Unit-2 Market equilibrium

and efficiency.

1.Meaning of Demand.
Meaning of demand:
• Ordinarily, demand means a desire for commodity. But in economics, it is more than
a mere desire for commodity. In economics, the term demand conveys different
meaning than the ordinary usage. In economics, the demand for any commodity is
the desire for that commodity backed by ability to pay and willingness to pay for it.
And it is always defined with reference to specific price, specific time and amount of
purchase.
• Therefore, in economics, to be a demand following things are necessary:
a) Desire for a commodity,
b) Ability to pay for the commodity, and
c) Willingness to pay for the commodity.
Demand for a commodity or service is in fact consumer's reaction or attitude towards
that commodity or service. Then mere desire is not demand, it must be backed by
ability to pay and willingness to pay for it. It is called 'Effective Desire' in economics.
According to professor Penson, 'demand is the effective desire'. But effective desire is
called want in economics. Then, want and demand are not synonyms, and they are
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different words. To be a demand specific price, specific time and amount of

purchase are necessary. Then the definition given by Benham is more appropriate
which is given below:
"The demand for anything at a given price is the amount of it, which will be
bought per unit of time at that price".
In this definition, all things are mentioned. They are :
(1) Effective desire,
(2) Certain price,
(3) Specific time, and
(4) Amount of purchase.
Then demand for anything is defined as the schedule of quantity demanded,
which a consumer is willing and able to purchase at various prices at a
given period. Therefore, complete statement of the demand would be,
Mohan's demand for Orange is about 5 kg. at price Rs. 75 per kg. for a week.
Demand schedule.
• If we present different quantity demand of a commodity at different price
level in a tabular form, then it is called demand schedule. Demand schedule
shows the price and quantity demand relationship of a commodity at fixed
time period. There is inverse relationship between price and quantity demand
of the commodity in a demand schedule. There are two types of demand
schedule:
• Individual demand schedule, and
• Market demand schedule.
• Individual demand schedule. If we present different quantity demanded of a
commodity by an individual at different price level in a tabular form, then it is
called individual demand schedule. A demand schedule of Ram Bahadur is
given below:
Individual demand schedule.

Price of Quantity demand of

• It is an individual
demand schedule, Orange (Rs.) Orange (Kg.)
because it shows the
quantity demand of 5 10
Orange by an individual
Ram Bahadur at various 4 20
price level over a period. 3 30
2 40
1 50
 Market demand schedule.

• If we present different Price Demand Demand Demand

Market
quantity demanded by all demand
(Rs.) of A (kg.) of B (kg.) of C (kg.)
consumers of a market at (A+B+C) (kg)
different price level over a
period in tabular form, then it 1 25 30 35 90
is called market demand 2 20 25 30 75
schedule. A market demand
schedule of 3 consumers A, B, 3 15 20 25 60
and C of Dhankuta bazar is 4 10 15 20 45
given below:
5 5 10 15 30
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It is a market demand schedule. We can find market demand schedule by

the addition of different quantity demand of all consumers of the market
over a period. In this table, there are three individual consumers in the
market. When price is Rs. 1, consumer A demands 25 kg., B demands 30 kg.,
and C demands 35 kg. then market demand becomes 35 kg+30 kg+25 kg =
90 kg. Similarly, at price Rs. 2, it will be 75 kg., at Rs. 3, it will be 60 kg., and
so on.
• Demand Curve.
The graphical presentation of quantity demand of a commodity at different
price level over a period is called demand curve. It shows price and quantity
demand relationship, and it is downward sloping. Then there is inverse
relationship between price and quantity demand of a commodity. There are
two types of demand curve. The are: (1) Individual demand curve, and (2)
Market demand curve.
(1) Individual
demand curve.
• Graphical
presentation of
individual quantity
demand of a
commodity at
different price level
over a period is
called individual
demand curve. It is
given below:
Graphical presentation of price
and quantity demand combinations in a
graph paper from market demand
schedule is called market demand curve.
It is shown in the figure.

• In the figure, DA,DB, and DC

are individual demand curves.
By the horizontal summation
of these individual demand
curves, we can find market
demand curve MD. It is flatter
than the individual demand
curves. Or it is less steep than
the individual demand curves.
Types of demand.
Mainly there are three types of demand. They are : (1) Price demand, (2) Income
demand, and (3) Cross demand.
(1) Price Demand. Other things remaining the same, price demand refers to the various
quantities of a commodity that a consumer would purchase at a various prices at a
fixed time period in a market. Then, price demand establishes a negative relationship
between price and quantity demand of a commodity.
(2) Income Demand. Other things remaining the same, income demand refers to the
various quantities of a commodity that a consumer would purchase at various level of
income at a fixed time period in a market. Then income demand establishes the
positive relationship between income and quantity demand. But, in case of inferior
goods, there is –ve relationship between income and quantity demand.
(3) Cross Demand. Various goods are related to each other. Some goods are
complementary to each other, and some goods are substitutes. Then the change in
price of one good affects the quantity demand of other goods. Therefore, Other things
remaining the same, change in quantity demand of one goods due to the change in
price of other goods is cross demand. In case of complementary goods, cross demand is
–ve, and in case of substitutes it is +ve.
 There are also other types of demand. They are :
• (1) Composite Demand. The demand for a commodity that can be used In
various ways is composite demand. For example, demand for electricity, coal,
milk etc. are composite demand.
• (2) Direct Demand. The demand for final goods and services is direct demand.
These kind of goods and services directly satisfy human wants. For example,
demand for Bread, Biscuits, and Chau Chau is direct demand.
• (3) Derived Demand. The demand for intermediate goods and services
is derived demand. For example, demand for labor and raw material is derived
demand. These goods and services are demanded by increase in demand of
final goods and services. Then if demand for final goods and service increases in
the economy, then demand for labor and raw materials increases to produce
more final goods and services.
• (4) Joint Demand. When various goods and services are demanded jointly,
then it is called joint demand. For example, for making tea, milk, sugar, and tea
leaves are demanded jointly. Similarly, we need paper, dot pen, and table to
write a letter to the friend etc.
Demand Function:
The functional relationship between price and the quantity demand of a commodity
is called demand function. But the demand for a commodity is also affected by
other determinants of demand like income of consumer, price of related goods,
taste and preference of consumer etc. Then the demand function can be also
defined as the mathematical relationship between determinants of demand and
quantity demand of a commodity.
Types of Deman Function :
1. Single Variable and Multivariable Demand Function.
Single variable demand function.
When there is only one independent variable (i.e., price) in the demand function,
then it is called single variable demand function. Single variable demand function
establishes the relationship between price and quantity demand of a commodity.
Mathematically it is expressed as : Qx = f (Px)
Where, Qx = quantity demand of good x
F = functional relation
Px = price of good x.
Multivariable demand function.
• When there are two or more than two independent variables in the demand
function, then it is called multivariable demand function. Therefore, in
multivariable demand function, there are more independent variables like
price, income, taste and preference of consumer etc. Mathematically
multivariable demand function is expressed as : Qx = f ( Px, Y, Taste, W, T, A)
• Where, Qx = quantity demand of good x
f = functional relation
Px = price of good x
Y = income of consumer
Taste = taste and preference of consumer
W = weather
T = tax and
A = advertisement.
(2) Linear and Non-linear Demand function:
• Linear demand function.
• If the slope of demand curve remains constant through out its length, it is
called linear demand function. If both dependent and independent variables
change at a constant rate, then the demand function will be a linear. Then the
curve of linear function would be straight line. Mathematically it is expressed
as : Qx = a - bPx
Were,
Qx = quantity demand of good x,
Px = price of good x,
a and b are parameters.
a = demand intercept, and
b = slope of demand curve.
This function can be written as : Qx = 100 – 5Px
-

• Now computation of quantity demand at various price level.

Px Qx = 100 - 5Px
0 100
1 95
2 90
3 85
4 80

5 75

From the above table, we can find linear demand curve like in the figure. In the
figure DD is the linear demand curve. Its slope is equal in all points.
Non-linear demand function.
• If the slope of demand curve changes along the demand curve, it is called
non-linear demand function. Then both dependent and independent
variables change at the different rates. A non-linear demand function is
generally in power function as follows :
Qx = aPx-b or, Qx = a / Pxb
Where, Qx = quantity demand of good x,
Px = price of good x,
a = demand intercept, and
b = slope of demand curve.
This function can be written as : Qx = 100 / Px1/2
Now computation of quantity demand at various price level.

Px Qx = 100/Px1/2
0 ∞
25 20
36 16.66
49 14.28

From the above table, we can find non-linear demand curve like in the
figure. In the figure DD is the non-linear demand curve. Its slope is
different in all points.
 The Determinants of Demand.
• 1. Price of commodity. It is the main determinant of demand. There is inverse
relationship between price and quantity demand.
• 2. Price of related goods. Some goods are related to each other. Some goods
may be complementary, and some may be substitutes. If the price of these
related goods changes the quantity demand of other goods changes. Then
price of related goods is another determinant of demand.
• 3. Income of consumer. Income of consumer is the basic determinant of
demand. Generally, there is +ve relationship income of consumer and quantity
demand of the commodity in case of normal goods. But in case of inferior
goods, it is -ve.
• 4. Advertisement. It is another determinant of demand. Producer / seller
advertise the product to introduce in the market. It helps to increase the
demand for the product. From many researches it is found that there is +ve
relationship between advertisement expenditure and demand for the product.
• 5. Weather. Weather is another determinant. In winter season, woolen garments are
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demanded and in summer season, cotton clothes are demanded.

• 6. Customs. Customs also affect the demand for the product. New clothes
are demanded in the Dashain festival.
• 7. Fashion. Fashion related goods have a +ve relationship with demand. When the
same product goes out of fashion, the demand will decrease.
• 8. Taste and preference of the consumer. If the consumer has more taste and
preference of goods, demand for the goods increases and vice-versa.
• 9. Tax rate. If government imposes heavy tax on certain goods, quantity demand
decreases.
• 10. Change in population. If the size and composition of population changes, quantity
demand of the product changes. If the total size of population increases, quantity
demand increases. Similarly, if the composition of population changes, quantity
demand is also affected. If the number of children increases, the quantity demand
of toys, perambulators increases. Likewise, if the number of old man increases,
demand of walking sticks, false teeth, medicine increases.
• 11. Technological changes. Gramaphone — Radio set. Radio set — T V set. All
things — Mobile set. If new things are invented, the demand for old things decreases.
 The Law of Demand
• Consumers purchase more goods at lower price and less purchase at
higher price in the market. Then there is inverse relationship between
price and quantity demand of the commodity. This is law of demand.
Therefore, law of demand explains the relationship between price and
quantity demand of the commodity in the market. According to P.
Samuelson, "Law of demand states that people will buy more at lower
price and buy less at higher price, other things remaining the same." In the
other words, 'higher the price lower the quantity demand and lower the
price higher the quantity demand of the commodity' ceteris paribus.
• The law of demand can be explained with the help of demand schedule
and demand curve.
-
Demand Schedule Demand Curve
Price of Quantity
Commodity (in Rs.) Demand (in Kg.)

5 30

10 25

15 20

20 15

25 10

In the above table, price of the commodity and quantity of the commodity are shown. There
is inverse relationship between price and quantity demand of the commodity. This is law of
demand. Similarly, in the figure, DD is demand curve. It is downward sloping and indicates
that there is inverse relationship between price and quantity demand. This is law of demand.
 Some exceptions to the law of demand.
• The law of demand does not work in the following conditions, and these are
called exceptions to the law of demand.
• 1.Valuable commodities or conspicuous consumption.
• 2. Giffen paradox or in inferior goods. ( Sir Robert Giffen in mid 19th century)
• 3. Change in expectation.
• 4. Trade cycle.
• 5. Necessary goods.
• 6. Due to ignorance.
• 7. Out of fashion.
• 8. Habit.
• 9. Commodities that are used in fixed proportion. e.g., Salt, sugar, spices.
• 10 In special occasion.
 Why demand curve slopes downward ?
• A normal demand curve slopes downward from left to right and there exists inverse
relationship between price and quantity demand of the commodity in case of normal
goods. There are some reasons behind it. They are as follows:
• 1. Law of diminishing marginal utility. The additional utility derived from extra unit of
the commodity goes on decreasing. In equilibrium position of the consumer marginal
utility and price of the commodity are equal. Then if price falls, consumer chooses
more units of the commodity with less marginal utility. Therefore, demand curve
slopes downward.
• 2. Income effect. Any change in price of a commodity, affects the purchasing power of
the consumer. A fall in price of a commodity, increase the real income of the
consumer. Then consumer can purchase more units of the commodity and demand
curve slopes downward.
• 3. Substitution effect. When the price of a commodity falls, it becomes relatively
cheaper and consumer buys more by substituting costlier one. Then demand curve
slopes downward.
• 4.Multiple use of a commodity. When a commodity becomes cheaper, it can be put to
more uses and demand increases. Then demand curve slopes downward.
• 5. New consumers. When a commodity becomes cheaper, new consumers are
attracted and the demand for the commodity increases. Then the demand curve
slopes downward.
Movement along the demand curve and shift
in demand curve.
• Movement along the demand curve.
Rise in quantity demand due to the fall in price of a good, other things
remaining the same, the consumer's equilibrium point in the demand
curve moves forward. On the other hand, fall in quantity demand
dude to the rise in price, other things remaining the
same, consumer's equilibrium point in the demand curve moves
backward. This forward and backward movement of consumer along
the demand curve is called movement along the demand curve. The
forward movement is expansion in demand, and the backward
movement is contraction in demand. It is shown in the following figure:
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The movement of consumer from

e1 to e2 along the demand curve
due to the fall in price is
expansion in demand. It is forward
movement. The movement of
consumer from e1 to e3 due to the
rise in price along the demand
curve is contraction in demand. It
is backward movement. Then the
forward movement and backward
movement of consumer along the
demand curve is called movement
along the demand curve.
 Shift in demand curve.
• If there is change in other determinant of demand than the price, there is
change in quantity demand. For example, if income of consumer increases,
the quantity demand increases. As a result, the demand curve moves
upward from its initial position to new position. This is called shift in
demand curve. Similarly, if income of consumer decreases, the quantity
demand also decreases. Then the demand curve moves backward from its
initial position to new position. This is also called shift in demand curve.
The change in quantity demand due to the rise in income is called
increase in demand and decreased in quantity demand due to the fall in
income is called decrease in demand. Due to the increase in demand and
decrease in demand, the demand curve moves forward and backward
from its initial position to the new position. This tendency of demand
curve is called shift in demand curve. It is shown in the following figure :
-
• If quantity demand
increases in same OP price,
the demand curve shifts to
upward as D'D' and if
quantity demand
decreases in same OP
price, the demand curve
shifts to backward as D"D".
This process is called shift
in demand curve.
 1. Cange in price of related goods.
2. Change in consumer's income.
Factors 3. Change in taste and preference of consumer.

causing 4. Technological change.

5. Change in size of population.
shift in 6. Change in money supply in the economy.
demand 7. Change in tax rate.

curve. 8. Change in weather.

9. Change in income distribution in the economy.
10. Change in advertisement expenditure.
Thanks.