Law of Demand

Law of Demand and Elasticity of Demand
• Meaning of Demand
• In ordinary speech, the term demand is many times
confused with ‘desire’ or ‘want’.
• Desire is only a wish to have any thing.
• In economics demand means more than mere desire.
• Demand in economics means an effective desire for a
commodity i.e. desire backed by the
• ‘ability to pay’ and ‘willingness to pay’ for it.
• Thus, demand refers to the quantity of a good or service
that consumers are willing and able
• to purchase at different prices during a period of time.
• Thus, defined, the term demand shows the
following features:
• 1. Demand is always with reference to a PRICE.
• 2. Demand is to be referred to IN A GIVEN
PERIOD OF TIME.
• 3. Consumer must have the necessary
purchasing power to back his desire for the
commodity.
• 4. Consumer must also be ready to exchange
his money for the commodity he desires
• Determinants of Demand For estimating market
demand for its products, a firm must have knowledge
about—
• (a) the determinants of demand for its product, and
• (b) the nature of relationship between demand and its
determinants.
• The various factors on which the demand for a
product/commodity depends are as follows:—
• Price of the commodity: 1. Other things being equal,
the demand for a commodity is inversely related with
its price.
• 2. It means that a rise in price of a commodity brings
about fall in its demand and vice versa.
• 3. This happens because of income and substitution
effects.
• Price of the related commodities:
• 1. The demand for a commodity also depends
on the prices of related commodities.
• 2. Related commodities are of two types
namely— Substitutes or competitive goods, &
Complementary goods.
• 3. Substitute goods are those goods which
can be used with equal ease in place of one
another. Ex tea and coffee; Rice and Wheat
etc.
• 4. Demand for a particular commodity is
affected if the price of its substitute falls or
rises.
• 5. Complementary good are those goods
whose utility depends upon the availability of
both the goods as both are to be used
together.
• 6. E.g. a pen and refill; car and petrol; a hand
set and phone connection;
• 7. The demand for complementary goods have
an INVERSE RELATIONSHIP with the price of
related goods.
• 8. E.g. If the price of Scooters falls, its demand
will increase leading to increase in demand for
petrol
• Income of the consumers
• 1. Other things being equal, generally the quantity
demanded of a commodity bear a DIRECT
RELATIONSHIP to the income of the consumer i.e.
with an increase in income, the demand for a
commodity rises.
• 2. However, this may not always hold true. It
depends upon the class to which commodity belongs
i.e. necessaries or comforts and luxuries or inferior
goods:
• Necessaries (E.g. Food, clothing and shelter).
Initially, with an increase in the income, the demand
for necessaries also rises upto some limit. Beyond
that limit, an increase in income will leave the
demand unaffected.
• Comforts and Luxurious (E.g. Car; Air-Conditioners;
etc.) Quantity demanded of these group of
commodities have a DIRECT RELATIONSHIP with
the income of the consumers. As the income
increases, the demand for comforts and luxuries
also increases.
• Inferior goods (E.g. Coarse grain; rough cloth;
skimmed milk; etc.). Inferior goods are those
goods for which superior substitutes are available
Quantity demanded of this group of commodities
Have an INVERSE RELATIONSHIP with the income
of the consumer. E.g. A consumer starts consuming
full cream milk (normal good) in place of toned
milk (inferior good) with an increase in income
• Therefore, it is essential that business
managers must know— (a) the nature of good
they produce, (b) the nature of relationship
between the quantities demanded and
changes in consumer’s income, and (c) the
factors that could bring about changes in the
incomes of the consumers
• Advertisement: A clever and continuous
campaign and advertisement create a new
type of demand. E.g. Toilet products like
soaps, tooth pastes, creams etc
• Demand Function
• 1. Mathematical/symbolic statement of functional
relationship between the demand for a product (the
dependent variable) its determinants (the
independent variables) is called demand function
• Dx = f (Px , M, Ps ; Pc , T, A)
• Where— Dx= quantity demanded of product
• Px = the price of the product
• M = money income of the consumer
• Ps = the price of its substitute
• Pc = the price of its complementary goods
• T = consumer’s tastes and preferences
• A = advertising effect measured through the level of
advertisement expenditure
The Law of Demand
• The Law of Demand expresses the nature of
functional relationship between the price of a
commodity and its quantity demanded.
• It simply states that demand varies inversely to the
changes in price i.e. demand for a commodity
expands when price falls and contracts when price
rises.
• “Law of Demand states that people will buy more at
lower prices and buy less at higher prices, other
things remaining the same.” (Prof. Samuelson)
• It is assumed that other determinants of demand are
constant and ONLY PRICE IS THE VARIABLE AND
INFLUENCING FACTOR
Thus, the law of demand is based on the
following main assumptions
• Consumers income remain unchanged
• Tastes and preferences of consumers remain

unchanged.
• Price of substitute goods and complement

goods remain unchanged.
• The law can be explained with the help of a
demand schedule and a corresponding
demand curve.
• Demand schedule is a table or a chart which
shows the different quantities of commodity
demanded at different prices in a given period
of time.
• Demand schedule can be Individual Demand
Schedule or Market Demand Schedule
Individual Demand Schedule is a table showing different quantities of
commodity that ONE PARTICULAR CONSUMER is willing to buy at
different level of prices, during a given period of time
Demand schedule of an individual buyer
Price of sugar Rs per kg. Quantity Demanded kgs. per month
1 5
2 4
3 3
4 2
5 1
Market Demand Schedule is a table showing different quantities of a
commodity that ALL THE CONSUMERS are willing to buy at different prices,
during a given period of time.
Table 2 : Market Demand Schedule
Price of sugar Rs Quantity Demanded p.m. kgs. Market Demand
per kg. A+B
Consumer A Consumer B
1 5 6 11
2 4 5 9
3 3 4 7
4 2 3 5
5 1 2 3
Both individual and market schedules denotes an INVERSE functional
relationship between price and quantity demanded. In other words, when
price rises demand tends to fall and vice versa
• A demand curve is a graphical representation

of a demand schedule or demand function. u
A demand curve for any commodity can be
drawn by plotting each combination of price
and demand on a graph. Price (independent
variable) is taken on the Y-axis and quantity
demanded (dependent variable) on the X-axis.
Individual demand curve and market demand
curve
• Individual Demand Curve as well as Market
Demand Curve slope downward from left to
right indicating an inverse relationship
between own price of the commodity and its
quantity demanded.
• Reasons for the law of demand and
downward slope of a demand curve are
as follows:—
• 1)The Law of Diminishing Marginal Utility
• According to this law, other things being equal
as we consume a commodity, the marginal
utility derived from its successive units go on
falling
• Hence, the consumer purchases more units only
at a lower price.
• A consumer goes on purchasing a commodity
till the marginal utility of the commodity is
greater than its market price and stops when
MU = Price i.e. when consumer is at equilibrium.
• When the price of the commodity falls, MU of
the commodity becomes greater than price and
so consumer start purchasing more till again MU
= Price.
• It therefore, follows that the diminishing
marginal utility implies downward sloping
demand curve and the law of demand operates
2) Change in the number of consumers:
• Many consumers who were unable to buy a
commodity at higher price also start buying
when the price of the commodity falls. Old
customers starts buying more when price falls
3)Income effect: When price of a commodity
falls, the purchasing power (i.e. the real income)
of the consumer increases. Thus he can
purchase the same quantity with lesser money
or he can get more quantity for the same
money.
This is called income effect of the change in
price of the commodity

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Law of Demand and Elasticity of Demand

• Tastes and preferences of consumers remain

• Price of substitute goods and complement

• A demand curve is a graphical representation

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