Concept of Demand in economics

Consumer demand depends on many factors, like the commodity's price, the consumer's
income, and so on. In this module, we will study the determinants and their relation to
demand. We will also understand the concepts like price elasticity, a shift in demand and
supply curve, and their relevance in the real world.

Concept of Demand in Economics

Demand is a desire for a good or service, backed by the ability and Purchase to pay. A desire
without the ability to buy is merely a wish. It will not be considered as 'demand; in
Economics.

Individual demand is used to analyze consumer behavior. Individual demand is the quantity
demanded at a given price over time, say per day, month, etc. Demand is always expressed in
quantity (kg, meters, liters, units, and so on) and frequency (per day, per week, etc.) at
different price levels.

Market demand (the addition of all consumers' demands) is used for analyzing the market.
Market demand refers to the total quantity that all the users of a commodity are willing to pay
at a given period.

The price is shown in the extreme left column in the following table. And total demand for
chocolate bars is shown in the outer right column. It is derived from adding individual
demand at different levels of price.

Price (Rs.per Total Demand

chocolate bar) A B C (chocolate bars)
50 2 3 4 9
40 3 5 6 14
30 4 6 7 17
20 5 7 8 20
10 6 8 9 23

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While discussing consumer demand, we will take into account individual demand. And while
talking about the equilibrium price for a particular product in the market, we will consider
market demand (Total demand) for the product and market supply.

Demand Function and Law of Demand

Demand is a function of (price, income, price of related commodities, and Consumer Taste)
Qdx =f (Px,I, Py,T)

Determinants of Demand

Price of the product: Generally, when the price of the product increase, demand decreases,
and vice versa.

Income of the consumer: When income increases, demand will increase.

Prices of related goods: Demand for the commodity also depends on the prices of substitutes
and complementary goods. Two commodities are substitutes for each other if both goods
satisfy the same human needs. E.g., tea and coffee. If the price of tea increases, consumers
will increase the demand for coffee.

Two commodities are complementary to each other if both goods are needed at the same time
to satisfy the same human needs. E.g., tea, sugar, and milk. If the price of tea increases,
consumers will reduce tea consumption. Hence not only will demand for tea comes down but
also demand for milk and sugar will reduce.

Advertising and Consumer Tastes

Demand is also affected by individual tastes and preferences. These patterns are partly shaped
by culture and partly implanted by information and knowledge of products and services.

Population
The total number of consumers determines market demand for the product. The larger a
country's population, the greater its demand for consumer goods. Demand for wheat in India
will be greater than that in Sri Lanka. Similarly, the demand for wheat in India in 2020 was
greater than in 1950.

Consumer Expectations
Consumer expectations cause people to demand either more or less of a good. If consumers
expect a product shortage soon, they will increase the demand for the product and vice versa.

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If there is poor rainfall, consumers will expect a shortage of food grains, increasing the
present demand for the food grains.

Law of Demand

Other things remain the same. As the price of a commodity rises, its demand decreases. As
the price falls, demand expands. Therefore, there is an inverse relationship between the price
of a commodity and its supply. The following factors are assumed to be constant.

Assumptions:

1. No change in tastes and Preferences of consumers

2. No change in consumer's income
3. No change in prices of related goods
4. No change in consumer's wealth
5. No change in expectations about future prices

The demand schedule is a tabular representation of the quantity demanded of a

commodity at different prices per unit of time. A hypothetical market demand schedule is
given in the following table.

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Demand Curve

The quantity demanded decreases from 14 to 2 as the price increases from Rs.1 to
Rs.7. The Demand curve slopes downward from left to right.

Exceptions to the law of demand

1. Giffen Goods: These inferior quality goods are named after economist Sir Robert
Giffen who identified them and introduced them in economic theory. A fall in the
price of bajra will enable the household to release more money for other commodities,
and the consumer may substitute consumption of bajra with the consumption of other
superior goods.
2. Veblen Goods: Veblen goods are high-quality premium goods, the demand for which
increases along with their price.
3. Emergencies: Households behave abnormally at times of emergencies like war,
famine, floods, etc. They expect scarcity and further price rises and make the
increased purchase even at a higher price.
4. Expectations: If the product price increases and consumers expect a further rise, they
may demand more quantity even at a higher price.

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Shift in demand

Quantity Quantity Demanded

Price
Demanded (dx) (d'x)

1 14 16
2 12 14
3 10 12
4 8 10
5 6 8
6 4 6
7 2 4

The Change in demand curve with reference to the change in the price of the product is
shown along the same demand Curve. But if demand responds to factors other than price, the
demand curve shifts either leftward or rightward. In this example demand curve has shifted
rightwards.

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Determinants of Supply

Supply responds to the changes in the price of products. But other factors affect the
supply apart from price. Take the example of the prices of the inputs. Input prices include
the price of labor, raw material, interest paid on loans taken, transportation, and so on.
When input prices decrease, supply will increase because the seller or the producer will
earn more profit from the reduced prices. On the other hand, if input prices increase, the
cost of production will go up. It will, in turn, reduce the profit margins, and hence the
supply will decrease.

Technological; progress may lead to efficiency improvement, waste reduction, and so on.
It reduces the cost of production and increases the profit margins. Hence suppliers are
ready to supply more at the same price level.

When the government imposes restrictions on production or imported raw materials,

supply will be affected. Noneconomic factors like strikes, lockouts, wars, and natural
calamities also adversely affect the supply of commodities.

The Supply Function

Supply is a function of price of the product, price of the factors of production, prices of
raw material, the state of technology, and so on.

The supply schedule is a tabular representation of the quantity supplied of a commodity at

different prices per unit of time. A hypothetical market schedule is given in the following
table.

Price Quantity Supplied (Sx)

1 2
2 4
3 6
4 8
5 10
6 12
7 14

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 16
14
12
10
Price

8
6
4
2
0
0 1 2 3 4 5 6 7 8
Quantity Supplied

The quantity demanded decreases from 2 to 14 as the price increases from Rs.1 to
Rs.7. The Supply curve slopes upward from left to right.

Sometimes seller is ready to supply more quantity at each level of price. This can be shown in
the rightward shift of the supply curve.

Quantity Quantity
Price
Supplied (sx) Supplied (s'x)

1 2 4
2 4 6
3 6 8
4 8 10
5 10 12
6 12 14
7 14 16

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The Change in supply curve with reference to the change in the price of the product is shown
along the same supply curve. But if supply responds to factors other than price, the supply
curve shifts either leftward or rightward. In this example supply curve has shifted rightwards.

Simultaneous Shifts in Supply and Demand

We observed the shift of the demand curve and the shift of the supply curve in the previous
chapters. What will happen if there is a simultaneous shift in the demand and supply curve?

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In the above Figure, E is the initial point of Equilibrium as the demand and supply curves
intersect each other at this point. After the increase in demand, the new demand curve is
D1D1, and the new supply curve is S1S1.The new point of equilibrium is E1.

1. Why new equilibrium price is less than the earlier equilibrium price?
2. what will happen if the demand curve shifts rightward and the supply curve shifts
leftward?
3. What are the reasons for the shift in the demand and supply curve?

price ceiling and a price floor

In a free market, equilibrium is achieved through the forces of demand and

consumption. Unit the government wants to influence the price either to protect the
interests of the suppliers or of the consumers. The government, in that case, will put
restrictions on either upward or downward movement gradually imposes a maximum
limit on the price (price ceiling) that can be charged by suppliers. The intention is to
make certain commodities affordable to the general public.

Here in the given graph, equilibrium is determined as the equilibrium price p* with the
quantity at q*
Let's consider the house-rent market. The government puts a ceiling (restriction on the
upper price limit, in this case, PC) what will happen? At this price level, there is a
demand for, and supply of houses are qc and supply is q’c respectively.

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In the short run, people are getting a house at an affordable rate; but some are
deprived of the houses. In the long run, these extra people will try to get a house on
rent, which will eventually give rise to the black market and higher rents. A price
ceiling, in the long run, can lead to black marketing and unrest in the supply side.

Price Floor
A price floor is a situation where the government does not allow prices to fall down
beyond a certain point.

In this example equilibrium price is P*. But when the government declares that
suppliers should get at least Pf price.
See what happens to demand at this level. Demand falls short of supply. In such cases,
the government may intervene and absorb the excess quantity brought into the market.

Elasticity

Generally, when the price of the product increase, consumers reduce the demand for
the product. This is the response consumer gives to the change in price. Elasticity is
the degree of responsiveness of demand to the change in the price of the product.

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 Perfectly elastic Demand Curve: Infinite quantity is demanded at the same price. If
the price is increased slightly, demand will be zero, and if the price is reduced
slightly, demand remains infinite.
Demand Schedule 1

Quantity Demanded
Price (in Rs)
(dx)
3 0
3 10
3 20
3 30
3 40

3.5
3 3 3 3
3

2.5
Price ( in Rs.)

1.5

0.5

0
0 5 10 15 20 25 30 35

Quantity Demanded
A perfectly elastic demand curve is a horizontal straight line parallel to the Z axis.

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Perfectly Inelastic Demand Curve
Whatever the change in price, the quantity demanded does not change at all.
Demand schedule 2

Quantity
Price
Demanded
(in Rs)
(dx)
0 10
1 10
2 10
3 10
4 10

Graph 2

3.5

2.5
Price ( in Rs)

1.5

0.5

0
0 2 4 6 8 10 12
Quantity Demanded (unites)

A Perfectly inelastic demand curve is a vertical straight line parallel to the Y axis. In the
above figure, though price increases from P1 to P2, there is no change in demand. The
demand for the products like salt or medicines is perfectly inelastic.

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Relatively elastic Demand Curve
Small proportionate change in price results in a large proportional change in demand

Graph 3

Relatively Inelastic Demand Curve

A big proportional change in price results in a small proportionate change in the demand.

Graph 4

In the above figure, the price is reducing substantially but the quantity demanded is
increasing slightly.

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Unitary elastic demand Curve
Proportionate change in price is exactly matched by the proportionate change in quantity
demanded

If the price falls by 50%, the demand will rise by 50the %. In the figure, the price change is P
to P1, and the change in demand is Q to Q1.

Graph 5

The shape of this demand curve is like a rectangular hyperbole. The total area covered
under the curve remains the same in the case of the unitary elastic demand curve. i. e. The
total expenditure of the consumer on that commodity remains unchanged when the price
of the commodity changes.

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Is the elasticity positive or negative?

Calculate Cross elasticity

Is the elasticity positive or negative?

What will be the relation between two commodities if you get a negative sign?

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Calculate Income elasticity

Importance of elasticity

• Producers
• Government
• Public Utilities

• Exporters
• Trade unions

Exercise: What is the importance of the concept of elasticity? Explain with examples.

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Determinants of elasticity

• Nature of the product

• Number of substitutes

• Total expenses on the commodity as part of income

• Number of uses of the commodity
• Possibility of postponing the consumption

• Habitual necessity

Exercise: What are the determinants of elasticity? Explain with examples.

Elasticity of Supply
Generally, when the price of the product increase, sellers increase the quantity
supplied. This is the response seller gives to the change in price. Price Elasticity of
supply is the degree of responsiveness of supply to the change in the price of the
product.

A perfectly elastic supply curve will be an infinite quantity supplied at

the same price. If the price is decreased slightly, supply will be zero, and if the price is
increased slightly, demand remains infinite.

A perfectly inelastic supply curve will be a vertical straight line parallel to the Y axis.
Whatever the price changes, supply remains constant.

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 The supply of fruits and vegetables is inelastic. Even if the prices increase, sellers
cannot increase the supply. If the prices decrease, sellers cannot reduce the supply.
They will sell the products they brought to the market. These products are perishable
and cannot be stored.

Determinants of supply elasticity

• Spare Production Capacity

• Stock of Finished products
• Time Period involved in the Production Process

Consumer Surplus
Consumers' willingness to pay for a commodity depends on the utility they expect to derive
from it. But the price the consumer is willing to pay may or may not match the market price.
If the market price is less than what the consumer is willing to pay, then the consumer saves
money. This saving is consumer surplus.

The value of the benefit of collective goods (roads, bridges, public gardens) is greater than
the price charged because most people would be willing to pay a higher price than they
charge.

French Engineer Arsene Julis Dupont coined the concept of consumer surplus in 1844, but it
was immeasurable until Alfred Marshal defined it in the 1920s. According to Marshal, what a
consumer is willing to pay for one unit of commodity measures the monetary value of
expected utility, and what he pays gives the monetary cost of the expected utility.

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If a consumer is ready to pay Rs.300 for a cab, but pays Rs.200, the consumer surplus is Rs.
100.

On a supply and demand curve, it is the area between the equilibrium price and the
demand curve.

The producer surplus is the difference between the price received for a product and
the marginal cost to produce it. As the marginal cost is low for the first units of the
good produced, the producer gains the most from producing these units to sell at the
market price.
If a seller is ready to sell Rs.200 for a unit, but actually gets Rs. 300, the producer
surplus is Rs.100. A producer surplus exists if the market price of a good is higher
than the price the producer is willing to sell.

On a supply and demand curve, it is the area between the equilibrium price and the
supply curve.

Case study:

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 Maharashtra farmers dumped onions on the road protesting low prices in March 2024.
Farmers demanded minimum prices for onions.
A. How do look at this incident in the context of supply elasticity?
B. What measures can the government take to avoid such incidents in the future?

Long Questions
1. Explain the law of demand? What are the assumptions and exceptions to the law of
demand?
2. Explain the law of diminishing marginal utility.
3. Explain the concepts of consumer surplus and producer surplus
4. What are the determinants of demand? Give examples
5. What is the importance of price elasticity in the real world?

Suggested books

• Microeconomics by Robert Pinyck/Daniel Rubinfeld

• Micro Economic Theory by Dominick Salvatore
• Modern Economics: H L Ahuja
• Big ideas simply explained
• Any book on microeconomics used by students of commerce or arts just to get
concepts clear

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