Demand

The quantity of a commodity that a consumer is willing to buy and is able to afford,
given prices of goods and consumer’s tastes and preferences is called demand for the
commodity.
Generally, desire, wants and demand are interchangeably used in day-to-day life. But in
economics all these terms have different meanings.
Let’s us understand the 3 different terms:
1. Desire means a mere wish to have a commodity.
For Eg: Desire of a poor person for a car with just ₹ 200 in his pocket. So, desire is just
a wish to possess something.

2. Wants is that desire which is backed by the ability and willingness to satisfy it:
Every desire is not a want. But a desire can become a want if the person is in a position
to satisfy.
For Eg: In the above example, if the poor person wins a lottery and now, he has enough
money to buy a car, then his desire for car will now be termed as want.

3. Demand is an extension to wants as it has two more characteristics:

a) Demand is always defined with reference to price.
The demand for a commodity is always stated with reference to its price. With change
in price, quantity demanded may also change as more is demanded at lower price and
less at higher price. Therefore, demand is meaningless without reference to price.

b) Demand is always with respect to a period of time.

Demand is always expressed with reference to time. Even at the same price demand
may change, depending upon time period under consideration
For Eg: Demand for umbrellas is more in rainy seasons as compared to other seasons.
The time frame might be of an hour, a day, a month or a year.

Demand for a commodity may be either with respect to an individual or to the entire
market.
1. Individual Demand:
Refers to the quantity of a commodity that a consumer is willing and able to buy at
each possible price during a given period of time.

2. Market Demand:
Refer to the quantity of a commodity that all consumer are willing and able to buy at
each possible price during a given period of time.

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Demand Function:
Demand function shows the relationship between quantity demanded for a particular
commodity and the factors influencing it.

Individual Demand Function

Individual demand function refers to the functional relationship between individual
demand and the factor affecting individual demand.
It is expressed as
Dx= f (Px, Pr, Y, T, F)

Where
Dx= Demand for commodity x
Px = Price of the given commodity x
Pr = Price of related goods
Y = Income of the consumer
T = Taste and preference
F = Expectation of change in price in future.

Demand function is just a short-hand way of saying that quantity demanded (Dx)
which is on the left-hand side, is assumed to depend on the variables that are listed
on the right-hand side.

Market Demand Function

Market demand function refers to the functional relationship between market
demand and the factors affecting market demand.
Market demand is affected by all factors affecting individual demand. In addition,
it is also affected by size and composition of population, season and weather and
distribution of income.
So, market demand function can be expressed as
Dx= f (Px, Pr, Y, T, F, Po, S, D)
Where
Dx= Demand for commodity x
Px = Price of the given commodity x
Pr = Price of related goods
Y = Income of the consumer
T = Taste and preference
F = Expectation of change in price in future.
Po=Size and composition of population
F= Expectation of change in price in future
D= Distribution of income
S= Season and Weather

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Determinants of Demand (Individual Demand)
1. Price of the given commodity
2. Price of related goods.
3. Income of the consumer
4. Tastes & Preference
5. Expectation of changes in the price in future.
Determinants of Market Demand
1. Size and composition of population
2. Season and Weather
3. Distribution of income.
Demand Schedule
Demand schedule is a tabular statement showing various quantities of a commodity being
demanded at various levels of price, during a given period of time.
It shows the relationship between price of the commodity and its quantity demanded.
A demanded schedule can be determined both for individual buyers and for the entire
market. So, demand schedule is for two types.
1) Individual Demand Schedule
2) Market Demand Schedule
Individual Demand Schedule:
Individual demand schedule refers to a tabular statement showing various quantities of a
commodity that a consumer is willing to buy at various levels of price, during a given
period of time.
Quantity Demanded
Price (in₹)
of Commodity X
5 1
4 2
3 3
2 4
1 5
As seen in the schedule, quantity demanded of ‘x’ increases with decreases in its price.
The consumer is willing to buy 1 unit at ₹5. When price falls to ₹4, demand rises to 2
units.

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Market Demand Schedule:
Market demand schedule refers to a tabular statement showing various quantities of a
commodity that all the consumers are willing to buy at various levels of price, during a
given period of time. It is the sum all individual demand schedules at each and every
price.
Market demand schedule can be expressed as
Dm = DA+DB+……….....
Where Dm is the market demand and DA+DB+…… are the individual demands of
Household A, Household B and so on.
Individual Demand
(in units)
Price (₹) Market Demand (in units)
Household A Household B
(DA) (DB)
5 1 2 1+2=3
4 2 3 2+3=5
3 3 4 3+4=7
2 4 5 4+5=9
1 5 6 5+6=11

Market demand is obtained by adding demand of household A and B at different prices.

At ₹5 per unit, market demand is 3 units. When price falls to ₹4, market demand rises to
5 units. So, market demand schedule also shows the invers relationship between price
and quantity demanded.
Demand Curve
Demand curve is a graphical representation of demand schedule. It is the locus of all the
points showing various quantities of a commodity that a consumer is willing to buy at
various levels of price, during a given period of time, assuming no change in other
factors.
 It shows the inverse relationship between the quantity demanded of a commodity
with its price, keeping other factor constant.
 It can be drawn for any commodity by plotting each combination of demand
schedule on a graph.
 Like demand schedules, demand curves can also be drawn both for individual
buyers and for the entire market. So, demand curve is of two types.
i) Individual Demand Curve
ii) Market Demand Curve.

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Individual Demand Curve:
Individual demand curve refers to a graphical representation of individual demand
schedule.

As seen in the diagram, price is taken on the vertical axis (Y-axis) and quantity
demanded on the horizontal axis (X-axis). At each possible price, there is a quantity,
which the consumer is willing to buy. By joining all the points (P to T), we get a demand
curve ‘DD’.
Market Demand Curve
Market demand curve refers to a graphical representation of market demand schedule. It
is obtained by horizontal summation of individual demand curves.

DA and DB are the individual demand curves. Market demand curve (DM) is obtained by
horizontal summation of the individual demand curves.
Law of Demand
Law of demand states to invers relationship between price and quantity demanded,
keeping other factor constant. This law is also known as the ‘Frist Law of Purchase’.

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Assumption of Law of demand
While stating the law of demand, we use the phrase ‘keeping other factors constant’. This
phrase is used to cover the following assumption on which the law is based:
1. Price of substitute goods do not change.
2. Prices of complementary goods remain constant.
3. Income of the consumer remains the same.
4. There is no expectation of change in price in the future
5. Tastes and preferences of the consumer remain the same.
Law of demand can be better understood with the help of table and graph
Demand Schedule
Quantity Demanded of
Price (in₹)
Commodity X
5 1
4 2
3 3
2 4
1 5
Clearly shows that more and more units of commodity are demanded when price of the
commodity falls. Demand curve DD slopes downwards from left to right, indicating an
inverse relationship between price and quantity demanded.
Why Other factors are kept constant?
The quantity demanded of a commodity depends on many factors, besides price of the
given commodity. If we want to understand the separate influence of one factor, it is
necessary, that all other factor are kept constant. Therefore, while discussing the ‘Law of
Demand’, it is assumed that there is no change in the other factors.
Individual Demand Vs Market Demand
Individual Demand Market Demand

It is the quantity demanded of a It is the quantity demanded of a

commodity by an individual consumer at a commodity by all the consumers at a given
given price during a given period of time price during a given period of time

It may or may not follow the law of

It always follows the Law of Demand, i.e
Demand, i.e. it is possible that an
market demand always falls with rise in
individual consumer may demand more
price and vice-versa
even at higher price.

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Individual demand is not affected by all Market demand is affected by all the
the factors affecting market demand factors affecting individual demand.
Substitute Goods and Complementary goods
Substitute Goods
Substitute goods are those goods which can be used in place of one another for
satisfaction a particular want, like tea and coffee.
Demand for a given commodity varies directly with the price of substitute good. For Eg:
if price of a substitute good (say, coffee) increases, then demand for given commodity
(say, tea) will rise as tea will become relatively cheaper in comparison to coffee.

As seen in the given diagram, price of coffee (substitute good) is shown on the Y-axis
and demand for tea (given commodity) on the X-axis. When price of coffee rises from
OP and OP1 demand for tea also rises from OQ to OQ1
Complementary Goods
Complementary goods are those goods which are used together to satisfy a particular
want. Demand for given commodity varies inversely with the price of a complementary
good. For Eg: if price of a complementary good (say, sugar) increases, then demand for
given commodity (say, tea) will fall as it will be relatively costlier to use both the goods
together.

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As seen in the given diagram, price of sugar (complementary good) is shown on the Y-
axis and demand for tea (given commodity) on the X-axis. When the price of sugar rises
from OP to OP1 demand for tea falls from OQ to OQ1
Substitute Goods Vs Complementary Goods

Basis Substitute Goods Complementary Goods

Substitute goods refers to those Complementary goods refer
goods which can be used in to those goods which are used
Meaning
place of one another to satisfy a together to satisfy a particular
particular want. want.
Nature of Substitute goods have Complementary goods have
demand competitive demand joint demand.
Price of a complementary
Price of one substitute good has
good has negative
positive relationship with
Relation relationship with quantity
quantity demanded of another
demanded of another
substitute good.
complementary good.
Tea and coffee Tea and Sugar
Example
Coke and Pepsi Car and Petrol

Normal Goods and Inferior Goods

Most of the commodities that we usually buy are normal goods. As a general practice a
consumer buys more of such goods, when his income rises and less of it when his income
falls. The commodities that follow this rule are called ‘Normal Goods’
Normal goods refer to those goods whose demand increases with an increase in income.
For Eg: If the demand for TV increases with a rise in income, then TV will be called a
normal good. Income effect is positive in case of normal goods.
Inferior Goods
Inferior goods refers to those goods whose demand decreases with an increase in income.
It means, that there exists an inverse relationship between income and the demand for
inferior goods. So, income effect in negative in case of inferior goods.
For Eg: If the income of a consumer rises and he prefers to replace his black-and-white
TV with a coloured one, then demand of B/W TV will fall. In such case, B/W TV is an
inferior good.

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Normal Goods Vs Inferior Goods
Basis Normal Goods Inferior Goods
Normal Goods refer to those goods Inferior goods refer to those
Meaning whose demand increases with an goods whose demand decreases
increase in income with an increase in income.
Income effect is positive in case of Income effects in negative in
Income Effect
normal goods case of inferior goods
There is a direct relation between There is an inverse relation
Relation income and demand for normal between income and demand
goods for inferior goods
“Full Cream Milk” is a normal “Toned milk’ is an inferior
Example good if its demand increases with good if its demand decreases
an increase in income with an increase in income.

Change in Quantity Demanded Vs Change in Demand

Basis Change in Quantity Demand Change in Demand
When the quantity demanded When the demand changes
changes due to a change in the due to change in any factor
Meaning price, keeping other factors other than the own price of
constant, it is known as change in the commodity, it is termed
quantity demanded as change in demand
It leads to a movement along the It leads to a shift in the
Effect on Demand
same demand either upwards or demand curve either
Curve
downwards rightwards or leftwards.
It occurs due to change in
It occurs due to an increase or a other factors, like change in
Reason decrease in the price of the given prices of substitutes, change
commodity in prices of complementary
goods, change in income, etc.

Shift in Demand Curve (Change in Demand)

Demand curve is drawn to show the relationship between price and quantity demanded of
a commodity, assuming all other factor being constant. However, other factor are bound
to change sooner or later. A change in one of ‘other factor’ 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.

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Various Reasons for Shift in Demand Curve
i) Change in price of substitute goods
ii) Change in price of complementary goods
iii) Change in income of consumers
iv) Change in tastes and preferences
v) Expectation of change in price in future
vi) Change in population
vii) Change in distribution of income
viii) Change in season and weather
Let us understand the concept of shift in demand curve with the help of diagram.

In 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:
 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.
 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.
Increase in demand leads to a rightward shift in the demand curve.

Demand
Price (₹)
(units)
20 100

20 150

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As seen in the given schedule and diagram, demand rises from 100 units to 150 units at
the same price of ₹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 demand
curve.
Demand
Price (₹)
(units)
20 100

20 70

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

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Movement Along the Demand Curve (Change in Quantity Demanded)
When quantity demanded of a commodity change 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 or an upward movement along the same
demand curve. Let us understand the movement along the demand curve.
OQ quantity is demanded at a price of OP. Change is 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
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 resulting in a downward
movement form A to B along the same demand curve DD.
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.
 It leads to a downward movement along the same demand curve.
 It is also known as ‘Extension in Demand’ or ‘Increase in Quantity Demanded’.
It can be better understood from table and graph.

Demand
Price (₹)
(units)
20 100

15 150

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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 ₹20 to ₹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.
 It leads to an upward movement along the same demand curve.
 It is also known as ‘Decrease in Quantity Demanded’.
It can be better understood from table and graph

Demand
Price (₹)
(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 ₹20 to ₹25, resulting in an upward movement from
A to B along the same demand curve DD.

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