Demand Notes

Law of Demand &
Elasticity of Demand
General Economics
1
Demand
Willing to
Able to Purchase
Purchase at
at Various Prices
Various Prices
during Period of
during Period of
Time Time
General Economics: Law of Demand and

2
Definitions of Demand
• Demand refers to the Quantities of
Commodity that the Consumers are Able to
Buy at each possible Price during a given
Period of Time, other things being equal.
By : Ferguson
• Demand is the Ability and Willingness to
buy Specific Quantity of a Good at
Alternative Prices in a given Time Period,
Ceteris Paribus.
By : B. R. Schiller
3
Determinants of Demand
• Price of the Commodity
• Price of Related Commodities
• Level of Income of the Household
• Taste & Preferences of Consumers
• Other Factors
4
• Price of the Commodity
Ceteris paribus i.e. Other Things
Being Equal,
1
D ∝
P
This Happens Because of Income &
Substitution Effect.
5
• Price of Related Commodities
Complementary Goods e.g. Pen & Ink

Price of one Good
Demand of Other Good
Substituting Goods e.g. Tea & Coffee

Price of one Good
Demand of Other Good
6
• Level of Income of the Household
Average Money Income
Quantity Demanded of a Good
Exception: Inferior Goods

Average Money Income
Quantity Demanded of a Good
7
• Taste & Preferences of Consumers
• Other Factors
–Size of the Population
–Composition of Population

8
Law of Demand
• Law of demand states that People will Buy
more at Lower Prices and Buy less at Higher
Prices, Ceteris paribus, or other things
Remaining the Same.
By : Samuelson
• The Law of Demand states that Quantity
Demanded Increases with a Fall in Price
and Diminishes when Price Increases, other
things being equal.
By : Marshall
9
Assumption to Law of Demand
• Law of demand holds Good when “Other Things
Remain the Same” meaning thereby, the factors
affecting demand ,other then price, are assumed to
be constant.
• Demand Function: Dx= f(PX, Pr, Y, T, E)

where, Dx = Demand for Commodity
Px = Price of Commodity X
Pr = Price of Other Goods
Y = Income of the Consumer
T = Tastes
E = Expectation of the Consumer
10
Explanation
• According to Law of Demand, Ceteris Paribus
1
Quantity Demanded ∝
Price
However, this Relation is not Proportional,
meaning thereby that it is not necessary
that when Price Falls by ½, Demand for
Goods will be Doubled.
This simply indicates the Direction of Change
in Demand as a result of Change in Price.
11
Demand Schedule
• Demand Schedule is a Series of
Quantities which Consumer would like to
Buy per unit of Time at Different Prices.
• Two Aspects of Demand Schedule
–Individual Demand Schedule
–Market Demand Schedule

12
Individual Demand Schedule
• It is defined as a Price per unit Quantity
Table which shows (in Rs.) Demanded
(Units)
Quantities of a
Given Commodity 1 4
which an Individual 2 3
Consumer will buy
3 2
at all Possible
Prices at a given 4 1
Time. General Economics: Law of Demand and
13
Market Demand Schedule
• It is defined as the Quantities of a Given
Commodity which all Consumers will buy
at all Possible Prices at a given Moment of
Time. In Market there are many
Consumers of a Single Commodity. The
Schedule is based on the Assumption that
there are in all, 2 Consumers ‘A’ & ‘B’ of
Commodity ‘X’. By aggregating their
Individual Demand, the Market Demand
Schedule is constructed.
14
Price of Demand of Demand of Market
Commodity ‘X’ A B Demand
(in Rs.) (Units)
1 4 5 4+5=9
2 3 4 3+4=7
3 2 3 2+3=5
4 1 2 1+2=3
It indicates that when price of ‘X’ is Rs 1.00

per unit, Demand of ‘A’ is for 4 units and that
of ‘B’ is for 5 units. Thus the Market Demand
is 9 units. As the Price Increases, Demand
Decreases. Elasticity of Demand
15
Demand Curve
• A Demand Curve is a Locus of Points
showing various Alternative Price-
Quantity Combinations.
• It shows the Inverse Relationship
between Price & Quantity Demanded.
• It Slopes Downwards to the Right.

16
Individual Demand Curve
X X Axis – Price (Rs.)
D Y Axis – Quantity
DD – Demand Curve
4
3 The Demand Curve

Price
2 Slopes Downwards
from Left to Right,
1
meaning thereby that
D when Price is High
0
1 2 3 4 Y Demand is Low and
Quantity General Economics: Law of Demand and
17
vice versa.
Market Demand Curve
Y
4
Price
1
D
X
0
3 5 7 9
Quantity
18
Why does Demand Curve Slope
Downward?
• Income Effect : It is the Effect that a Change in a
Person’s Real Income caused by Change in the
Price of a Commodity has on the Quantity of that
Commodity. In other words, the Increase in
Demand on Account of Increase in Real Income is
known as Income Effect.
• Substitution Effect : It is the Effect that a Change in
Relative Prices of Substitute Goods has on the
Quantity Demanded. Substitutes are Goods that
can be used in place of each other.
19
Why does Demand Curve Slope
Downward?
• Different Uses: Demand for
Commodities with Alternative Uses
tends to Extend Consequent upon the
fall in their prices.
• Size of Consumer Group: When the Price
of a Commodity falls, then many
Consumers, who are unable to buy that
Commodity at its Previous Price, Come
Forward to buy it.
20
Exceptions to Law of Demand
• Article of Distinction or Veblen Goods: Goods
like Jewellery, Diamonds & Gems are
considered as Articles of Distinction. These
Goods command More Demand when their
Prices are High.
• Ignorance: Many a time, Consumers out of
sheer Ignorance or Poor Judgment consider a
Commodity to be of Low Quality if its Price is
Low and of High Quality if its Price is High.
21
Exceptions to Law of Demand
• Giffen Goods : Giffen Goods are those Inferior
Goods whose Demand falls even when their
Prices Falls. For example, ‘Bajra’. Only those
Inferior Goods are called Giffen Goods where
Law of Demand Fails.
• Expectation of Rise or Fall in Price in Future: If
Prices are likely to Rise More in the Future then
even at the Existing Higher Price people may
Demand more Units of the Commodity in the
Present and vice versa.
22
Expansion & Contraction in Demand
• Price ↓, QD ↑
Expansion • Downward Movement
Along the Demand Curve
• Price ↑, QD ↓
Contraction • Upward Movement Along
the Demand Curve
23
Expansion & Contraction in Demand
Y
P``
Contraction of Demand
Price
P
Expansion of Demand
P`
D
O X
L M N
Quantity Demanded
24
Increase & Decrease in Demand
• Price Same, QD ↑ due to
Increase Change in Other Factors
• Rightward Shift
• Price Same, QD ↓ due to

Decrease Change in Other Factors
• Leftward Shift
25
Increase & Decrease in Demand
Increase in Demand Decrease in Demand
D` D
D D`
Price
Price
D` D
D D`
Quantity Demanded Quantity Demanded

26
Distinction between Extension &
Increase in Demand
• Extension in Demand • Increase in Demand
means Rise in Demand refers to the Rise in
in Response to fall in Demand in Response to
the Price of a the Change in the
Commodity, Other Determinants of
things being equal. Demand other then
• It is expressed by the Price.
Movement from a • It is expressed by the
Higher Point to a Upward Shift of the
Lower Point along the Entire Demand Curve.
same Demand Curve.
27
Distinction between Contraction
& Decrease in Demand
• Contraction in Demand • Decrease in Demand
means Fall in Demand means Fall in Demand
in Response to a Rise in Response to Change
in the Price of a in Determinants of
Commodity, Other Demand, Other then
things being Equal. the Price.
• It is expressed by the • It is expressed by a
Movement from a Downward Shift of the
Lower Point to a Entire Demand Curve.
Higher Point on the
Same Demand Curve.
28
• It answers the Question “BY HOW MUCH?”
• Elasticity of Demand is defined as the
Responsiveness of the Quantity Demanded of a
Good to Change on one of the Variables on
which Demand Depends.
% Change in Q.D.
E=
% Change in one of the Variables
on which Demand depends
29
Types of Elasticity of Demand
Price Income Cross

Elasticity Elasticity Elasticity

30
Price Elasticity of Demand
It is Measured as a Percentage Change in Quantity
Demanded Divided by the Percentage Change in
Price, Other things Remaining Same.
% Change in Q.D.
Ep =
% Change in Price
Change in Quantity Original Price
Ep = ×
Change in Price Original Quantity
31
Price Elasticity of Demand
∆Q P
Ep = ×
∆P Q
Where, Ep Price Elasticity
∆ Very Small Change
P Price
Q Quantity Demanded
Note: Ep is (-)ve due to Inverse Relationship

Between Price & Quantity Demanded.
32
Degrees of Price Elasticity of
Demand
More Less than

Perfectly Perfectly Unit than Unit Unit
Elastic Inelastic Elastic Elastic Elastic
E=∞ E=0 E=1 (Elastic) (Inelastic)
E>1 E<1

33
Perfectly Elastic Demand
Y • A Perfectly Elastic Demand
6
is one in which a Little
Change in Price will Cause
D
E = infinite
D
an Infinite Change in
4 Demand.
Price (Rs.)
• A very little Rise in Price

causes the Demand to Fall
to Zero and a very little Fall
in Price causes Demand to
0 10 20 30 X
Extend to Infinity.
Quantity
• Under Perfect Competition,
Demand Curve of a Firm is
Elasticity ofPerfectly Elastic. 34
Demand
Perfectly Inelastic Demand
Y • Perfectly Inelastic
E=0 D Demand is one in
6
which a Change in
Price Produces No
Price (Rs.)
Change in the
4
Quantity Demanded.
2 • In this case, Elasticity
D
of Demand is Zero.
0 2 4 6
X
Quantity General Economics: Law of Demand and

35
Unitary Elastic Demand
Y
• Unitary Elastic
Demand is one in
D
which a % Change in
P Price Produces an
Price (Rs.) (%)
E=1
Equal % Change in
Demand.
T D • This type of Demand
Curve is called
X
Rectangular
O M N
Hyperbola.
Quantity (%)General Economics: Law of Demand and 36
Greater than Unitary Elastic
Demand
Y • Greater than Unitary
D Elastic Demand is one
P
E>1
in which a Given
%Change in Price
Price (Rs.) (%)
T
D Produces Relatively
more %Change in
Demand.
• In this case Elasticity of
O M N
X Demand is Greater than
Unitary.
Quantity (%) General Economics: Law of Demand and
37
Less than Unitary Elastic
Demand
Y
• Less than Unitary
D Elastic Demand is one
P in which a given %
E< 1
Price (Rs.) (%)
Change in Price
Produces Relatively
T Less % Change in
D
Demand
• In this case, Elasticity
M N
X of Demand is Less then
O
Unitary.
Quantity (%) General Economics: Law of Demand and
38

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Law of Demand &

General Economics: Law of Demand and

Complementary Goods e.g. Pen & Ink

Substituting Goods e.g. Tea & Coffee

Exception: Inferior Goods

General Economics: Law of Demand and

• Demand Function: Dx= f(PX, Pr, Y, T, E)

General Economics: Law of Demand and

It indicates that when price of ‘X’ is Rs 1.00

General Economics: Law of Demand and

3 The Demand Curve

• Price Same, QD ↓ due to

Quantity Demanded Quantity Demanded

General Economics: Law of Demand and

Price Income Cross

General Economics: Law of Demand and

Note: Ep is (-)ve due to Inverse Relationship

More Less than

General Economics: Law of Demand and

• A very little Rise in Price

Quantity General Economics: Law of Demand and

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