DEMAND Demand can be defined as the total amount of goods required and able to be purchased by consumers at various price

levels in a particular period of time. In economics, demand refers to effective demand which implies 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 Demand means effective desire or want for a commodity which is backed up by the ability (purchasing power) and willingness to pay for it. Demand = Desire + Ability to pay + Willingness to spend Demand is a relative concept not absolute It is related to price , time and place. The demand for a commodity refers to the amount of it which will be bought per unit of time at a particular price ( in a particular market). Essentials of Demand An Effective Need, A Specific Price, A Specific Time, A Specific Place. ESSENTIALS OF DEMAND 1. An Effective Need: Effective need entails that there should be a need supported by the capacity and readiness to shell out. Hence, there are three basics of an effective need: a. The individual should have a need to acquire a specific product. b. He should have sufficient funds to pay for that product. c. He should be willing to part with these resources for that commodity. 2. A Specific Price: A proclamation concerning the demand of a product without mentioning its price is worthless. For example, to state that the demand of cars is 10,000 is worthless, unless expressed that the demand of cars is 10,000 at a price of Rs. 4,00,000 each. 3. A Specific Time: Demand must be assigned specific time. For example, it is an incomplete proclamation to state that the demand of air conditioners is 4,000 at the price of Rs. 12,800 each. The statement should be altered to say that the demand of air conditioners during summer is 4,000 at the price of Rs. 12,800 each. 4. A Specific Place: The demand must relate to a specific market as well. For example, every year in the town of Dehradun, the demand for school bags is 4,000 at a price of Rs.200. Hence, the demand of a product is an effective need, which demonstrates the quantity of a product that will be bought at a specific price in a specific market at some stage in a specific period. Nevertheless, the significance of a specific market or place is not as significant as the price and time period for which demand is being measured. DEMAND SCHEDULE : A tabular statement of price-quantity relationship is known as the demand schedule. It narrates how much amount of a commodity is demanded by an individual or a group of individuals in the market at alternative prices, per unit of time. There are, thus, two types of demand schedules : (i) the individual demand schedule, and (ii) the market demand schedule.

INDIVIDUAL DEMAND SCHEDULE A tabular list showing the quantities of a commodity that will be purchased by an individual at various prices in a given period of time (say per day, per week, per month or per annum) is referred to as an individual demand schedule. Price of X in Rs. (per kg.) Quantity Demanded of X per week (in Kg.) 30 2 25 4 20 6 15 10 10 16 This illustrates a hypothetical (purely imaginary) demand schedule of an individual consumer Mr A for commodity X. CHARACTERISTICS OF DEMAND SCHEDULE 1) The demand schedule does not indicate any change in demand by the individual concerned, but merely expresses his present behaviour in purchasing the commodity at alternative prices. 2) It shows only the variation in demand at varying prices. 3) It seeks to illustrate the principle that more of a commodity is demanded at a lower price than at a higher one. In fact, most of the demand schedules show an inverse relationship between price and quantity demanded. MARKET DEMAND SCHEDULE It is a tabular statement narrating the quantities of a commodity demanded in aggregate by all the buyers in the market at different prices in a given period of time. A market demand schedule, thus, represents the total market demand at various prices. Theoretically, the demand schedules of all individual consumers of a commodity can be compiled and combined to form a composite demand schedule, representing the total demand for the commodity at various alternative prices. The derivation of market demand from individual demand schedules is illustrated in the table given below. Here it is assumed that the market is composed only of three buyers. Price in Rupees (per unit) Units of Commodity X per day by Individuals A+ 1 2 3 5 B+ 3 4 5 9 C+ 3 5 7 10 Demanded Quantity Demanded in the market for X = 7 11 15 24

4 3 2 1

Apparently, the market demand schedule is constructed by the horizontal additions of quantities at various prices shown by the individual demand schedules. It follows that like an individual demand schedule, the market demand schedule also depicts an inverse relationship between the price and quantity demanded. THE DEMAND CURVE :

A demand curve is a graphical presentation of a demand schedule. When price-quantity information of a demand schedule is plotted on a graph, a demand curve is drawn. Demand curve thus depicts the picture of the data contained in the demand schedule. Conventionally, a demand curve is drawn by representing the price variable on the Y-axis and the demand variable on the X-axis. Fig. given below illustrates the demand curve based on the data contained in Table. In this figure, the quantity demanded is measured on the horizontal axis (X-axis) and the price per kg. is measured on the vertical axis (Y-axis). Corresponding to the price-quantity relations given in the demand schedule, various points like a, b, c, d and e are obtained on the graph. These points are joined and the smooth curve DD is drawn, which is called the demand curve. The demand curve has a negative slope. It slopes downwards from left to right, representing an inverse relationship between price and demand.

Individual Demand Curve The figure, given above, represents an individual demand curve. Likewise, by plotting the market demand schedule graphically, the market demand curve may be drawn.

DERIVATION OF MARKET DEMAND CURVE Market demand curve is derived by the horizontal summation of individual demand curves for a given commodity. Figure given on the next next illustrates this:

Derivation of Market Demand Curve It may be observed that the slope of the market demand curve is an average of the slopes of individual demand curves. Essentially, the market demand curve too has a downward slope indicating an inverse price-quantity relationship, i.e. quantity demand rises when the price falls, and vice-versa.

Types of demand Price Demand Income Demand Cross Demand Joint and complementary demand Composite demand Direct an derived demand Individual demand & Market demand Demand for capital goods and demand for consumer goods Autonomous demand & Derived demand Direct & indirect demand Demand for durable & non-durable goods 1. Price Demand: Price demand shows the relationship between price of the goods and quantity demanded. If the price of goods is higher consumers will purchase less quantity of goods and if the price is lower, consumers will purchase more quantity of goods. It means there is inverse relationship between price and quantity demanded. 2. Income Demand: Other thing remaining the same, income demand indicates the relationship between income of the consumer and quantity of demanded commodity. In others words, it relates to the various quantities of a commodity that will be bought by the consumer at various levels of income. Here, demand of goods depends upon the income of consumer. Generally, if income of consumerincrease the demand of goods also increases and vice-versa. Incase of normal goods, there is positive relationship between income and quantity demanded. But in case of inferior goods there is inverse relationship between income andquantitydemanded. 2.CrossDemand

It is a situation; where change in the price of one-commodityresults in the change of the demand of other commodity. In this way, cross demand indicates how the demand for a commodities affected by changes in the price of related goods. Cross demand function will be as under:

Dx=f(Py) Dx=DemandforX commodity Py=Price ofY commodity Related goods may substitute or complement. Let us understand cross demand in the case of these two type ofgoodsseparately. a. Demand for Substitute or Competitive Commodities:- Commodities which can be used in place of other commodities are known as substitute goods, such as tea and coffee, bread and rice etc. With the

rise in price of commodity A the demand for it decreases and the demand of othercommodity B increases. These commodities are called substitutes or competitive goods. For example, the increase in demand for coffee with the rise in price of tea or increase in the demand for rice with the rise in price of wheat. b. Demand for complementary commodities: Commodities which are required jointly, are termed as complementary goods, such as simcard and mobile set, pen and paper, car and petrol, etc. These goods have joint demands. In case of complementary goods, fall in the price of commodityA brings a rise in the demand for commodity B. They are called as complementary goods. Their demand curve will be downward slopping curve. For example, when the price of mobile set falls, demand for simcard increases.

LAW OF DEMAND We have considered various factors that fashion the demand for a commodity. As explained the first and the most important factor that determines the demand of a commodity is its price. If all other factors (noted above) remain constant, it may be said that as the price of a commodity increases, its demand decreases and as the price of a commodity decreases its demand increases. This is a general behaviour observed in a market. This gives us the 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. The law of demand thus merely states that the price and demand of a commodity are inversely related, provided all other things remain unchanged or as economists put it ceteris paribus. Assumptions of the Law of Demand 1. Income level should remain constant: The law of demand operates only when the income level of the buyer remains constant. If the income rises while the price of the commodity does not fall, it is quite likely that the demand may increase. Therefore, stability in income is an essential condition for the operation of the law of demand. 2. Tastes of the buyer should not alter: Any alteration that takes place in the taste of the consumers will in all probability thwart the working of the law of demand. It often happens that when tastes or fashions change people revise their preferences. As a consequence, the demand for the commodity which goes down the preference scale of the consumers declines even though its price does not change. 3. Prices of other goods should remain constant: Changes in the prices of other goods often impinge on the demand for a particular commodity. If prices of commodities for which demand is inelastic rise, the demand for a commodity other than these in all probability will decline even though there may not be any change in its price. Therefore, for the law of demand to operate it is imperative that prices of other goods do not change. 4. No new substitutes for the commodity: If some new substitutes for a commodity appear in the market, its demand generally declines. This is quite natural, because with the availability of new substitutes some buyers will be attracted towards new products and the demand for the older product will fall even though price remains unchanged. Hence, the law of demand operates only when the market for a commodity is not threatened by new substitutes. 5. Price rise in future should not be expected: If the buyers of a commodity expect that its price will rise in future they raise its demand in response to an initial price rise. This behaviour of buyers violates the law of demand. Therefore, for the operation of the law of demand it is necessary that there must not be any expectations of price rise in the future.

6. Advertising expenditure should remain the same: If the advertising expenditure of a firm increases, the consumers may be tempted to buy more of its product. Therefore, the advertising expenditure on the good under consideration is taken to be constant. Desire of a person to purchase a commodity is not his demand. He must possess adequate resources and must be willing to spend his resources to buy the commodity. Besides, the quantity demanded has always a reference to a price and a unity of time. The quantity demanded referred to per unit of time makes it a flow concept. There may be some problems in applying this flow concept to the demand for durable consumer goods like house, car, refrigerators, etc. However, this apparent difficulty may be resolved by considering the total service of a durable good is not consumed at one point of time and its utility is not exhausted in a single use. The service of a durable good is consumed over time. At a time, only a part of its service is consumed. Therefore, the demand for the services of durable consumer goods may also be visualised as a demand per unit of time. However, this problem does not arise when the concept of demand is applied to total demand for a consumer durable. Thus, the demand for consumer goods also is a flow concept. Why does the demand curve slope downwards As Fig. 2.1 shows, demand curve slopes downward to the right. The downward slope of the demand curve reads the law of demand i.e. the quantity of a commodity demanded per unit of time increases as its price falls and vice versa. The reasons behind the law of demand i.e. inverse relationship between price and quantity demanded are following: _ 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. _ Income Effect: As a result of fall in the price of a commodity, the real income of its consumer increase at least in terms of this commodity. In other words, his/her purchasing power increases since he is required to pay less for the same quantity. The increase in real income (or purchasing power) encourages demand for the commodity with reduced price. The increase in demand on account of increase in real income is known as income effect. It should however be noted that the income effect is negative in case of inferior goods. In case, price of an inferior good accounting for a considerable proportion of the total consumption expenditure falls substantially, consumers real income increases: they become relatively richer. Consequently, they substitute the superior good for the inferior ones, i.e., they reduce the consumption of inferior goods. Thus, the income effect on the demand for inferior goods becomes negative. Managerial Economics 33 _ Diminishing Marginal Utility: Diminishing marginal utility as well is to be held responsible for the rise in demand for a product when its price declines. When an individual purchases a product, he swaps his money revenue with the product in order to increase his satisfaction. He continues to purchase goods and services as long as the marginal utility of money (MUm) is lesser than the marginal utility of the commodity (MUC). Given the price of a commodity, he modifies his purchase so that MUC = MUm. This plan works well under both Marshallian assumption of constant MUm as well as Hicksian assumption of diminishing MUm. When price falls, (MUm = Pc) < MUC. Thus, equilibrium state is upset. To get back his equilibrium state, i.e., MUm = PC, = MUC, he buys more quantities of the commodity. For, when the supply of a commodity rises, its

MU falls and once again MUm = MUC. For this reason, demand for a product rises when its price falls. Exceptions to the Law of Demand: Under certain circumstances the inverse relationship between price and demand does not hold good. These are know as the exceptions to the law of demand. Some of the important exceptions are : (a)Giffen Goods: These are special type of inferior goods. An exception to this law is the typical case of Giffen goods named after Sir Robert Giffen (1837-1910). 'Giffen goods' does not represent any particular commodity. It could be any low-grade commodity which is cheap as compared to its superior alternatives, consumed generally by the lower income group families as an important consumer good. A rise in the price of giffen goods leads to a rise in their demand and viceversa. E.g. A poor household who spends a major portion of his money on an inferior goods like coarse grain, say bajra. If the price of bajra goes up the household will be forced to maintain the earlier consumption level of consumption of this good, he will be left with lesser income to spend on other commodities that he used to consume earlier. The household will be forced to cut down the consumption of other commodities still further to compensate itself for the loss of consumption of bajra. Conversely, a fall in price of bajra will enable the household to release more money for other commodities and may substitute consumption of bajra by consumption of other superior commodities. The bajra will be considered as gifen goods to which law demand does not apply. (b)Conspicuous necessities: Another exception occur in case of such commodities as though their constant use is because of fashion or prestige value attached to them have become necessity of life. Eventhough their price rises continuously their demand does show any tendency to fall. Conspicuous consumption: A few goods like diamond etc. purchased by rich persons of the society because the prices of those goods are so high that they are beyond the reach of the common man. More of these commodities is demanded when their prices go up very high. The law of demand does not apply. (d)Future changes in price: Household also act as speculators when the price are rising, the house hold tend to buy larger quantity of the commodity out of apprehension that the prices may go up further. Likewise when prices are expected to fall further a reduced price may not be sufficient incentive to induce the household to buy more. E.g. share market. (e)Emergencies: Emergencies like war, famine, flood etc. may negate the operations of lay of demand. At such time the household may behave in a abnormal way. Household accentuate scarcity and induce further price rises by making increase purchases even at higher prices during such period. During depression, on the other hand, no amount of falling price is sufficient inducement for consumer to demand more. (f)Change in fashion: A change fashion entails effect demand for a commodity. (g)Ignorance: Consumers ignorance is another factor that at times induces him to buy more of commodity at a higher price. This happens when the consumer thinks that a high price commodity is better in quality than low price commodity.

Problem Questions
1. If price of good X increases by 10% and quantity decreases by 30%, what is the price elasticity of demand for the good? 2. The demand function of good M is Qd = 100 2P. Calculate the price elasticity of demand for M if price increases from RM2 per unit to RM3 per unit. 3. If price elasticity of demand is 2, price increase of X from RM10 per unit to RM12 per unit will result in the decrease of quantity demanded from 20 units to _________ units. 4. The table below shows the relationship between income level and quantity demanded for good R, good S and good T. Consumer s Income Good R Good S Good T RM1000 20 20 50 RM2000 40 10 50 (a) Calculate the income elasticity of demand for good R, good S and good T. (b) State the type of goods, based on the value of income elasticity obtained in (a). 5. The table below shows the relationship between good A and quantity demanded for good K, good L and good M. Price of Good A Quantity Demanded (Units) (RM) K L M 2 10 20 40 3 5 30 40 (a) Calculate the cross elasticity between good A with good K, good L and good M. (b) State the relationship between good K and A; L and A; M and A. 6. If price increases from RM20 per unit to RM30 per unit, and quantity supplied increases from 120 to 140 units, calculate the elasticity of supply.