class 11

1. Demandisthe total amountof goods or serviceswhichpeople wanttobuy,fora setprice.The demand
for an itemindicateshowmuchitisneededorwanted....Demandisthe amountof goodsthat people
wantto buy at a givenprice.Pricesgoup when supplyisless,anddemandismore
Demandis basically the numberof goodsor commodities,whichaconsumerisboth,willing,andable to
buy,at a particularprice duringa givenperiodof time.
The demandcurve,isa graphical representationof the relationshipbetweenproductprice andthe
quantityof the product demanded....Suchconditionsinclude the numberof consumersinthe market,
consumertastesor preferences,pricesof substitute goods,consumerprice expectations,andpersonal
income
Demandcurvesare usedtoestimate behaviourincompetitivemarketsandare oftencombinedwith
supplycurvestofindthe equilibriumprice ie the price atwhichsellerstogetherare willingtosell the
same amountas buyerstogetherare willingtobuy,alsoknownasmarketclearingprice) andthe
equilibriumquantity ie the amountof thatgoodor service thatwill be producedandboughtwithout
surplus/excesssupplyorshortage/excessdemand) of thatmarket
Movement"alongthe demandcurve"referstohow the quantitydemandedchangeswhenthe price
changes.A "shiftof the demandcurve"occurswhenevenif the price remainsconstantthe quantity
demandedchangesbecause of some otherfactorsuchas advertisingorhigherqualitythatisnotonone
of the axesof the diagram,resultinginashiftof the entire demandcurve ratherthanjusta change in
the current price andquantity.
The law of demandisa fundamental principle of economicsthatstatesthatat a higherprice consumers
will demandalowerquantityof a good.... Changesinprice can be reflectedinmovementalonga
demandcurve,butdo not bythemselvesincreaseordecrease demand.The law of demandstatesthatif
all otherfactors remainconstant,thenthe price andthe demandedquantityof anygoodand service are
inverselyrelatedtoone another....Similarly,if the price of anarticle decreasesthenitsdemandshould
increase accordingly
The law of demandholdstrue inmostcases. The price keepsfluctuatinguntil anequilibriumiscreated.
However,there are some exceptionstothe law of demand.These include the Giffengoods,Veblen
goods,possible price changes,andessential goods.
GiffenGoods
GiffenGoodsisa conceptthat was introducedbySirRobertGiffen.These goodsare goodsthatare
inferiorincomparisontoluxurygoods.However,the unique characteristicof Giffengoodsisthatas its
price increases,the demandalsoincreases.Andthisfeatureiswhatmakesitan exceptiontothe lawof
demand
The IrishPotato Famine isa classicexample of the Giffengoodsconcept.Potatoisastaple inthe Irish
diet.Duringthe potatofamine,whenthe price of potatoesincreased,peoplespentlessonluxuryfoods
such as meatand boughtmore potatoestostick to theirdiet.Soasthe price of potatoesincreased,so
didthe demand,whichisa complete reversal of the law of demand.
VeblenGoods

2. The secondexceptiontothe lawof demandisthe conceptof Veblengoods,namedafterthe economist
ThorsteinVeblen,whointroducedthe theoryof “conspicuousconsumption“.AccordingtoVeblen,there
are certaingoodsthat become more valuable astheirprice increases.If aproductis expensive,thenits
value andutilityare perceivedtobe more,andhence the demandforthat product increases.
Andthishappensmostlywithpreciousmetalsandstonessuchasgoldand diamonds Asthe price of
these goodsincreases,theirdemandalsoincreasesbecausethese productsthenbecomeastatus
symbol.
The expectationof Price Change
In additiontoGiffenandVeblengoods,anotherexceptiontothe law of demandisthe expectationof
price change.There are timeswhenthe price of a productincreasesandmarketconditionsare suchthat
the product mayget more expensive.Insuchcases,consumersmaybuymore of these productsbefore
the price increasesanyfurther.Consequently,whenthe price dropsormay be expectedtodropfurther,
consumersmightpostpone the purchase toavail the benefitsof alowerprice
For instance,inrecenttimes,the price of onionshadincreasedtoquite anextent.Consumersstarted
buyingandstoringmore onionsfearingfurtherprice rise,whichresultedinincreaseddemand.
There are alsotimeswhenconsumersmaybuyandstore commoditiesdue toafearof shortage.
Therefore,evenif the price of a productincreases,itsassociateddemandmayalsoincrease asthe
productmay be takenoff the shelf oritmightcease to existinthe market.
Elasticityof demandisan importantvariationonthe conceptof demand....Anelasticdemandisone in
whichthe change in quantitydemandeddue toa change inprice is large.Aninelasticdemandisone in
whichthe change in quantitydemandeddue toa change inprice is small or none. If the value isless
than 1, demandisinelastic.Inotherwords,quantitychangesslowerthanprice.If the numberisequal to
1, elasticityof demandisunitary.
Determinantsof Demand
There are variousfactorson whichthe marketdemandandindividualdemandforaproductdepends.
These factorsare knownas determinantsof demand.The knowledge of the determinantsof market
demandfora product and the nature of relationshipbetweenthe demandanditsdeterminantsproves
veryhelpful inanalyzingandestimatingdemandforthe product.These factorscanbe summarizedas
follows:
1. Price of the product
The price of a product isone of the mostimportantdeterminantsof itsdemandinthe longrunand the
onlydeterminantinthe shortrun.The quantityof the product demandedbythe consumerinversely
dependsuponthe price of the product.If the price rise demandfallsandvice versa.The relation
betweenprice anddemandiscalledLawof demand.Itisnot onlythe existingprice butalsothe
expectedchangesinprice whichaffectdemand.

3. INCOME OF THE CONSUMER:The income of a consumeraffectshis/herpurchasingpower,whichinturn
influencesthe demandforaproduct.Increase inthe income of a consumerwouldautomatically
increase demandof productandvice-versaincase of basicconsumergoodsuptoa fixedlimit.
In case of luxurygoods,demandincreaseswithincrease inprice.
Consumer'staste andpreferences
The demandfor anygoodsand service dependsonindividual'staste andpreferences.Theyinclude
fashion,habit,custometc.Tastesandpreferencesof the consumersare influencedbyadvertisement,
changesinfashion,climate,new invention.Otherthingsbeingequal,demandforthose goodsincreases
for whichconsumersdeveloptaste andpreferences.Contrarytoit,an unfavourable change inconsumer
preferencesandtastes foraproduct will cause demandtodecrease.
Price of Relatedgoods
The demandfor a commodityisalsoaffectedbythe changesinthe price of its relatedgoods.Related
goodsmay be substitutesorcomplementarygoods.
(a) Substitutes
Two commoditiesare substitutesforone anotherif change inthe price of one affectsthe demandfor
the otherin the same direction.Forexample XandY are substitutesforone another.If price forX
increases,demandforYincreasesandvice versa.Teaand coffee,hamburgersandhotdogs,Coke and
Pepsi are some examplesof substitutesinthe case of consumergoods.
(b) Complements
Complementarygoodsare those goodswhichcomplete the demandforeachother,suchas car and
petrol or penandink.There is an inverse ornegative relationshipbetweenthe demandforfirstgood
and price of the secondwhichhappenstobe complementarytothe first.Forexample anincrease inthe
price of petrol causesadecrease inthe demandof car and otherpetrol runvehicles,otherthings
remainingsame.
Consumer'sExpectationsof future IncomeandPrice
Consumersdonotmake purchasesonlyon the basisof current price structure.Especiallyincase of
durables,whendemandcanbe postponed,consumersdecide theirpurchase onthe basisof future price
and income.If theyexpecttheirincometoincrease orprice to fall infuture,theywill postponetheir
demandonthe otherhandif theyexpectprice toincrease infuture theywill hastenthe purchase.For
example,purchase of carsandotherdurablesincreasesbefore budgetisannouncedif consumersfear
that pricesmayrise afterbudget.Or,whenpeople expectpayrevisions,theywaitformajorpurchases
till payisrevised.
Advertisement
Advertisementcostsare incurredwiththe objective of promotingsale of the product.Advertisements
helpinincreasingthe demandinthe followingways:

4. 1. By informingpotential consumersaboutthe productandits availability2.Byshowingitssuperiority
overrival product3. By influencingconsumer'schoice againstthe rival products4.By settingnew
fashionsandchangingtastes.
There are instanceswhenadvertisementshave changedlifestyle of people.CadburyIndiahas
revolutionizedthe marketforitsleadingproductDairyMilkthroughhighinvestmentinadvertisement
PopulationCountryof
Size of population,age distribution,rural urbandistributionandgenderdistributionaffectaggregate
demand.If populationof acountryis constantlycreasing,more fooditemsandothergoodsandservices
will be neededtosatisfythe needsof the people.Age distributionof the populationdetermineswhat
kindof commoditieswill be demanded.If populationmostlyconsistsof agedpeople,there will be
demandof more medicinesandhealthcare services.Onthe otherhandif major sectionof populationis
youth,there will be more demandforeducationemployment
Distributionof income inthe society-
If income isequallydistributedamongpeopleinthe society,the demandforproductswouldbe higher
than incase of unequal distributionof income.Due tounequal distributionof income highorlow
consumptionof aproduct by differentsegmentsof the societytakesplace.