DAVPE_XII_MICRO DEMAND & LAW OF DEMAND 1

CHAPTER: DEMAND & LAW OF DEMAND

Demand: Demand means quantity of a good a consumer or a group of consumers is/are

willing to buy at different price at a particular time. It is want backed by the
purchasing power.

Factors affecting Demand

1. Price of Commodity
The Law of Demand states that other things remaining the same (ceteris paribus)
quantity demanded of a good is inversely related to its price. The quantity demanded
for a commodity decreases as its price rises and vice-versa.
Graphically the demand curve is a downward sloping curve.
PRICE

Demand

QUANTITY

2. Prices of Related Commodities

i) Complimentary Goods are those ii) Substitute Goods are those

where one commodity is demanded only
when the second related commodity is
also available e.g. pen-ink, bread-butter,
tea-sugar etc. As the price of a
complimentary good (e.g. butter) the
demand for the good (bread) decreases.
Graphically it can be shown as
downward sloping curve.
Price of Butter
goods where one can be consumed in
place of another e.g. tea-coffee. In case
of substitute goods there is a direct
relationship between Price of the
substitute good (coffee) and the demand
for the good (tea) Graphically it can be
shown as upward sloping curve.

Price of Coffee

Demand for Complimentary Demand for Substitutes

Goods

Quantity of Bread Quantity of Tea

 DAVPE_XII_MICRO DEMAND & LAW OF DEMAND 2

Cross Demand: Cross demand indicates the relationship between the quantity
demanded of a good and the price of related goods (substitutes or complimentary goods)
other things remaining the same (ceteris paribus).
In case of complimentary goods there is an inverse or negative relationship and in case
of substitutes goods it is direct or positive.

3. Income of the Consumer

Ordinarily with an increase in income of the household or an individual, demand for

goods increase, but not always.

A) Necessities are those goods, which are essential for human existence like
food, cloth, shelter etc. These goods occupy a place of priority therefore even at a
low level of income the commodities are demanded. With an increase in Income,
demand for necessary goods may increase up to a point, but beyond that point
increase in income does not affect demand.

B) Comforts and Luxuries are those goods, which make our lives more
comfortable and enjoyable. As income increases demand for normal goods
(comforts and luxuries) also goes up.
Normal goods are the goods demand for which increases with increase in
income.

C) Inferior Goods are the goods demand for which decreases with increase
in income. These goods are rated low in consumer estimation. He consumes
these goods because he cannot afford better substitutes.
With an increase in income demand for these goods will decrease, as the
consumer will switch over to better substitutes.

Necessities Comforts & Inferior Goods

Income

Income

Income

Luxuries

Quantity Quantity Quantity

Income Demand: Income demand indicates the relationship between the quantity
demanded of a good and the income of the consumer other things remaining the same
(ceteris paribus).
In case of inferior good there is an inverse or negative relationship and in case of a
normal good it is direct or positive.
DAVPE_XII_MICRO DEMAND & LAW OF DEMAND 3

4. Tastes and Preferences of Consumers: Favourable change in tastes and

preferences would increase the demand for that good and vice-versa.

5. Size of Population: Larger the population, greater is the demand for the goods.

6. Composition of Population: More children in population would mean more demand

for goods like baby-food, toys, biscuits etc.

7. Distribution of Income: In case of equal distribution all the people are in position to
demand the goods. Therefore there is large demand for the goods. But in case of
unequal distribution majority of people get small proportion of national income; the
demand for the goods will be limited.

8. Sociological Factors like class groups, background, education, marital status, age &
place of residence (urban or rural) affect the demand for the goods.

9. Weather Conditions: Changes in the weather influences demand e.g. a sudden

rainfall in summers bring down the demand for ice.

CHANGES IN DEMAND

Demand for a good may change because of the changes in the factors affecting it e.g.
price of the good, price of the related good, income of the consumer and taste &
preference of the consumers. The change in demand is of two types:
1. Movement along the same demand curve.
2. Shift in the demand curve.

1. Movement along the same demand curve: When the price of a good change there
is upward or downward movement along the same demand curve. This is called
contraction and expansion of demand respectively.
a) Expansion of demand:
Increase in quantity demanded b) Contraction in demand:
because of fall in price is called Decrease in quantity demanded
expansion of demand. because of increase in price is
Graphically, it is shown by the called contraction in demand.
downward movement along the Graphically, it is shown by the
same demand curve. upward movement along the
same demand curve.

Contraction of
PRICE

PRICE

Expansion of Demand
Demand

QUANTITY QUANTITY
 DAVPE_XII_MICRO DEMAND & LAW OF DEMAND 4

2. Shift in the Demand Curve: When there is a change in any factor other than price, demand
curve shifts e.g. Increase in the price of substitutes may lead to rightward shift of the demand
curve. Shift in the demand curve means at a particular price more or less quantity is demanded
because of factors like price of substitute goods, income of the consumer etc. The shift in
demand is of two types:

a) Increase in Demand: Increase in b) Decrease in Demand: Decrease in

quantity demanded because of change
in the factors other than price is called
increase in demand. It means at a
particular price more quantity is
demanded. Graphically it is shown as
the rightward shift of the demand curve.
Following factors may lead to increase in
demand:
1. Increase in income of the
consumer.
2. Increase in the price of
substitutes
3. Decrease in the price of
complimentary goods
4. Favourable change in the
tastes and preferences of the
consumers
Quantity demanded because of change
in the factors other than price is called
decrease in demand. It means less
quantity of a good is demanded at a
particular price. Graphically it is shown
as the leftward shift of the demand
curve. Following factors may lead to
decrease in demand:
1. Decrease in income of the
consumer
2. Decrease in the prices of
substitutes goods
3. Increase in the price of the
complimentary goods
4. Unfavourable change in
the tastes and preferences of the
consumers

Increase in Decrease in
PRICE
PRICE

Demand Demand

D2 D1
D1
D2

QUANTITY QUANTITY

Individual Demand: Individual demand means quantity of a good an individual

consumer is willing to buy at different price at a particular time.
DAVPE_XII_MICRO DEMAND & LAW OF DEMAND 5

Market Demand: Market Demand means quantity of a good all consumers in a market
together are willing to buy at different price at a particular time. It is obtained by
adding up quantity demanded of all the consumers. Graphically it is the horizontal
summation of all individual demand curves.
DAVPE_XII_MICRO DEMAND & LAW OF DEMAND 6

WHY DEMAND CURVE SLOPES DOWNWARD? OR WHY DOES LAW OF DEMAND OPERATE?
TRADITIONAL APPROACH
1. Law of Diminishing Marginal Utility:
The Law of Diminishing Marginal Utility states that as the consumer consume more
and more units of a commodity the marginal utility of the commodity falls. It means as
the consumers consume more quantity of a good he cares less for successive units.
A consumer equates marginal utility with price. As the additional unit gives him less
satisfaction, he will buy more of a good only at a low price.
2. Change in the Number of Consumers:
As the price of good decreases there is an increase in number of consumers as more
people can afford to buy the goods. This would lead to increase in quantity
demanded. Similarly as the price increases there is a decrease in the number of
consumers as fewer people can afford to buy the good. It would result in decrease in
quantity demanded.
3. Diverse Uses of a Commodity:
There are goods that can be put to a number of uses e.g. electricity, milk, potato etc.
If there is an increase in price we cut down some of the uses leading to only
necessary uses. This results in decrease in quantity demanded.
In case of decrease in price we extend consumption to more uses. So this would lead
to increase in quantity demanded.
MODERN APPROACH
1. Income Effect:
Any change in price of a good affects the purchasing power or real income of a
household. With a fall in price the real income of household increases leading to
increase in quantity demanded of the good. Similarly a rise in price of the good
decreases the real income leading to decrease in quantity demanded.
2. Substitution Effect:
When the price of a commodity rises the substitutes become relatively cheaper, so
the consumer purchases more of substitutes and therefore less of the main good,
e.g. if there is increase in the price of coffee, tea will be relatively cheaper. People will
demand less of coffee as they consume more of tea.
Opposite would be the effect of a decrease in the price of the good. The substitutes
will now be relatively costlier. We will consume less of substitutes and therefore more
of the main good.
Exceptions to Law of Demand

Giffen Goods:
Giffen goods are a special type of inferior goods in which quantity demanded of a good is
directly proportional to its price. A rise in the price leads to an increase in demand for the
good and with a decrease in price the demand also decrease.
If there is an increase in price of the good (e.g. Bajra) the real income of the consumer
falls. As the consumer falls he would consume more of the inferior good (e.g. Bajra) and
less of normal good or superior good (e.g. wheat). This means income effect is negative
in case of inferior goods. Giffen goods are those inferior goods where the negative
income effect is stronger than positive substitution effect.