Demand

 DEMAND
 Meaning and Definition of Demand

 According to Benham: “The demand for anything, at a
given price, is the amount of it, which will be bought per
unit of time, at that price.”
 According to Bobber, “By demand we mean the various
quantities of a given commodity or service which
consumers would buy in one market in a given period of
time at various prices.”
 Requisites:
a. Desire for specific commodity.
b. Sufficient resources to purchase the desired commodity.
c. Willingness to spend the resources.
d. Availability of the commodity at
 (i) Certain price (ii) Certain place (iii) Certain time.
Kinds of Demand
1. Individual demand
2. Market demand
3. Income demand
 Demand for normal goods (price –ve, income +ve)
 Demand for inferior goods (eg., coarse grain)
 4. Cross demand
 Demand for substitutes or competitive goods (eg.,tea & coffee, bread
and rice)
 Demand for complementary goods (eg., pen & ink)
 5. Joint demand (same as complementary, eg., pen & ink)

 6. Composite demand (eg., coal & electricity)
 7. Direct demand (eg., ice-creams)
 8. Derived demand (eg., TV & TV mechanics)
 9. Competitive demand (eg., desi ghee and vegetable oils)
 10.Demand of unrelated goods
FACTORS AFFECTING DEMAND
 1. Prices of Goods
 2.Income of Consumer
 3.Prices of Related Goods
 4.Population
 5.Tastes,Habit
 6.Expectation about future prices
 7.Climatic Factors
 8.Demonstration Effect
 9.Distribution of national income
Demand Schedule
 Demand Schedule: a tabular presentation showing different quantities of a
commodity that would be demanded at different prices.

 Types of Demand Schedules
Individual Demand schedule Market Demand Schedule

Price A Price A B C M.S
1 50 1 50 45 40 135
2 40
2 40 30 38 108
3 30
4 20 3 35 20 30 85
4 20 15 25 60
The Law of Demand
 Prof. Samuelson: “Law of demand states that people will
buy more at lower price and buy less at higher prices,
others thing remaining the same.”
 Ferguson: “According to the law of demand, the quantity
demanded varies inversely with price”.
 Chief Characteristics:
1. Inverse relationship.
2. Price independent and demand dependent variable.
3. Income effect & substitution effect.
 Assumptions:
 No change in tastes and preference of the consumers.
 Consumer’s income must remain the same.
 The price of the related commodities should not change.
 The commodity should be a normal commodity
Law of Demand
 Exceptions:
Inferior goods
Articles of snob appeal. (exception:
Veblen goods, eg., diamonds)
Expectation regarding future prices
(shares, industrial materials)
Emergencies
Change in fashion, habits, attitudes, etc..
The Law of Demand
P P
A
P1
B
P2
D1 D2
Q1 Q2
Q Q
CHANGE IN CHANGE IN OTHER=
PRICE= change in demand
change in quantity
Elasticity of demand
 Definition: “Elasticity of demand is defined as the
responsiveness of the quantity demanded of a good to
changes in one of the variables on which demand depends.”
 These variables are price of the commodity, prices of the
related commodities, income of the consumer & other
various factors on which demand depends. Thus, we have
Price Elasticity, Cross Elasticity, Elasticity of Substitution &
Income Elasticity. It is always price elasticity of demand
which is referred to as elasticity of demand
 A.Price Elasticity
 Measures how much the quantity demanded of a good
changes when its price changes.
 Or
 It may be defined as “Percentage Change in Quantity
demanded over percentage change in price”
Factors affecting Elasticity of Demand
1. Availability of substitutes
2. Postponement of consumption
3. Proportion of expenditure (needles: inelastic; TV: elastic)
4. Nature of the commodity (necessity vs. luxury;
durability/reparability eg., shoes)
5. Different uses of the commodity (paper vs. ink)
6. Time period (elastic in the long term)
7. Change in income (necessaries: inelastic; milk and fruit for a rich
man)
8. Habits
9. Joint demand
10. Distribution of income
11. Price level (very costly & very cheap goods: inelastic)
Price Elasticity
 Price Elasticity
 Elastic Demand or more than 1 – When quantity
demanded responds greatly to price changes
 Inelastic Demand or less than 1 – When quantity
demanded responds little to price changes.
 Unitary Elastic – When quantity demanded responds
equally to the price changes.
 Perfectly inelastic or 0 elastic demand
 Perfectly elastic or infinite elastic demand
 Economic factors determine the size of price elasticity

for individual goods. Elasticity tends to be higher when
the goods are luxuries, when substitutes are available
and when consumer have more time to adjust their
behavior.
Calculating Price Elasticity
PED = % Change in Qty Demanded
 % Change in Price
Points to Remember:
We drop the minus sign from the numbers by treating all %
changes as positive. That means all elasticity’s are positive,
even though prices and quantities move in the opposite
direction because of the law of downward sloping demand.
Definition of elasticity uses percentage changes in price and
demand rather than actual changes. That means that a
change in the units of measurement does not affect the
elasticity. So whether we measure price in Rupees or paisa,
the price elasticity stays the same.
Some business applications of Price
Elasticity
Price discrimination
Public utility pricing (electricity, railway)
Joint supply (wool and mutton)
Super markets
Use of machines (lower cost of production for elastic)
Factor pricing (workers producing inelastic demand
products)
International trade (devalue when exports are price-elastic)
Shifting of tax burden (shift commodity tax when demand is
inelastic)
Taxation policy
Elasticity & Revenue:
When demand is price inelastic, marginal revenue is negative and a
price decrease reduces total revenue.
When demand is price elastic, marginal revenue is positive and a price
decrease increases total revenue.
In the borderline case of unit elastic demand, marginal revenue is 0 and
a price change leads to no change in the total revenue.
B. Income Elasticity of Demand: Is the degree of responsiveness of

quantity demanded of a good to a small change in the income of the
consumer.
If the proportion of income spent on a good remains the same as
income increases, then income elasticity for the good is equal to one.
If the proportion spent on a good increases, then the income elasticity
for the good is greater than one.
If the proportion decreases as income rises, then income elasticity for
the good is less than one.
Income elasticity
 Types:
Zero
Negative
Positive (i) low (ii) unitary (iii) high
 Empirical evidence suggests that income elasticity falls as income rises.
 Income elasticity and business decisions

1. If ei is >0 but <1, sales will increase but slower than the general
economic growth;
2. If ei is >1, sales will increase more rapidly than general economic growth
 Corollary: in a growing economy while farmers suffer as their products
have low income elasticity, industrialists gain as their products have
high income elasticity.
Cross Elasticity: A change in the demand for one good in
response to a change in the price of another good
represents cross elasticity of demand of the former good
for the latter good.
If two goods are perfect substitutes for each other cross
elasticity is infinite and if the two goods are totally
unrelated, cross elasticity between them is zero.
Goods between which cross elasticity is positive can be
called Substitutes, the good between which the cross
elasticity is negative are not always complementary as
this is found when the income effect on the price change
is very strong.

Degrees of Elasticity of
Demand
 1. Perfectly Elastic
 2. Perfectly Inelastic
 3. Unitary Elastic
 4. Relatively more elastic
 5. Relatively less elastic
1. Perfectly Elastic
Ed = ∞
p
O
d d1 X
2. Perfectly Inelastic
p1
Ed = 0
p
O
d X
3. Unitary Elastic
p1
Ed = 1
p
O
d d1 X
4. Relatively more
Elastic
Y
p1
Ed > 1
p
O
d d1 X
5. Relatively less
Elastic
Y
p1
Ed < 1
p
O
d d1 X

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 DEMAND

 Meaning and Definition of Demand

 5. Joint demand (same as complementary, eg., pen & ink)

Individual Demand schedule Market Demand Schedule

 Economic factors determine the size of price elasticity

B. Income Elasticity of Demand: Is the degree of responsiveness of

 Empirical evidence suggests that income elasticity falls as income rises.

 Income elasticity and business decisions

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