Unit –II Theory of Demand

1.Demand is a quantity of a commodity which a consumer wishes to purchase at a given

level of price and during a specific period of time.
In other words, demand for a commodity refers to the desire to buy a commodity backed with
sufficient purchasing power and the willingness to spend.
2. Desire is just a wish for a commodity and a person can desire a commodity even if he does
not have the capacity to buy it from the market whereas demand is desire backed by
purchasing power that is to say whatever an individual is willing to buy from the market in a
given period of time at a given price. A poor person can desire to own a car but that will not
become a demand because he does not have the purchasing power to buy a car from the
market.

3. Factors affecting personal (individual) demand:

(a) Price of the commodity:

Inverse relationship exists between price of the commodity and demand of that commodity.
It means with the rise in price of the commodity the demand of that commodity falls and vice-
versa.
(b) Price of related goods: It may be of two types:

1. Substitute goods
2. Complementary goods

Let us discuss it in detail,

(i) Substitute Goods: Substitute goods are those goods which can be used in place of another
goods and give the same satisfaction to a consumer.

There would always exist a direct relationship between the price of substitute goods and demand
for given commodity.
It means with an increase in price of substitute goods, the demand for given commodity also
rises and vice-versa. For example, Pepsi and Coke.

(ii) Complementary Goods: Complementary goods are those which are useless in the absence
of another goods and which are demanded jointly.

There would always exist an inverse relationship between price of complementary goods and
demand for given commodity.
It means, with a rise in price of complementary goods, the demand for given commodity falls
and vice-versa. For example pen and refill.
 1. (c) Income of a Consumer: There are two types of goods:

For Normal Commodity: For normal commodity, with a rise in income, the demand of the
commodity also rises and vice-versa. Shortly, direct relationship exists between income of a
consumer and demand of normal commodity.
2. For Inferior Goods: For inferior goods, with a rise in income, the demand of the commodity
falls and vice-versa.
Shortly, inverse relationship exists between income of a consumer and demand of inferior
goods.

(d) Taste and Preferences of the Consumer: Tastes, preferences and habits of a consumer also
influence its demand for a commodity.

For example, if Black and White TV set goes out of fashion, its demand will fall. Similarly, a
student may demand more of books and pens than utensils of his preferences and taste.
Miscellaneous: Some of the other factors affecting the demand of a consumer are: Change in
weather, change in number of family members, expected change in future price, etc.

4. Market demand refers to the quantity of a commodity that all the consumers are willing and
able to buy, at a particular price during a given period of time.

5. Factors affecting Market demand:

 1. Price of the commodity
2. Price of related commodity
3. Income of a consumer
4. Taste and preference of a consumer
5. Miscellaneous
6. Population Size: Demand increases with the increase in population and decreases with the
decrease in population. This is because with the increase (or decrease) in population size,
the number of buyers of the product tends to increase (or decrease). Composition of
population also affects demand. If composition of population changes, namely, female
population increases, demand for goods meant for women will go up.
7. Distribution of Income: Market demand is also influenced by change in distribution of
income in the society. If income is not equally distributed, there will be less demand. If
income is equally distributed, there will be more demand.

6. Demand function shows the relationship between quantity demanded for a particular
commodity and the factors that are influencing it.

7. Individual demand function refers to the functional relationship between individual demand
and the factors affecting the individual demand.

8. Market demand function refers to the functional relationship between market demand and
the factors affecting the market demand.

9. Demand Schedule is a table showing different quantities being demanded of a given

commodity at various levels of price. It shows the inverse relationship between price of the
commodity and its quantity demanded. It is of two types:

1. Individual Demand Schedule

2. Market Demand Schedule

10. Individual demand schedule refers to a table that shows various quantities of a commodity
that a consumer is willing to purchase at different prices during a given period of time.
11. Market demand schedule is a tabular statement showing various quantities of a commodity
that all the consumers are willing to buy at various levels of price. It is the sum of all individual
demand schedules at each and every price.
Market demand schedule can be expressed as,

Movement Along The Demand Curve Or Change In Quantity Demandend

1. It is based on Law of Demand which states that quantity demanded of the commodity
changes due to the changes in price of the commodity.
2. The change in quantity demanded due to the change in price of the commodity is known as
movement along the demand curve. It may be of two types; namely,
(a) Expansion in Demand (Increase in quantity demanded)
(b) Contraction in Demand (Decrease in quantity demanded)
3. Expansion in Demand (Increase in quantity demanded or downward movement along
the demand curve):
(a) It is based on Law of demand which states that quantity demanded of the commodity rises
due to the fall in price of the commodity.
(b) The rise in quantity demanded due to the fall in price of the commodity, is known as
expansion in demand.
(c) It is shown in the figure given below
• In the given diagram price is measured on vertical axis whereas quantity demanded is measured
on horizontal axis. A consumer is demanding OQ quantity at OP price.
• But, due to fall in price of the commodity from OP to OP the quantity demanded rises from
1

OQ to OQ which is known as expansion in demand.

1

4. Contraction in Demand (Decrease in quantity demanded or upward movement

along the demand curve):
(a) It is based on Law of Demand which states that quantity demanded for the commodity falls
due to the rise in price of the commodity.
(b) The fall in quantity demanded due to the rise in price of the commodity is known as
contraction in demand.
(c) This is shown in the figure given below:

• In the given diagram, price is measured on vertical axis whereas quantity demanded is
measured on horizontal axis. A consumer is demanding OQ quantity at OP price.
• But, due to rise in price of the commodity from OP to OP , the quantity demanded falls from
1

OQ to OQ which is known as Contraction in Demand.

1

Shift In Demand Curve Or Change In Demand

1. It is based on factor other than price. If demand changes due to the change in factors other
than price, it is known as shift in demand curve.
2. It may be of two types,
(a) Increase in Demand (b) Decrease in Demand
(a) Increase in Demand:
(j) An increase in demand means that consumers now demand more at a given price of a
commodity.
(ii) It’s conditions are:
• Price of substitute goods rises.
• Price of complementary goods falls.
• Income of a consumer rises in case of normal goods.
• Income of a consumer falls in case of inferior goods.
• When preferences are favourable.
(iii) In the given diagram, price is measured on vertical axis whereas quantity demanded is
measured on horizontal axis. A consumer is demanding OQ quantity at an OP price.

(iv) But, due to the change in factors other than price then demand curve shifts rightward from
DD to D D .
1 1

(v) With the rightward shift in demand curve from DD to D D the quantity demanded rises from
1 1

OQ to OQ which is known as increase in Demand.

1

(b) Decrease in Demand:

(i) A decrease in demand means that consumers now demand less at a given price of a
commodity.
(ii) Its conditions are:
• Price of substitute goods falls.
• Price of complementary goods rises.
• Income of a consumer falls in case of normal goods.
• Income of a consumer rises in case of inferior goods.
• When a preference becomes unfavourable.
(iii) In the given diagram price is measured on vertical axis whereas quantity demanded is
measured on horizontal axis. A consumer is demanding OQ quantity at an OP price.

(iv) But, due to the change in factor other than price, the demand curve shifts leftward to DD to
DD
1 1
(v) With the leftward shift in demand curve from DD to D D , the quantity demanded falls from
1 1

OQ to OQ which is known as decrease in demand.

1

Causes Of Law Of Demand And Exceptions To Law Of Demand

1. There is a inverse relationship between price of the commodity and quantity demanded
for that commodity which causes demand curve to slope downward from left to right.
2. It is because of the following reasons:
(a) Income effect:
(i) Quantity demanded of a commodity changes due to change in purchasing power (real
income), caused by change in price of a commodity is called Income Effect.
(ii) Any change in the price of a commodity affects the purchasing power or real income of a
consumers although his money income remains the same.
(iii) When price of a commodity rises more has to be spent on purchase of the same quantity of
that commodity. Thus, rise in price of commodity leads to fall in real income, which will thereby
reduce quantity demanded is known as Income effect.

It refers to substitution of one commodity in place of another commodity when it becomes

relatively cheaper.
(ii) A rise in price of the commodity let coke, also means that price of its substitute, let pepsi, has
fallen in relation to that of coke, even though the price of pepsi remains unchanged. So, people
will buy more of pepsi and less of coke when price of coke rises.
(iii) In other words, consumers will substitute pepsi for coke. This is called Substitution effect.
(c) Law of Diminishing Marginal Utility:
(i) This law states that when a consumer consumes more and more units of a commodity, every
additional unit of a commodity gives lesser and lesser satisfaction and marginal utility decreases.
(ii The consumer consumes a commodity till marginal utility (benefit) he gets equals to the price
(cost) they pay, i.e., where benefit = cost.
(iii) For example, a thirsty man gets the maximum satisfaction (utility) from the first glass of
water. Lesser utility from the 2nd glass of water, still lesser from the 3rd glass of water and so
on. Clearly, if a consumer wants to buy more units of the commodity, he would like to do so at a
lower price. Since, the utility derived from additional unit is lower.
(d) Additional consumer:
(i) When price of a commodity falls, two effects are quite possible:
* New consumers, that is, consumers that were not able to afford a commodity previously, starts
demanding it at a lower price.
• Old consumers of the commodity starts demanding more of the same commodity by spending
the same amount of money.
(ii) As the result of old and new buyers push up the demand for a commodity when price falls.
3. Exceptions to the Law of Demand are:
(a) Inferior Good or Giffen Goods:
(i) Giffen goods are a special category of inferior goods in which demand for a commodity falls
with a fall in its price.
(ii) In case of certain inferior goods when their prices fall, their demand may not rise because
extra purchasing power (caused by fall in prices) is diverted on purchase of superior goods.
(b) Goods expected to become scarce or costly in future:
(i) These goods are purchased by the household in increased quantities even when their prices
are rising upwards.
(ii) This is due to the fear of further rise in prices.
(c) Goods of Ostentation:
(i) Status symbol goods are purchased not because of their intrinsic value but because of status or
prestige value.
(ii) The same jewellery when sold at a lower price sells poorly but offered at two times the price,
sells quite well.
4. Necessities:
(a) The law of demand is not seen operating in case of necessities of life such as food grain, salt,
matchstick, milk for children, etc.
(b) A minimum quantity of these goods has to be bought whether the prices are high or low. In
such cases, law of demand fails to operate.
5. Ignorance: Being ignorant of prevailing prices, a consumer may buy more of a
commodity when its price has gone up.
6. Emergency: In times of emergency like flood, famine or war, the households do not
behave in a normal way and consequently law of demand may not operate.

Words that Matter

1. Demand: Demand is a quantity of a commodity which a consumer wishes to purchase at a

given level of price and during a specified period of time.
2. Substitute goods: Substitute goods are those goods which can be used in place of another
goods and give the same satisfaction to a consumer.
3. Complementary Goods: Complementary goods are those which are useless in the absence of
other good and which are demanded jointly.
4. Normal goods: For normal commodity, with a rise in income, the demand of the commodity
also rises and vice-versa.
5. Inferior Goods: For inferior goods, with a rise in income, the demand of the commodity falls
and vice-versa.
6. Market demand: Market demand refers to the quantity of a commodity that all the consumers
are willing and able to buy, at a particular price during a given period of time.
7. Demand function: It shows the relationship between quantity demanded for a particular
commodity and the factors that are influencing it.
8. Cross Price effect: When demand for one commodity is affected by the change in the price of
another commodity it is known as Cross Price Effect.
9. Law of Demand: It states that price of the commodity and quantity demanded are inversely
related to each other when other factors remain constant (ceteris Paribus).
10. Movement along the demand curve: The change in quantity demanded due to the change in
price of the commodity is known as movement along the demand curve.
11. Expansion in demand: The rise in quantity demanded due to the fall in price of the
commodity, is known as expansion in demand.
12. Contraction in demand: The fall in quantity demanded due to the rise in price of the
commodity is known as contraction in demand.
13. Shift in demand: If demand changes due to the change in factors other than price, it is
known as shift in demand curve.
14. Increase in demand: An increase in demand means that consumers now demand more at a
given price of a commodity.
15. Decrease in demand: A decrease in demand means that consumers now demand less at a
given price of a commodity.
16. Income Effect: Quantity demanded of a commodity changes due to change in purchasing
power (real income), caused by change in price of a commodity is called Income Effect.
17. Substitution Effect: It refers to substitution of one commodity in place of another
commodity when it becomes relatively cheaper.
18. Law of Diminishing Marginal Utility: This law states that when a consumer consumes
more and more units of a commodity, every additional unit of a commodity gives lesser and
lesser satisfaction and marginal utility decreases.
19. Giffen goods: Giffen goods are a special category of inferior goods in which demand for a
commodity falls with a fall in its price. In case of certain inferior goods when their prices fall,
their demand may not rise because extra purchasing power (caused by fall in prices) is diverted
on purchase of superior goods