Theory of Demand-Law of

Demand.
Introduction
 People demand goods because they satisfy
their wants.
 The want satisfying power of a commodity is
called utility.
 Utility is a subjective entity and it is an
ethically neutral concept.
What is demand?
 Demand for a commodity implies both the
desire to purchase and the ability to pay for a
good.
 Demand is determined by:
1. Tastes and preference of the consumer.
2. Income of the consumer.
3. Prices of related goods-substitutes or
complements.
The law of demand.
 Statement of the law:
‘If price of a commodity falls, the quantity
demanded of it will rise, and if price of the
commodity rises, its quantity demanded will
decline, other things remaining the same’.
 Other things implies taste and preference,
income and prices of related goods.
 Demand schedule Demand curve

14
12
10
Price (Rs.) Quantity
demanded 8 Fig.1
12 10 6
P
r 4
10 20 i 2
c
8 30 0
e
10 20 30 40 50 60
6 40
quantity
4 50

2 60
 Demand curve slopes downward to the right.
 Demand schedule or demand curve does not tell
us what the price is; it only tells how much
quantity of the good would be purchased by the
consumer at various possible prices.
 Any change occurs in any factors other than
price of commodity, the whole demand schedule
or curve will change.
 In drawing the demand curve, the consumer
takes the price of the commodity as given and
constant for him.
Demand and Quantity
demanded
 Demand represents the whole demand
schedule or curve and shows how price
of a good is related to quantity which the
consumer is willing and able to buy,
ceteris paribus.
 Quantity demanded refers to the quantity
which the consumer buys at a particular
price.
Individual consumer’s demand
and market demand.
 Market demand for a good is the total sum
of the demands of the individual consumers
who purchase the commodity in the
market.
 Market Demand Curve
Demand by A Demand by B Market Demand
12 Fig.2 12 Fig.3 12 Fig.4

10 10 10
p p
p
r 8 r 8
r 8
i i
i
c 6 6 c 6
c
e e
e 4
4 4

2 2 2

0 0 0
1 2 3 4 5 2 4 6 8 10 3 6 9 12 15
Quantity Quantity Quantity
 Whatever be the number of the
individuals in the market, their demand
curves can be added together to get a
market demand curve for the good.
 Market demand curve also slopes
downward to the right.
Why does Demand Curve
slopes downward?
 There are two reasons in case of an
individual consumer:
1. Income Effect
2. Substitution Effect
 Marshall explains the downward sloping
demand curve in his Cardinal utility
analysis with the aid of the substitution
effect alone since he ignored the income
effect of the price change.
 Hicks & Allen put forward the Indifference
Curve Analysis of consumer’s behaviour
with the aid of both income & substitution
effects.
 In case of market demand, another reason
of downward sloping demand curve is the
changes in the number of consumers as
price changes.
 Exceptions of the Law of Demand.
1. Goods having Prestige Value: Veblin Effect.
2. Giffen Goods.
 Determinants of demand.
1. Tastes & preferences of the consumers.
2. Income of the people.
3. Changes in the prices of the related goods.
4. The number of consumers in the market.
5. Changes in propensity to consume.
6. Income distribution.
7. Consumers’ expectations with regard to
future prices.
Extension and Contraction in
Demand
 Downward Fig.5
movement along the 12
demand curve as a
result of fall in price of 10
D
the good, ceteris p L
paribus, is called r
8
Extension in demand.i M
6
 Upward movement c
along the demand e
4
N
curve as a result of
D
rise in price of the 2 ’
good, ceteris paribus, is
called Contraction in 0
demand. 1 2 3 4 5

Quantity
 Changes in Demand: Increase and
Decrease
Increase in Demand
 When the changes in the factors other than
price causes a rightward shift in the whole
demand curve.
Decrease in Demand
 When the changes in the factors other than
price causes a leftward shift in the whole
demand curve.
 Thus, the factors which cause the demand
curve to shift are called ‘shift factors’.
 Increase in demand Decrease in demand

Fig.7
D Fig.6 D
D’’
D’

p p
r r
i i
c c
e e
D D
D D’’
’

0 0

Quantity Quantity
Demand Function
Individual’s demand function can be
expressed in general form as :
Qdx = f(Px, I, Pr, T)
Where Qdx= quantity demanded of X,
Px=price of X, I=income, Pr=prices of
related goods, T=tastes & preferences
 For many purposes, we write the demand
function as:
Qdx= j (Px)
Where Qdx= quantity demanded of X
Px= price of X
 The specific demand function of a linear form
is written as:
Qdx= a-bPx
Where Qdx= quantity demanded of X,
a=intercept term, b= co-efficient, Px=price of
X
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