Theory of Demand

Theory of Demand
L.B.Deshmukh
Demand
The term demand is different from desire, want, will or wish. Demand refers to three things: Desire for a commodity Sufficient money to purchase the commodity, rather the ability to pay Willingness to spend money to acquire that commodity
ESSENTIALS OF DEMAND
1. 2. 3. 4. An Effective Need A Specific Price A Specific Time A Specific Place
Determinants of Demand
1. Price of the given commodity, prices of other substitutes and/or complements, future expected trend in prices etc. 2. General Price level existing in the country inflation or deflation. 3. Level of income and living standards of the people. 4. Size, rate of growth and composition of population. 5. Tastes, preferences, customs, habits, fashion and styles 6. Publicity, propaganda and advertisements. 7. Quality of the product. 8. Profit margin kept by the sellers. 9. Weather and climatic conditions. 10. Conditions of trade boom or prosperity in the economy. 11. Terms & conditions of trade. 12. Governments policy taxation, liberal or restrictive measures. 13. Level of savings & pattern of consumer expenditure. 14. Total supply of money circulation and liquidity preference of the people. 15. Improvements in educational standards etc.
LAW OF DEMAND
The demand for a commodity increases with a fall in its price and decreases with a rise in its price, other things remaining the same.
Assumptions of the Law of Demand

Income level should remain constant Tastes of the buyer should not alter Prices of other goods should remain constant No new substitutes for the commodity Price rise in future should not be expected Advertising expenditure should remain the same
Demand Schedule
A demand schedule is a series of quantities, which consumers would like to buy per unit of time at different prices
Demand Schedule for Tea
Demand Curve
Why does the demand curve slope downwards?

Substitution Effect: When the price of a commodity falls it becomes relatively cheaper if price of all other related goods, particularly of substitutes, remain constant. In other words, substitute goods become relatively costlier. Since consumers substitute cheaper goods for costlier ones, demand for the relatively cheaper commodity increases. The increase in demand on account of this factor is known as substitution effect.
Why does the demand curve slope downwards?
Income Effect Diminishing Marginal Utility
Exceptions to the Law of Demand

Giffens Paradox Veblens effect Fear of shortage Fear of future rise in price Speculation Conspicuous necessaries Emergencies Ignorance Necessaries
Giffens Paradox
A paradox is a foolish or absurd statement, but it will be true. The Giffens paradox holds that Demand is strengthened with a rise in price or weakened with a fall in price. He gave the example of poor people of Ireland who were using potatoes and meat as daily food articles. When price of potatoes declined, customers instead of buying greater quantities of potatoes started buying more of meat (superior goods). Thus, the demand for potatoes declined in spite of fall in its price.
Veblens effect
Veblens effect states that demand for status symbol goods would go up with a arise in price and vice-versa. commodities having snob appeal
Fear of shortage
When serious shortages are anticipated by the people, (e.g., during the war period) they purchase more goods at present even though the current price is higher.
Fear of future rise in price

If people expect future hike in prices, they buy more even though they feel that current prices are higher. Otherwise, they have to pay a still high price for the same product.
Speculation
Speculation implies purchase or sale of an asset with the hope that its price may rise or fall and make speculative profit. Normally speculation is witnessed in the stock exchange market. People buy more shares only when their prices show a rising trend. This is because they get more profit, if they sell their shares when the prices actually rise. Thus, speculation becomes an exception to the law of demand.
Conspicuous necessaries
Conspicuous necessaries are those items which are purchased by consumers even though their prices are rising on account of their special uses in our modern style of life. In case of articles like wrist watches, scooters, motorcycles, tape recorders, mobile phones etc customers buy more in spite of their high prices.
Emergencies
During emergency periods like war, famine, floods cyclone, accidents etc., people buy certain articles even though the prices are quite high.
Ignorance
Sometimes people may not be aware of the prices prevailing in the market. Hence, they buy more at higher prices because of sheer ignorance.
Necessaries
Necessaries are those items which are purchased by consumers what ever may be the price. Consumers would buy more necessaries in spite of their higher prices.
The Market Demand Curve

The quantity of a commodity which an individual is willing to buy at a particular price of the commodity during a specific time period, given his money income, his taste and prices of substitutes and complements, is known as individual demand for a commodity. The total quantity which all the consumers of a commodity are willing to buy at a given price per time unit, other things remaining the same, is known as market demand for the commodity.
Price and Quantity Demanded
Demand Function
The functional relationship between the demand for a commodity and its various determinants may be expressed mathematically in terms of a demand function, thus: Dx = f (Px, Py, M, T, A, U) where, Dx = Quantity demanded for commodity X. f = functional relation. Px = The price of commodity X. Py = The price of substitutes and complementary goods. M = The money income of the consumer. T = The taste of the consumer. A = The advertisement effects. U = Unknown variables or influences.
Shift in Demand Curve
Reasons for Shift in Demand Curve

Fall in the consumers income so that he can buy only OQ1 of X at price OP2it is income effect. Price of Xs substitute falls so that the consumers find it beneficial to substitute Q1Q2 of X with its substituteit is substitution effect. Advertisement made by the producer of the substitute, changes consumers taste or preference against commodity X so much that they replace Q1Q2 of X with its substitute, again a substitution effect. Price of complement of X increases so much that they can now afford only OQX of X Also for such reasons as commodity X is going out of fashion; its quality has deteriorated; consumers technology has so changed that only OQ1 of X can be used and due to change in season if commodity X has only seasonal use.
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Theory of Demand

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Theory of Demand

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Theory of Demand

Assumptions of the Law of Demand

Demand Schedule for Tea

Why does the demand curve slope downwards?

Why does the demand curve slope downwards?

Income Effect Diminishing Marginal Utility

Exceptions to the Law of Demand

Fear of future rise in price

The Market Demand Curve

Price and Quantity Demanded

Shift in Demand Curve

Reasons for Shift in Demand Curve

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