What is Demand?

Demand is defined as consumers' willingness and ability to consume a

given good. An increase in price will decrease the quantity demanded of
most goods. A decrease in price will increase the quantity demanded of
most goods. The inverse relationship between price and quantity
demanded of a good is known as the law of demand and is typically
represented by a downward sloping line known as the demand curve.
Demand Schedule
A demand schedule is the a tabular presentation of the different levels of
prices at corresponding levels of quantity demanded of that commodity.
It shows at different levels of prices higher or lower how the quantity
demanded is different. This shows the relationship between price and
quantity demanded of a commodity i. e. law of demand.
Demand Schedule of Note Books
Price per Notebook (Px) Quantity of Notebooks Demanded (Dx)
25

20

15

10

10

12

Demand Curve
The demand curve shows the quantity demanded of a given product at
varying price points graphically, holding all else constant. For most

goods, this is a downward sloping line. Every individual person has his
or her own demand curve for a given product. How many quarts of ice
cream would you consume mid-summer at $1/quart, $5/quart, and
$10/quart? Your responses to these price points would create your
individual demand curve for ice cream mid-summer. Your best friend
may have had slightly different quantities at each price, either as a result
of varying income levels or personal preferences. Aggregating all
individual demand curves for ice cream mid-summer would create the
market demand curve for that product.
Assume this demand curve is your individual demand curve for ice
cream mid-summer. At $5/quart, the quantity demanded by you is 6
quarts, represented by point A on the chart. If the price were to increase
to $10/quart, the quantity demanded by you would decrease to 1 quart
(point B). If the price decreases to $2/quart, the quantity demanded by
you would be 9 quarts (point C).

Moving from point A to B or C is not a change in demand but rather

movements along the demand curve, shown by the green arrows. Your
demand, willingness and ability to consume ice cream at varying price
points, holding all else constant, did not change. Only the price of ice

cream changed, which prompted a change in how many quarts you

would consume, the quantity demanded, of ice cream. In other words,
the amount you would consume moved from point A on the demand
curve to a different point on the same demand curve as a result of
changes in price.
Individual and market demand
Individual demand
The demand of one person is called individual demand and demand of
many persons is known as market demand. The experts are concerned
with market demand schedule. The following demand schedule of a
consumer is presented. The table shows the demand of certain
commodity at different price levels.
Individual demand schedule
Price in dollars

Demand in kilograms

10

15

20

The individual demand is the graphical presentation of individual

demand schedule. The curve, which shows the relation between the price
of a commodity and the amount of that commodity the consumer wishes
to purchase, is called demand curve. The individual demand is curve
slopes from left down to right. The following diagram shows the
individual demand curve.

Market demand
The market demand schedule means 'quantities of given commodity
which all consumers want to buy at all possible prices at a given moment
of time'. The demand schedule of all individuals can be added up to find
out market demand schedule. The following table shows the market
demand schedule.
Market demand schedule
Demand of
Price in
individual
dollars
'A'

Demand of
individual
'B'

Demand of Demand of
individual individual A
'C'
+B+C

20

30

50

100

40

60

100

200

60

90

150

300

80

120

200

400

The demand schedule can be presented graphically. The graph of

demand schedule is called demand curve. It shows the maximum
quantities per unit of time that all consumers buy at various prices. The
following diagram shows market demand curve.

The diagram shows that when price is 5 dollars the market demand is
100 kilograms. When price is 4 dollars the demand is 200 kilograms.
When price is fixed at 3 dollars the demand is 300 kilograms . There is
increase in demand to 400 kilograms when price is 2 dollars. It means
there is inverse relationship between price and demand for goods. When
price decreases the market demand for goods increases and vice versa.

What Are the Determinants of Demand?

The determinants of demand are:
1. The price of the good or service.

2. Prices of related goods or services. These are either

complementary (purchased along with) or substitutes (purchased
instead of).
3. Income of buyers.
4. Tastes or preferences of consumers.
5. Expectations. These are usually about whether the price will go up.
For aggregate demand, the number of buyers in the market is the sixth
determinant.
Demand Equation or Function
This equation expresses the relationship between demand and its five
determinants:
qD = f (price, income, prices of related goods, tastes, expectations)
It says that the quantity demanded of a product is a function of its price,
theincome of the buyer, the price of related goods (substitutes or
complements), the tastes of the consumer, and any expectation the
consumer has of future supply, prices, etc.

How Each Determinant Affects Demand

You can understand how each determinant affects demand if you first
assume that all of the other determinants don't change.
That's the principle known as ceteris paribus -- all other things being
equal. So, ceteris paribus here's how each element affects demand.
Price - The law of demand states that when prices rise, the quantity
demanded falls. That also means that, when prices drop, demand will

rise. People base their purchasing decisions on price if all other things
are equal.
The exact quantity bought for each price level is described in
the Demand Schedule. It's then plotted graphically to show the Demand
Curve.
If the quantity demanded responds a lot to price, then it's known
as elastic demand. If the quantity doesn't change much, regardless of
price, that's inelastic demand.
However, the demand curve can only show the relationship between the
price and quantity. If one of the other determinants changes, the
entire demand curve shifts.
Income - When income rises, so will the quantity demanded. When
income falls, so will demand. However, even if your income doubles,
you won't necessarily buy twice as much of a particular good or service.
There's only so many pints of ice cream you'd want to eat, no matter
how rich you are. That's where the concept ofmarginal utility comes into
the picture. The first pint of ice cream tastes delicious. You might have
another. But after that, the marginal utility starts to decrease to the point
where you don't want any more.
Prices of related goods or services - The price of complementary goods
or services raises the overall cost of using the good you demand, so
you'll want less. For example, when gas prices rose to $4 a gallon in
2008, the demand for Hummers fell. Gas is a complementary good to
Hummers. The overall cost of driving a Hummer rose along with gas
prices.
The opposite reaction occurs when the price of a substitute rises. When
that happens, people will want less of the good or service. That's why

Apple continually innovates with its iPhones and iPods. As soon as a

substitute, such as the Droid, appears at a lower price, Apple comes out
with a better product, so now the Droid isn't a substitute.
Tastes - This is the desire, emotion, or preference for a good or service.
When tastes rise, so does the quantity demanded. Likewise, when tastes
fall, it will depress the amount demanded. Brand advertising tries to
increase the desire for consumer goods. For example,
Buick spent millions to make you think it's car is not only for older
people.
Expectations - When people expect that the value of something will
rise, then they demand more of it. That explains the housing asset
bubble of 2005. Housing prices rose, but people bought more because
they expected the price to continue to go up. That drove prices even
further until the bubble burst in 2006. Between 2007 and 2011, housing
prices fell 30%. However, the quantity demanded didn't improve. Why?
People expected prices to continue falling, thanks to record levels
of foreclosures entering the market. Demand didn't increase until people
expected future prices would, too. For more, see Subprime Mortgage
Crisis Explained.
Other Factors:
i.
ii.
iii.

Size and regional Distribution of population

Demographic Composition of Population
Economic Distribution of Income

Number of buyers in the market - The number of buyers affects

overall, or aggregate, demand. As more buyers enter the market rises, so
does the quantity demanded -- even if prices don't change. That
was another reason for the housing bubble. Low-cost and sub-prime
mortgages increased the number of people who were told they could

afford a house. The number of buyers increased, driving up the demand

for housing. When they found they really couldn't afford the mortgage,
especially when housing prices started to fall, they foreclosed. That
reduced the number of buyers, and demand also fell.

Law of Demand
There is an inverse relationship between quantity demanded and its
price. The people know that when price of a commodity goes up its
demand comes down. When there is decrease in price the demand for a
commodity goes up. There is inverse relation between price and demand
. The law refers to the direction in which quantity demanded changes
due to change in price.
A consumer may demand one dozen oranges at $5 per dozen . He may
demand two dozens when the price is $4 per dozen. A person generally
buys more at a lower price. He buys less at higher price. It is not the
case with one person but all people liken to buy more due to fall in price
and vice versa. This is true for all commodities and under all conditions.
The economists call it as law of demand. In simple words the law of
demand states that other things being equal more will be demanded at
lower price and lower will be demanded at higher price.
Definition
1. Alfred Marshal says that the amount demanded increase with a fall
in price, diminishes with a rise in price.
2. C.E. Ferguson says that according to law of demand, the quantity
demanded varies inversely with price.
3. Paul A. Samuelson says that law of demand states that people will
buy more at a lower prices and buy less at higher prices, other
things remaining the same.
Assumptions of the law

1. There is no change in income of consumers.

2. There is no change in the price of product.
3. There is no change in quality of product.
4. There is no substitute of the commodity.
5. The prices of related commodities remain the same.
6. There is no change in customs.
7. There is no change in taste and preference of consumers.
8. The size of population remains the same.
9. The climate and weather conditions are same.
10.
The tax rates and other fiscal measures remain the same.
Explanation of the law
The relationship between price of a commodity and its demand depends
upon many factors. The most important factor is nature of commodity.
The demand schedule shows response of quantity demanded to change
in price of that commodity. This is the table that shows prices per unit of
commodity ands amount demanded per period of time. The demand of
one person is called individual demand. The demand of many persons is
known as market demand. The experts are concerned with market
demand schedule. The market demand schedule means 'quantities of
given commodity which all consumers want to buy at all possible prices
at a given moment of time'. The demand schedules of all individuals can
be added up to find out market demand schedule.
Demand schedule
Price in dollars.

Demand in Kg.

100

200

300

400

The table shows the demand of all the consumers in a market. When the
price decreases there is increase in demand for goods and vice versa.
When price is $5 demand is 100 kilograms. When the price is $4
demand is 200 kilograms. Thus the table shows the total amount
demanded by all consumers various price levels.
Diagram

There is same price in the market. All consumers purchase commodity

according to their needs. The market demand curve is the total amount
demanded by all consumers at different prices. The market demand
curve slopes from left down to the right.

Why demand curve falls

Law of Diminishing Marginal Utility:

When a consumer buys more units of a commodity, the marginal utility
of such commodity continue to decline. The consumer can buy more
units of commodity when its price falls and vice versa. The demand
curve falls because demand is more at lower price.
Price effect:
When there is increase in price of commodity, the consumers reduce the
consumption of such commodity. The result is that there is decrease in
demand for that commodity. The consumers consume mo0re or less of a
commodity due to price effect. The demand curve slopes downward.
Income effect:
Real income of consumer rises due to fall in prices. The consumer can
buy more quantity of same commodity. When there is increase in price,
real income of consumer falls. This is income effect that the consumer
can spend increased income on other commodities. The demand curve
slopes downward due to positive income effect.
Same price of substitutes:
When the price of a commodity falls, the prices of substitutes remaining
the same, consumer can buy more of the commodity and vice versa. The
demand curve slopes downward due to substitution effect.
Demand of poor people:
The income of people is not the same, The rich people have money to
buy same commodity at high prices. Large majority of people are poor,
They buy more when price fall and vice versa. The demand curve slopes
due to poor people.

Different uses of goods:

There are different uses of many goods. When prices of such goods
increase these goods are put into uses that are more important and their
demand falls. The demand curve slopes downward due to such goods.

Exceptions to the law

Inferior goods
The law of demand does not apply in case of inferior goods. When price
of inferior commodity decreases and its demand also decrease and
amount so saved in spent on superior commodity. The wheat and rice are
superior food grains while maize is inferior food grain.
Demonstration effect
The law of demand does not apply in case of diamond and jewelry.
There is more demand when prices are high. There is less demand due to
low prices. The rich people like to demonstrate such items that only they
have such commodities.
Ignorance of consumers
The consumer usually judge the quality of a commodity from its price. A
low priced commodity is considered as inferior and less quantity is
purchased. A high priced commodity is treated as superior and more
quantity is purchased. The law of demand does not apply in this case.
Less supply
The law of demand does not work when there is less supply of
commodity. The people buy more for stock purpose even at high price.
They think that commodity will become short.

Depression
The law of demand does not work during period of depression. The
prices of commodities are low but there is increase in demand. it is due
to low purchasing power of people.
Speculation
The law does not apply in case of speculation. The speculators start
buying share just to raise the price. Then they start selling large quantity
of shares to avoid losses.
Out of fashion
The law of demand is not applicable in case of goods out of fashion. The
decrease in prices cannot raise the demand of such goods. The quantity
purchased is less even though there is falls in prices.

Importance of the law

Price determination
A monopolist can determine price of a commodity on the basis of such
law. He can know the effect on demand due to increase or decrease in
price. The demand schedule can help him to determine the most suitable
price level.
Tax on commodities
The law of demand is important for tax authorities. The effect of tax on
different commodities is checked. The commodity must be taxed if its
demand is relatively inelastic. A commodity cannot be taxed if its sales
fall to great extent.

Agricultural prices
The law of demand is useful to determine agricultural prices. When
there are good crops, the prices come down due to change in demand. In
case of bad crops, the prices go up if demand remains the same. The
poverty of farmers can be determined.

The Movement along the Demand Curve (Change in Quantity

Demanded)
When quantity demanded of a commodity changes due to a change in its
price, keeping other factors constant, it is known as change in quantity
demanded. It is graphically expressed as a movement along the same
demand curve.
There can be either a downward movement (Expansion in demand) or an
upward movement (Contraction in demand) along the same demand
curve. Let us understand the movement along the demand curve with the
help of Fig. 3.4:

i. Expansion in Demand is shown by downward movement from A to B.

Quantity Demanded rises from OQ to OQ., due to fall in price from OP
to OP1,
ii. Contraction in Demand is shown by an upward movement from A to
C. Quantity demanded falls from OQ to OQ2 due to rise in price from
OP to OP2
In Fig. 3.4, OQ quantity is demanded at a price of OP. Change in price
leads to an upward or downward movement along the same demand
curve:
Upward Movement:
When price rises to OP2, quantity demanded falls to OQ2 (known as
contraction in demand) leading to an upward movement from A to C
along the same demand curve DD.
Downward Movement:
On the other hand, fall in price from OP to OP1 leads to an increase in
quantity demanded from OQ to OQ1 (known as expansion in demand),
resulting in a downward movement from A to B along the same demand
curve DD.

Let us now understand the meaning of Expansion and Contraction in

demand.
Expansion in Demand:
Expansion in demand refers to a rise in the quantity demanded due to a
fall in the price of commodity, other factors remaining constant.
i. It leads to a downward movement along the same demand curve.
ii. It is also known as Extension in Demand or Increase in Quantity
Demanded. It can be better understood from Table 3.4 and Fig. 3.5.

Table 3.4: Expansion in Demand

Price (Rs.)
20

Demand (units)
100

15

150

As seen in the given schedule and diagram, the quantity demanded rises
from 100 units to 150 units with a fall in the price from Rs. 20 to Rs. 15,
resulting in a downward movement from A to B along the same demand
curve DD.
Contraction in Demand:
Contraction in demand refers to a fall in the quantity demanded due to a
rise in the price of commodity, other factors remaining constant.
i. It leads to an upward movement along the same demand curve.
ii. It is also known as Decrease in Quantity Demanded. It can be better
understood from Table 3.5 and Fig. 3.6.

Table 3.5: Contraction in Demand

Price (Rs.)
Demand (units)
20
100

25

70

As seen in the given schedule and diagram, the quantity demanded falls
from 100 units to 70 units with a rise in the price from Rs. 20 to Rs. 25,
resulting in an upward movement from A to B along the same demand
curve DD.

Shift in Demand Curve: Increase and Decrease

Demand curve is drawn to show the relationship between price and
quantity demanded of a commodity, assuming all other factors being
constant. However, other factors are bound to change sooner or later. A
change in one of other factors shifts the demand curve.
For example, suppose income of a consumer increases. Now, the
consumer may increase the demand for the product, even though the
price has not changed. Such increase in demand of any product, whose
price has not changed, cannot be represented by the original demand
curve. It will shift the demand curve.
When the demand of a commodity changes due to change in any
factor other than the own price of the commodity, it is known as
change in demand. It is expressed as a shift in the demand curve.
Let us understand the concept of shift in demand curve with the help of
diagram.

i. Increase in Demand is shown by rightward shift in demand curve from

DD to D1D1. Demand rises from OQ to OQ1 due to favourable change in
other factors at the same price OP
ii. Decrease in Demand is shown by leftward shift in demand curve from
DD to D2D2. Demand falls from OQ to OQ2 due to unfavourable change
in other factors at the same price OP
In Fig. 3.7, demand for the commodity is OQ at a price of OP. Change in
other factors leads to a rightward or leftward shift in the demand curve:
i. Rightward Shift:
When demand rises from OQ to OQ1 (known as increase in demand) at
the same price of OP, it leads to a rightward shift in demand curve from
DD to D1D1.
ii. Leftward Shift:
On the other hand, fall in demand from OQ to OQ2 (known as decrease
in demand) at the same price of OP, leads to a leftward shift in demand
curve from DD to D2D2.

Increase in Demand:
Increase in Demand refers to a rise in the demand of a commodity
caused due to any factor other than the own price of the commodity. In
this case, demand rises at the same price or demand remains same even
at higher price. For example, suppose a research reveals that people who
regularly eat green vegetables live longer. This will raise the demand for
green vegetables even at the same price and it will shift the demand
curve of vegetables towards right.
Increase in demand leads to a rightward shift in the demand curve as
seen in Fig. 3.8.

Table 3.6: Increase in Demand

Price (Rs.)
Demand (units)
20
100
20

150

As seen in the given schedule and diagram, demand rises from 100 units
to 150 units at the same price of Rs. 20, resulting in a rightward shift in
the demand curve from DD to D1D1.
Decrease in Demand:
Decrease in Demand refers to a fall in the demand of a commodity
caused due to any factor other than the own price of the commodity. In
this case, demand falls at the same price or demand remains same even
at lower price. It leads to a leftward shift in the demand curve. It can be
better understood from Table 3.7 and Fig. 3.9.
Table 3.7: Decrease in Demand
Price (Rs.)
Demand (units)
20

100

20

70

As seen in given schedule and diagram, demand falls from 100 units to
70 units at same price of Rs. 20, resulting in a leftward shift in the
demand curve from DD to D1D1.

Causes for Change/Shift in Demand

Increase in Demand (Upward or Rightward Shift in Demand Curve)
i. Increase in income and wealth of people.
ii.

Increase in Population.

iii.

Increase in prices of substitute goods.

iv.

Decrease in prices of complementary goods.

v.

Expectation of rise in price in future.

vi.

Changes in taste, preferences, fashions, customs, habits, etc in

favour of commodity.

Decrease in Demand (Downward or Leftward Shift in Demand

Curve)
i. Decrease in income and wealth of people.
ii.

Decrease in Population.

iii.

Decrease in prices of substitute goods.

iv.

Increase in prices of complementary goods.

v.

Expectation of fall in price in future.

vi.

Changes in taste, preferences, fashions, customs, habits, etc in

against a commodity.