Theory of Demand

If necessity is the mother of invention, then demand is the mother of production.

Baba Farid College

Desire :- A wish to have a commodity. Want :- A desire would become want if a person is in a position to satisfy it.
Demand :- Desire becomes demand when it is backed by ability and willingness to pay for the commodity.
DESIRE WANT
DEMAND
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Definition of Demand

Hibdon

Demand means the various quantities of a good that would be purchased per time period at different prices in a given market

Types of Demand
Substitute and Complementary Demand Composite Demand

Direct and Indirect Demand

Alternative Demand

Factors Affecting Demand

Price of Related Goods: Income of the Consumer: Distribution of Wealth: Tastes and preferences: Government Policy: State of Business: Population Growth: Selling Costs: Expectation of Future changes in Price : Taxation:
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Demand Function
The conditions of demand for a product in a market can be summarized as follows: D = f (Pn, PnPn-1, Y, T, P, E) Where: Pn = Price of the good itself PnPn-1 = Prices of other goods e.g. prices of Substitutes and Complements Y = Consumer incomes including both the level and distribution of income T = Tastes and preferences of consumers P = The level and age-structure of the population E = Price expectations of consumers for future time periods
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Demand Schedule and Curve

Demand Schedule: A demand schedule is a tabular presentation of the amount of goods consumers are willing and able to buy at different level of prices over a given period of time. 1. Individual Demand Schedule 2. Market Demand Schedule Demand Curve: The graphical representation of demand schedule is the demand curve. The demand curve is a downward sloping curve from left to right. This characteristic of the demand curve is due to the inverse relationship between price and quantity demanded.

Demand Schedule

Individual Demand Curve

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Market Demand Curve

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Demand
Law of Demand

The law of demand is normally depicted as an inverse relation of quantity demanded and price: the higher the price of the product, the less the consumer will demand, ("all other things being equal").

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Assumptions
There Should be no change in the income of the consumer No change in tastes and preferences Price of related commodities should remain unchanged No Change in Size of population The commodity in question should be a normal one There should be no expectation of rise in price of related goods

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Explanation of The Law

A Demand Table
Price per ice cream (in rupees) Price per Ice Ice Cream Cream Rs. demanded per week

6.00 5.00 4.00 3.50 3.00 2.00 1.00

A Demand Curve
E
D C Demand for Ice Cream B A

A B C D E

0.50 1.00 2.00 3.00 4.00

9 8 6 4 2

.50

1 2 3 4 5 6 7 8 9 10 Quantity of Ice Cream demanded (per week)

Why Demand Curve Slopes Downward ?

Law of Diminishing Marginal Utility. Substitution Effect Income Effect Change in number of Consumer Change in the number of uses Psychological Effect

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IMPORTANCE OF LAW

Importance in price determination. Importance for consumers Importance for Finance minister Importance for Planners Need for Subsidies

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Exceptions to the Law of Demand

Luxury goods The demand for the product is a direct function of its price. It comprises of luxury items. They are called Veblen goods. Eg. Expensive perfumes, designer clothes etc.

Future expectation of price Ignorance War or Emergency Necessities of Life

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Change in Demand
Change in Price :Extension in Demand Contraction in Demand Change in factors other than price Increase in Demand Decrease in Demand

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Thank You !
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