Meaning of Demand, Determinants of Demand, and Demand Schedule

Demand is one of the fundamental concepts in economics. It plays a crucial role in determining the
price, production, and distribution of goods and services in an economy.

Meaning of Demand

 In ordinary language, demand means a desire for something. However, in economics,

demand is more than just desire—it must be backed by willingness and ability to pay.

 Definition:

o Demand refers to the quantity of a commodity or service that consumers are

willing and able to purchase at different prices during a given period.

 Example:

o If a person wants to buy a car but does not have the money, it is not demand, but
just a desire.

o However, if the person has enough money and is ready to buy, then it becomes
effective demand.

 Formula for Demand:

Demand=Desire+Willingness to Purchase+Ability to Pay\text{Demand} = \text{Desire} +

\text{Willingness to Purchase} + \text{Ability to
Pay}Demand=Desire+Willingness to Purchase+Ability to Pay

Determinants of Demand

Demand for a product is influenced by several factors. These are:

1) Price of the Commodity

 The most important factor affecting demand.

 As per the Law of Demand, demand and price have an inverse relationship:

o If price increases, demand decreases.

o If price decreases, demand increases.

 Example: If the price of a smartphone decreases, more people will buy it.

2) Income of the Consumer

 A rise in income generally increases demand for normal goods.

 However, the effect depends on the type of goods:

o Normal Goods → Demand increases as income rises (e.g., branded clothes, cars).

o Inferior Goods → Demand decreases as income rises (e.g., cheap food items, public
transport).
3) Prices of Related Goods

 Demand for a product is also affected by the price of substitute goods and complementary
goods.

 Substitute Goods → Goods that can replace each other (e.g., tea and coffee).

o If the price of coffee increases, the demand for tea will rise.

 Complementary Goods → Goods that are used together (e.g., cars and petrol).

o If the price of petrol increases, demand for cars will fall.

4) Consumer Tastes and Preferences

 Changes in fashion, trends, and lifestyle influence demand.

 Example: If people become more health-conscious, demand for organic food will increase.

5) Population Size and Composition

 A larger population means higher demand for goods and services.

 Age and gender composition also affect demand.

o Example: Demand for baby products increases in countries with higher birth rates.

6) Expectations of Future Prices

 If consumers expect prices to rise in the future, they buy more now (increasing demand).

 If consumers expect prices to fall, they delay purchases (decreasing demand).

7) Level of Taxation

 Higher taxes on goods and services increase their prices, leading to lower demand.

 Lower taxes make goods cheaper, leading to higher demand.

8) Advertisement and Sales Promotion

 Effective advertising and promotions influence consumer choices and preferences.

 Example: Celebrity endorsements increase demand for branded products.

9) Climate and Seasonal Factors

 Certain goods have seasonal demand.

 Example: Demand for woolen clothes increases in winter, while demand for cold drinks rises
in summer.

10) Government Policies

 Government regulations, subsidies, and restrictions affect demand.

 Example: If the government subsidizes electric vehicles, their demand will increase.

Demand Schedule
A demand schedule is a table that shows the relationship between the price of a good and the
quantity demanded at different prices, assuming all other factors remain constant.

There are two types of demand schedules:

1) Individual Demand Schedule

 It shows the quantity of a commodity demanded by a single consumer at different prices.

 Example of an Individual Demand Schedule:

Price of Commodity (₹) Quantity Demanded (in units)

10 5

8 10

6 15

4 20

2 25

 The table shows an inverse relationship between price and quantity demanded.

 As price decreases, demand increases.

2) Market Demand Schedule

 It shows the total quantity of a commodity demanded by all consumers in a market at

different prices.

 Example of a Market Demand Schedule (for three consumers A, B, and C):

Price of Commodity (₹) Consumer A Consumer B Consumer C Market Demand (A+B+C)

10 5 10 15 30

8 10 15 20 45

6 15 20 25 60

4 20 25 30 75

2 25 30 35 90

 This table shows that as price falls, total market demand rises.

 The market demand schedule is obtained by summing up individual demand schedules.

Conclusion

 Demand is the quantity of a good that consumers are willing and able to buy at different
prices.
  Determinants of demand include price, income, related goods, population, tastes, and
government policies.

 The demand schedule helps in understanding the inverse relationship between price and
demand, forming the basis of the law of demand.

4o

You said:

make on Law of Demand

ChatGPT said:

Law of Demand

The Law of Demand is one of the most fundamental principles of microeconomics. It explains the
relationship between price and quantity demanded of a commodity, assuming all other factors
remain constant (ceteris paribus).

Definition of the Law of Demand

According to Prof. Alfred Marshall:

"Other things being equal, the higher the price of a commodity, the smaller the quantity demanded,
and the lower the price, the greater the quantity demanded."

This means there is an inverse relationship between price and quantity demanded:

 When price increases, demand decreases.

 When price decreases, demand increases.

This happens because consumers tend to buy more of a product when it is cheaper and less when it
is expensive.

Assumptions of the Law of Demand

The law of demand holds true only if other factors remain constant. These assumptions include:

1. Constant Income of Consumers

o Consumers’ income should not change, as a higher income may lead to increased
demand regardless of price.

2. No Change in Consumer Preferences

o The tastes, habits, and fashion preferences of consumers must remain unchanged.

3. No Change in Prices of Related Goods

o The price of substitute and complementary goods should remain constant.

o Example: If tea and coffee are substitutes, an increase in the price of tea may
increase the demand for coffee, violating the law of demand.
 4. No Expectation of Future Price Changes

o If consumers expect prices to rise in the future, they may buy more now, and vice
versa.

5. No Change in Population

o A sudden increase in population may increase demand for goods regardless of price.

6. No Change in Government Policies

o Changes in taxation, subsidies, or price controls can affect demand.

Demand Schedule (Example)

A demand schedule is a table that shows the relationship between the price of a commodity and the
quantity demanded.

Example of an Individual Demand Schedule

Price of Commodity (₹) Quantity Demanded (in units)

50 1

40 2

30 3

20 4

10 5

 As price falls, the quantity demanded increases.

Demand Curve

A demand curve is a graphical representation of the law of demand.

Features of the Demand Curve:

 The X-axis represents quantity demanded.

 The Y-axis represents price.

 The demand curve slopes downward from left to right, showing the inverse relationship
between price and demand.

📉 Graph Explanation

 When the price is high, the quantity demanded is low.

 As the price falls, the quantity demanded increases.

This downward slope of the demand curve is known as the negative slope of demand.
Why Does the Demand Curve Slope Downward? (Reasons for Law of Demand)

The demand curve slopes downward due to the following reasons:

1. Law of Diminishing Marginal Utility

o As consumers consume more units of a good, the satisfaction (utility) from each
additional unit decreases.

o Therefore, consumers will buy more only at a lower price.

2. Income Effect

o When the price of a good decreases, the purchasing power (real income) of the
consumer increases.

o This allows them to buy more of the good.

3. Substitution Effect

o When the price of a good decreases, it becomes cheaper compared to its

substitutes.

o Consumers switch from costlier alternatives to the now cheaper product, increasing
its demand.

4. New Consumers Enter the Market

o When prices fall, more people who could not afford the good earlier can now buy
it, increasing demand.

5. Stock Effect (Speculative Demand)

o When prices are low, consumers may buy in bulk or store extra stock.

Exceptions to the Law of Demand

In some cases, demand may not follow the law of demand. These are called exceptions, where
demand increases even when price rises:

1. Giffen Goods

o These are essential inferior goods whose demand increases even when their price
rises.

o Example: If the price of low-quality rice rises, poor consumers might buy more of it
and reduce spending on expensive foods like vegetables.

2. Prestige Goods (Luxury Items)

o Some goods are bought due to status symbols. Higher prices increase demand
because they make people look wealthier.

o Example: Gold, diamonds, designer handbags, luxury cars.

 3. Speculative Goods

o When people expect prices to rise further, they buy more even at higher prices.

o Example: Real estate, stocks, cryptocurrencies.

4. Necessities

o Essential goods like medicines, salt, electricity, petrol are demanded regardless of
price.

5. Ignorance Effect

o Some consumers wrongly believe that a higher-priced product is of better quality,

so they buy more at higher prices.

Conclusion

The Law of Demand states that there is an inverse relationship between price and quantity
demanded, assuming other factors remain constant. The demand curve slopes downward, and the
law is explained by factors like diminishing marginal utility, income effect, and substitution effect.
However, in certain cases, such as luxury goods and essential items, the law of demand may not
apply.

Understanding the law of demand is crucial for businesses, policymakers, and consumers, as it helps
in pricing strategies, production planning, and market analysis.

4o

You said:

make on Elasticity of Demand,Types of Elasticity of DemandTypes of Price Elasticity of

DemandMethods of Measuring Price Elasticity of Demand

ChatGPT said:

Elasticity of Demand

Elasticity of Demand measures the responsiveness of quantity demanded to changes in price,

income, or the price of related goods. It helps businesses and policymakers understand how
consumers react to changes in economic variables.

Definition

According to Prof. Alfred Marshall:

"Elasticity of demand is great or small according to the amount demanded, which rises much or little
for a given fall in price and quantity demanded, which falls much or little for a given rise in price."

In simple terms, elasticity tells us how much the quantity demanded changes when there is a
change in price, income, or the price of related goods.

Types of Elasticity of Demand

Elasticity of demand is categorized based on the factors affecting demand:

1) Price Elasticity of Demand (PED)

 Measures the responsiveness of quantity demanded to a change in the price of the good.

 Formula:

Ed=%Change in Quantity Demanded%Change in PriceE_d = \frac{\% \text{Change in Quantity

Demanded}}{\% \text{Change in Price}}Ed=%Change in Price%Change in Quantity Demanded

 Example: If the price of a product decreases by 10% and its demand increases by 20%, the
price elasticity of demand is 2 (elastic demand).

2) Income Elasticity of Demand (YED)

 Measures how much demand changes when consumer income changes.

 Formula:

Ey=%Change in Quantity Demanded%Change in IncomeE_y = \frac{\% \text{Change in Quantity

Demanded}}{\% \text{Change in Income}}Ey=%Change in Income%Change in Quantity Demanded

 Types of Income Elasticity:

o Positive (YED > 0): Demand increases as income increases (Normal Goods).

o Negative (YED < 0): Demand decreases as income increases (Inferior Goods).

3) Cross Elasticity of Demand (XED)

 Measures how the demand for a good changes when the price of a related good (substitute
or complement) changes.

 Formula:

Ec=%Change in Quantity Demanded of Good A%Change in Price of Good BE_c = \frac{\%

\text{Change in Quantity Demanded of Good A}}{\% \text{Change in Price of Good B}}Ec
=%Change in Price of Good B%Change in Quantity Demanded of Good A

 Types of Cross Elasticity:

o Positive (XED > 0): Goods are substitutes (e.g., tea and coffee).

o Negative (XED < 0): Goods are complements (e.g., cars and petrol).

Types of Price Elasticity of Demand

Price elasticity of demand can be classified into five types based on how quantity demanded reacts
to price changes:

1) Perfectly Elastic Demand (Eₑ = ∞)

 A tiny change in price leads to an infinite change in demand.

 The demand curve is a horizontal straight line.

  Example: Demand for foreign currency in international markets.

2) Perfectly Inelastic Demand (Eₑ = 0)

 Quantity demanded does not change at all, no matter the price change.

 The demand curve is a vertical straight line.

 Example: Life-saving medicines (like insulin).

3) Unit Elastic Demand (Eₑ = 1)

 The percentage change in quantity demanded is equal to the percentage change in price.

 The total revenue remains unchanged.

 Example: Certain mid-range products like clothing or furniture.

4) Relatively Elastic Demand (Eₑ > 1)

 A small change in price causes a large change in quantity demanded.

 The demand curve is flatter.

 Example: Luxury items, high-end smartphones, and branded goods.

5) Relatively Inelastic Demand (Eₑ < 1)

 A large change in price causes a small change in quantity demanded.

 The demand curve is steeper.

 Example: Essential goods like food, electricity, and petrol.

Methods of Measuring Price Elasticity of Demand

There are four major methods to calculate price elasticity of demand:

1) Ratio or Percentage Method

 This method calculates price elasticity by using the formula:

Ed=%Change in Quantity Demanded%Change in PriceE_d = \frac{\% \text{Change in Quantity

Demanded}}{\% \text{Change in Price}}Ed=%Change in Price%Change in Quantity Demanded

 Example:

o Price decreases from ₹100 to ₹90 (10% decrease).

o Quantity demanded increases from 500 to 600 units (20% increase).

o Elasticity of demand = 20% ÷ 10% = 2 (Elastic demand).

2) Total Expenditure (Total Revenue) Method (Marshall’s Method)

 Elasticity is determined by observing changes in total revenue (P × Q) when price changes.

  Rules to determine elasticity:

o If price decreases and total revenue increases → Demand is Elastic (Eₑ > 1).

o If price decreases and total revenue remains constant → Demand is Unit Elastic (Eₑ
= 1).

o If price decreases and total revenue decreases → Demand is Inelastic (Eₑ < 1).

Example Table:

Price (₹) Quantity Demanded Total Revenue (P × Q) Elasticity Type

10 100 1000 -

8 120 960 Inelastic (Eₑ < 1)

6 150 900 Inelastic (Eₑ < 1)

4 200 800 Inelastic (Eₑ < 1)

3) Geometric Method (Point Elasticity of Demand)

 This method is used to measure elasticity at a specific point on the demand curve.

 The formula used is:

Ed=Lower segment of demand curveUpper segment of demand curveE_d = \frac{\text{Lower

segment of demand curve}}{\text{Upper segment of demand curve}}Ed
=Upper segment of demand curveLower segment of demand curve

 The demand curve is divided into two segments, and the ratio of these segments
determines elasticity.

4) Arc Elasticity Method

 Measures elasticity between two points on the demand curve.

 The formula is:

Ed=(Q2−Q1)÷(Q2+Q1)(P2−P1)÷(P2+P1)E_d = \frac{(Q₂ - Q₁) \div (Q₂ + Q₁)}{(P₂ - P₁) \div (P₂ + P₁)}Ed
=(P2−P1)÷(P2+P1)(Q2−Q1)÷(Q2+Q1)

 Used when there is a large price change, instead of a small one.