substitute Goods (Ps): If the price of one good increases, the demand for its substitute
increases.
o Example: If the price of tea increases, the demand for coffee may rise.
• Complementary Goods (Pc): If the price of one good increases, the demand for its
complement decreases.
o Example: If petrol prices rise, the demand for cars may fall.

4. Tastes and Preferences (T): Consumer preferences significantly influence demand. Changes
in fashion, culture, or awareness can affect demand.
o Example: Demand for electric vehicles has increased due to environmental
awareness.
5. Consumer Expectations (E): Expectations about future price changes or income can
influence current demand.
o Example: If consumers expect a rise in gold prices, they may buy gold now,
increasing current demand.

6. Population and Market Size (N): The size and composition of the population affect demand.
o Example: A larger population leads to higher demand for essential goods like
food and housing.

7. Government Policies: Taxes, subsidies, and regulations can impact demand.

o Example: A government subsidy on electric vehicles increases their demand.

8. Seasonal Factors: Certain goods have seasonal demand patterns.

o Example: Demand for air conditioners rises in summer, while demand for woolen
clothes increases in winter.

9. Advertising and Marketing: Effective advertising can create awareness and boost demand.
o Example: Aggressive marketing campaigns for smartphones often lead to a spike
in demand.

Law of Demand
Law of Demand states that there is an inverse relationship between the price and
quantity demanded of a commodity, keeping other factors constant or ceteris paribus.
It is also known as the First Law of Purchase.

There are several other factors besides the price of the given commodity that affect
the quantity demanded of a commodity. Therefore, in order to understand the separate
influence of one factor affecting the demand, it is essential that the other factors are
kept constant.
Assumptions of Law of Demand
The assumptions on which the Law of Demand is based are as follows:
1. The price of substitute goods does not change.
2. The price of complementary goods also remains constant.
3. The income of the consumer does not change.
4. Tastes and preferences of the consumers remain the same.
5. People do not expect the future price of the commodity to change.

Graphical Presentation of Law of Demand

Let’s take an example to understand the concept of the Law of Demand better.

Price (in ₹) Quantity Demanded

4 2

3 4

2 6

1 8
Derivation of Law of Demand
According to the Law of Demand, while keeping other factors constant, there is an
inverse relationship between the demand and price of a commodity. It means that the
demand for a commodity falls or increases with a rise or fall in its price, respectively.
The inverse relationship between the price and demand for a commodity can be
derived by:
Marginal Utility = Price Condition
Marginal Utility = Price Condition or Single Commodity
Equilibrium Condition
According to this condition, a consumer buys only that much quantity of a commodity
at which its Marginal Utility is equal to the Price. However, the Marginal Utility of a
commodity can be more or less than its Price.

When Marginal Utility is less than the price of a commodity (MU<Price): The
Marginal Utility of a commodity is less than the price when the price of the commodity
increases. A rise in the price of the commodity discourages the consumer to purchase
more of it, showing that a rise in the price of a good decreases its demand. The
consumer in this buy will reduce the demand of the commodity until the Marginal
Utility becomes equal to the price again.

When Marginal Utility is more than the price of a commodity (MU>Price): The
Marginal Utility of a commodity is greater than the price when the price of the
commodity falls. A fall in the price of the commodity encourages the consumer to
purchase more of it, showing that a fall in the price of a good increases its demand.
The consumer in this case will buy the commodity until the Marginal Utility falls and
becomes equal to the price again.

Exceptions to Law of Demand

1. Giffen Goods: The special kind of inferior goods on which the consumers spend a big part
of their income are known as Giffen Goods. The demand for these goods increases with an
increase in price and falls with a decrease in price. This phenomenon was initially observed
by Sir Robert Giffen and is popularly known as Giffen’s Paradox.

2. Fear of Shortage: If the consumers expect that a commodity will become scarce in the
near future, they will start buying more of it in the present, even if the price of the commodity
rises because of the fear of its shortage and rise in its price in the future.

3. Status Symbol or Goods of Ostentation: Another exception to the law of demand is

the goods that are used as status symbols by the people.

4. Ignorance: Sometimes consumers are unaware of the prevailing price of a good in

the market. In such cases, they buy more of a commodity, even at a higher price.

5. Necessities of Life: The commodities which are necessary for human life have more
demand no matter whether their price reduces or increases.
6. Change in Weather: When there is a change in the weather, demand for some goods
changes, even if their price increases.

7. Fashion-related goods: The goods related to fashion are demanded more, even when
their price is high.

Law of Supply
Economists have studied the behaviour of both buyers and sellers. They have discovered the law
of supply as a result of their findings. The law of supply describes the relationship between price
and amount supplied when all other variables remain constant (ceteris paribus).

Price is a dominant factor in the determination of the supply of a commodity. As the price of a
commodity increases, the supply of that commodity in the market also increases and vice-versa.
This behaviour of the producers is studied through the law of supply.

Assumptions of Law of Supply

The phrase “keeping other factors constant or ceteris paribus” is used when describing
the law of supply. This expression refers to the following presumptions that the law
is based on:
1. The price of other commodities is constant.
2. The state of technology has not changed.
3. The price of factors of production is constant.
4. The taxation laws remain the same.
5. The producer’s objectives are constant.

Graphical Presentation of Law of Supply

The Law of Supply can be better understood with the help of the following table and
graph.

The above table indicates that when the price of the commodity rises, an increasing
number of units are offered for sale.

Reason for Law of Supply

The main reasons behind the law of supply are as follows:
1. Profit Motive: Maximising profits is the primary goal of producers when they supply a good
or service. Their profits grow when the price of a commodity rises without a change in costs.
Therefore, by increasing production, manufacturers increase the commodity’s supply. On the
other hand, as price fall, supply also declines since low price result in lower profit margins.
2. Change in Number of Firms: When the price of a specific commodity increases, potential
producers are encouraged to enter the market and produce the good to make money. The market
supply rises as the number of businesses increases. However, once the price begins to decline,
some businesses that do not anticipate making any money at a low price may stop production or
cut it back. As the number of businesses in the market declines, it decreases the supply of the
given commodity.

3. Change in Stock: When the price of an item rises, sellers are eager to supply additional things
from their stocks. However, the producers do not release significant amounts from their stock at
a significantly cheaper price. They work on building up their inventory in anticipation of
potential price increases in the future.

Exceptions to the Law of Supply

Generally, the slope of the supply curve is upwards, showing that with the rise in the price of a
commodity, its quantity supplied also rises. However, there may be some cases when there is no
positive relationship between the supply and price of a commodity. These cases are as follows:
1. Future Expectations:The law of supply is not valid if sellers expect a fall in the price in the
future. The sellers will be willing to sell more in this situation, even at a cheaper price. However,
if sellers expect an increase in the future price, they will reduce supply to deliver the item later
at a higher price.

2. Agricultural Goods: Agricultural products are exempted from the rule of supply as they are
produced in response to climatic circumstances. If the production of agricultural goods is low
because of unexpected weather changes, supply cannot be expanded, even at higher prices.

3. Perishable Goods: Sellers are willing to offer more perishable commodities, such as fruits,
vegetables, and other foods, even if prices are dropping. This occurs because sellers cannot keep
such things for an extended period.

4. Rare Articles: The law of supply does not apply to precious, rare, or artistic items. For
example, even if the price increases, the number of rare items like the Mona Lisa artwork cannot
be increased.

5. Backward Countries: Due to the scarcity of resources, output and supply cannot be enhanced
in economically underdeveloped countries.

Indifference Curve
An indifference curve is a graphical representation of a combined products that gives similar kind
of satisfaction to a consumer thereby making them indifferent. Every point on the indifference
curve shows that an individual or a consumer is indifferent between the two products as it gives
him the same kind of utility.
An indifference curve is a locus of all combinations of two goods which yield the same level of
satisfaction (utility) to the consumers.
Since any combination of the two goods on an indifference curve gives equal level of satisfaction,
the consumer is indifferent to any combination he consumes. Thus, an indifference curve is also
known as ‘equal satisfaction curve’ or ‘iso-utility curve’.

Indifference Schedule & Schedule

 Combination Mangoes Oranges
A 1 14
B 2 9
C 3 6
D 4 4
E 5 2.5

Assumptions of indifference curve

• Two commodities: It is assumed that the consumer has fixed amount of money, all of which
is to be spent only on two goods. It is also assumed that prices of both the commodities are
constant.

• Non satiety: Satiety means saturation. And, indifference curve theory assumes that the
consumer has not reached the point of satiety. It implies that the consumer still has the
willingness to consume more of both the goods. The consumer always tends to move to a
higher indifference curve seeking for higher satisfaction.

• Ordinal utility: According to this theory, utility is a psychological phenomenon and thus it is
unquantifiable. However, the theory assumes that a consumer can express utility in terms of
rank. Consumer can rank his/her preferences on the basis of satisfaction yielded from each
combination of goods.

• Diminishing marginal rate of substitution: And, diminishing marginal rate of substitution

states that the rate by which a person substitutes X for Y diminishes more and more with each
successive substitution of X for Y. As indifference curve theory is based on the concept of
diminishing marginal rate of substitution, an indifference curve is convex to the origin.
• Rational consumers: According to this theory, a consumer always behaves in a rational
manner, i.e. a consumer always aims to maximize his total satisfaction or total utility.

Properties of indifference curve

There are four basic properties of an indifference curve. These properties are

Indifference curve slope downwards to right

An indifference curve can neither be horizontal line nor an upward sloping curve. This is an
important feature of an indifference curve.
When a consumer wants to have more of a commodity, he/she will have to give up some of the
other commodity, given that the consumer remains on the same level of utility at constant income.
As a result, the indifference curve slopes downward from left to right.

Indifference curve is convex to the origin

As mentioned previously, the concept of indifference curve is based on the properties of
diminishing marginal rate of substitution. According to diminishing marginal rate of substitution,
the rate of substitution of commodity X for Y decreases more and more with each successive
substitution of X for Y. Also, two goods can never perfectly substitute each other. Therefore, the
rate of decrease in a commodity cannot be equal to the rate of increase in another commodity.

Indifference curve cannot intersect each other

Each indifference curve is a representation of particular level of satisfaction. The level of
satisfaction of consumer for any given combination of two commodities is same for a consumer
throughout the curve. Thus, indifference curves cannot intersect each other. The following diagram
will help you understand this property clearer.
Higher indifference curve represents higher level of satisfaction
Higher the indifference curves, higher will be the level of satisfaction. This means, any
combination of two goods on the higher curve give higher level of satisfaction to the consumer
than the combination of goods on the lower curve.

Elasticity of Demand
Elasticity means sensitiveness or responsiveness of demand to the change in price. Demand
extends or contracts respectively with a fall or rise in price. This quality of demand by virtue of
which it changes (increases or decreases) when price changes (decreases or increases) is called
Elasticity of Demand.

Elasticity of Demand is a degree of change in the quality demanded of a product in response to

its determinants, such as the price of the product, price of the substitutes and income of
consumers.

Types of Elasticity:
• Price Elasticity
• Income Elasticity
• Cross Elasticity

Distinction may be made between Price Elasticity, Income Elasticity and Cross Elasticity. Price
Elasticity is the responsiveness of demand to change in price; income elasticity means a change
in demand in response to a change in the consumer’s income; and cross elasticity means a
change in the demand for a commodity owing to change in the price of another commodity.

Elasticity of Demand
1. Perfectly Elastic Demand:
Perfectly elastic demand is said to happen when a little change in price leads to an infinite
change in quantity demanded. A small rise in price on the part of the seller reduces the demand
to zero. In such a case the shape of the demand curve will be horizontal straight line as shown
in figure 1.
2. Perfectly Inelastic Demand:
Perfectly inelastic demand is opposite to perfectly elastic demand. Under the perfectly
inelastic demand, irrespective of any rise or fall in price of a commodity, the quantit demanded
remains the same. The elasticity of demand in this case will be equal to zero (ed = 0).

3. Unitary Elastic Demand:

The demand is said to be unitary elastic when a given proportionate change in the price level
brings about an equal proportionate change in quantity demanded. The numerical value of
unitary elastic demand is exactly one i.e. Marshall calls it unit elastic.

4. Relatively Elastic Demand:

Relatively elastic demand refers to a situation in which a small change in price leads to a big
change in quantity demanded. In such a case elasticity of demand is said to be more than
one (ed > 1). This has been shown in figure 4.

5. Relatively Inelastic Demand:

Under the relatively inelastic demand, a given percentage change in price produces a
relatively less percentage change in quantity demanded. In such a case elasticity of demand
is said to be less than one (ed < 1). It has been shown in figure 5.

Price Effect: It can be defined as the change in quantity demanded of a

commodity as a result of a decrease in its price.
Substitution Effect: as the price of a commodity falls, it becomes cheaper in
comparison to other commodities. Therefore, consumers will buy more of the
commodity as it is relatively cheaper compared to other goods that are expensive.

Income Effects: An increase in income will increase purchasing power, which

will result in high demand and vice versa.