Course Title: Fundamentals of Agricultural Economics

Course Code: AES-121

Credit Hours: 2 (2+0)
Department of Agricultural Economics and Statistics

UNIT IV: Demand (Part I)

DEMAND

Demand in economics means a desire to possess a good supported by willingness and

ability to pay for it. If you have a desire to buy a certain commodity, say, a tractor, but do not
have the adequate means to pay for it, it will simply be a wish, a desire or a want and not
demand. Demand is an effective desire, i.e., a desire which is backed by willingness and
ability to pay for a commodity in order to obtain it.
Demand means the various quantities of a good that would be purchased per unit of
time at different prices in a given market.
There are thus three main characteristics of demand in economics.
i. Willingness and ability to pay. Demand is the amount of a commodity for which a
consumer has the willingness and also the ability to buy.
ii. Demand is always at a price. If we talk of demand without reference to price, it will be
meaningless. The consumer must know both the price and the commodity. He will then be
able to tell the quantity demanded by him.
iii. Demand is always per unit of time. The time may be a day, a week, a month, or a year.

Individual's Demand for a Commodity:

The individual’s demand for a commodity is the amount of a commodity which the
consumer is willing to purchase at any given price over a specified period of time, ceteris
paribus.
The Market Demand for a Commodity:
The market demand for a commodity is obtained by adding up the total quantity
demanded at various prices by all the individuals over a specified period of time in the
market. It is described as the horizontal summation of the individuals demand for a
commodity at various possible prices in market.

Kinds of Demand:
1. Price Demand: It refers to various quantities of a good or service that a consumer
would be willing to purchase at all possible prices in a given market at a given point
in time, ceteris paribus.
2. Income Demand: It refers to various quantities of a good or service that a consumer
would be willing to purchase at different levels of income, ceteris paribus.
3. Cross Demand: It refers to various quantities of a good or service that a consumer
would be willing to purchase not due to changes in the price of the commodity under
consideration but due to changes in the price of related commodity. For example:
Demand for tea is more not because price of tea has fallen but because price of coffee
has risen. Thus demand for substitutes take the form of cross demand.
Derived demand
Derived demand refers to demand for goods which are needed for further production.
It is the demand for producer’s goods like industrial raw material, machine tools and
equipments.
Autonomous demand
Autonomous demand is independent of the other product or main product. It’s not
linked or tie-up with the other goods or commodity.eg: food articles, clothes.

Demand Schedule
Demand schedule is a tabular representation of the quantity demanded of a
commodity at various prices. For instance, there are four buyers of apples in the market,
namely A, B, C and D.
Demand schedule for apples

The demand by buyers A, B, C and D are individual demands. Total demand by the four
buyers is market demand. Therefore, the total market demand is derived by summing up the
quantity demanded of a commodity by all buyers at each price.

Demand Curve
Demand curve is a diagrammatic representation of demand schedule. It is a graphical
representation of price- quantity relationship. Individual demand curve shows the highest
price which an individual is willing to pay for different quantities of the commodity. While,
each point on the market demand curve depicts the maximum quantity of the commodity
which all consumers taken together would be willing to buy at each level of price, under
given demand conditions.

Law of Demand
The law of demand explains the functional relationship between the quantity
demanded of a commodity and its unit price, i.e., a rise in the price of a commodity or service
is followed by a reduction in demanded and a fall in the price is followed by an extension in
demand, if other conditions remain constant. Demand varies inversely with price.
Demand curve has a negative slope, i.e., it slopes downwards from left to right depicting that
with increase in price, quantity demanded falls and vice versa.
Exceptions to Law of Demand
Unlike other laws, law of demand also has few exceptions i.e. there is no inverse
relationship between price and quantity demanded for these goods. Few of them are as
follows:

 Giffen goods: These are a type of inferior goods whose quantity demanded decreases
with decrease in price of the good. This exception to the law of demand was pointed
out by Sir Robert Giffen who observed that when the prices of bread/potatoes
increased, the low-paid British workers, in the early 19th century, purchased more of
bread/potatoes and not less of them. This is contrary to the law of demand. The reason
for this is that these British workers consumed a diet of mainly bread/potatoes and
when their prices went up they were compelled to spend more on given quantities of
bread/potatoes. Therefore, they could not afford to purchase as much meat as before.
Hence, after the name of Robert Giffen, such goods (bread/potatoes) are called Giffen
goods.
 Commodities which are regarded as status symbols (Prestigious Goods):
Expensive commodities like jewellery, AC cars, etc., are used to define status and to
display one’s wealth. These goods doesn’t follow the law of demand and quantity
demanded increases with price rise as more expensive these goods become, more will
be their worth as a status symbol.
According to Thorstein Veblen, some consumers measure the utility of a commodity
entirely based on its price i.e., for them, the greater the price of a commodity, the greater is its
utility for them. For example, diamonds are considered as prestigious good in the society.
However, the consumer will buy less of the diamonds, even if its price is low, because with
the fall in price its prestige value will go down. Similarly, at higher price, quantity demanded
of diamonds by a consumer will rise.
 Expectation of change in the price of the goods in future: if a consumer expects
the price of a good to increase in future, it may start accumulating greater amount of
the goods for future consumption even at the presently increased price. The same
holds true vice versa

Movement along the Demand Curve

Movement along the demand curve refers to change in the quantity demanded due to
change in price of the good. In this case, the demand curve remains unchanged. When, as a
result of change in price, the quantity demanded increases or decreases, it is technically called
extension and contraction in demand.
Extension of demand means buying more quantity of commodity at a lower price,
while contraction of demand indicates buying less at a higher price. The terms extension and
contraction refer to the movement on the same demand curve. The downward movement is
extension while the upward movement is contraction. Extension and contraction of demand
represent the ‘change in quantity demanded’.

Shifts in the demand curve

A shift of the demand curve is referred to as a change in demand due any factor other
than price. A demand curve will shift if any of these occurs:
1. Change in the price of other goods (complements and substitutes); leading to increase/
decrease of real income
2. Change in the income level
3. Change in consumers‟ tastes and preferences
Each of these factors tends the demand curve to shift downwards to the left or
upwards to the right. While downward shift signifies decrease in demand, an upward shift of
the demand curve shows an increase in the demand.
Increase in demand means more demand at same price or same demand at higher
price. On the other hand, decrease in demand means less demand at the same price or same
demand at lower price. Increase or d ecrease denote ‘change in demand’

Determinants of demand
Various factors affect the quantity demanded by a consumer of a good or service. The
key determinants of demand are as follows
1. Price of the good: This is the most important determinant of demand. The relationship
between price of the good and quantity demanded is generally inverse.
2. Price of related goods:
 Substitutes: If the price of a substitute goes down than the quantity demanded of the
good also goes down and vice versa.
 Complementary goods: If the price of gasoline goes up the quantity demanded of
automobiles will go down. Thus the price of complements have an inverse
relationship with the demand of a good
3. Income: Higher the income of the consumer the more will be quantity demanded of the
good. The only exception to this will be inferior goods whose demand decreases with an
increase in income level.
4. Individual tastes and preferences: a preference for a particular good may affect the
consumer’s choice and he / she may continue to demand the same even in rising prices
scenario
5. Expectations about future prices & income: If the consumer expects prices to rise in
future he / she may continue to demand higher quantities even in a rising price scenario and
vice versa.
6. Season: Demand for eggs decreases in summer season while increases in winter season.
7. Habits: Large number of smokers in a region influence the demand for tobacco and its
products.
8. Region: In high altitude regions demand for wine, woollen clothing, meat, etc., would be
more.
9. Advertisement: Advertisement impact positively on the demand of a commodity.