The document discusses the concept of demand, including the law of demand, demand curves and schedules, factors that affect demand, exceptions to the law of demand, individual and market demand, price elasticity of demand, income elasticity of demand, and cross elasticity of demand. It explains that according to the law of demand, the quantity demanded of a good increases when the price decreases and decreases when the price increases. Demand curves graphically represent the inverse relationship between price and quantity demanded.

1. By Dhwani Jogani

2. What is Demand?
 Quantities of a particular goods or services consumers
are willing or able to buy at a certain price.

3. The Law of Demand…
 Consumers buy more of a good when its price
decreases and less when its price increases.
 When price Demand When price Demand
goes up… goes down… goes down… goes up…

4. Explanation of Law of Demand by
Schedule
 Demand Schedule is a tabular representation of various
combinations of price and quantity demanded by a
consumer during a particular period of time. An imaginary
demand schedule is given below:
 As the price decrease from Rs.10 per kg to Rs.8 per kg and
then to Rs.6 per kg, quantity demanded by the consumer
increases from 10 kg to 20 kg and then to 30 kg respectively.

5. Explanation of Law of Demand by
Curve
 The above demand schedule through the following demand curve:
 In the figure above, price and quantity demanded are measured along the
y-axis and x-axis respectively. By plotting various combinations of price
and quantity demanded, we get a demand curve DD1 derived from points
A, B, C, D and E. This is a downward sloping demand curve showing
inverse relationship between price and quantity demanded.

6. The Demand Curve
Price
(Rs)
D
Quantity Demanded (t)

7. Factors of Demand
1. Changes in income (the income effect)…
When income consumers
goes up buy more
When income consumers
goes down buy less

8. Factors of Demand
2. Prices or availability of substitutes
(substitution effect)…
 A substitute is a good that can be used in place of
another.
Or

9. Factors of Demand
3. Prices or availability of
complementary good…
 Complementary goods are things that
are often sold or used together.
&

10. Factors of Demand
4. Changes in the number of buyers…
more
people
(buyers),
more sales.

11. Factors of Demand
5. Changes in taste & preferences…
Then… Now…

12. Factors of Demand
6. Expectations About Future prices…
Expect that Demand increases
price increases in present
Expect that Demand
decreases
price decreases in present

13. Demand Function
The demand equation is the mathematical expression of
the relationship between the quantity of a good demanded
and those factors that affect the willingness and ability of a
consumer to buy the good.
Qd = f(P; Prg, Y)
 Qd is the quantity of a good demanded
 P is the price of the good
 Prg is the price of a related good
 Y is income

14. Exceptions to the law of Demand
1. Inferior goods/ Giffen goods
Some special varieties of inferior goods are termed as
giffen goods. Cheaper varieties of goods like low
priced rice, low priced bread, etc. are some examples
of giffen goods.
 This exception was pointed out by Robert Giffen who
observed that when the price of bread increased, the
low paid British workers purchased lesser quantity
of bread, which is against the law of demand. Thus, in
case of giffen goods, there is indirect relationship
between price and quantity demanded.

15. 2. Goods having prestige value
This exception is associated with the name of the
economist, T.Velben and his doctrine of conspicuous
conception. Few goods like diamond can be purchased
only by rich people. The prices of these goods are so
high that they are beyond the capacity of common
people. The higher the price of the diamond the
higher the prestige value of it.

16. 3. Change in fashion
The law of demand is not applicable when the goods
are considered to be out of fashion. If the commodity
goes out of fashion, people do not buy more even if the
price falls. For example: People do not purchase old
fashioned shirts and pants nowadays even though
they've become cheap. On the other hand, people buy
fashionable goods in spite of price rise.

17. 4. Basic necessities of life
In case of basic necessities of life such as salt, rice,
medicine, etc. the law of demand is not applicable as
the demand for such necessary goods does not change
with the rise or fall in price.

18. Expansion and contraction of
demand
 The demand for a commodity changes due to a change in price. It is
called extension and contraction of demand. When there is
decrease in price of commodity there is in increase in demand of
that commodity. This is called extension of demand. When there is
increase in price of a commodity there is decrease in the demand
for that commodity. This called contraction of demand. Thus
demand varies in opposite direction due to change in price.

19. Increase & Decrease in Demand
 When demand change due to favorable other
factors then it is called increase in demand.
 When demand change due to unfavorable then it
is called decrease in demand.
Y
D1 D2 D3
price
decrease increase
D1 D2 D3
X
Demanded
quantity

20. Individual and market demand
 The demand of one person is called individual
demand and demand of many persons is known as
market demand.

21. Price elasticity of demand
 Price elasticity gives the percentage change in
quantity demanded in response to a one percent
change in price.
 Price elasticity is almost always negative, although
analysts tend to ignore the sign even though this
can lead to ambiguity. Only goods which do not
conform to the law of demand, such as Veblen and
Giffen goods, have a positive PED.
 E(p)= Proportionate change in demand
Proportionate change in price

22. Types of Price elasticity
1. Perfectly Elastic Demand:
 When a small change in price of a product causes a major
change in its demand, it is said to be perfectly elastic
demand. In perfectly elastic demand, a small rise in price
results in fall in demand to zero, while a small fall in price
causes increase in demand to infinity. In such a case, the
demand is perfectly elastic or ep = 00.

23. Types of Price elasticity
2. Perfectly Inelastic Demand:
 A perfectly inelastic demand is one when there is
no change produced in the demand of a product
with change in its price. The numerical value for
perfectly inelastic demand is zero (ep=0).

24. Types of Price elasticity
3. Relatively Elastic Demand:
 Relatively elastic demand refers to the demand when the
proportionate change produced in demand is greater than
the proportionate change in price of a product. The
numerical value of relatively elastic demand ranges between
one to infinity.
 Mathematically, relatively elastic demand is known as more
than unit elastic demand (ep>1).

25. Types of Price elasticity
4. Relatively Inelastic Demand:
 Relatively inelastic demand is one when the percentage
change produced in demand is less than the percentage
change in the price of a product. The numerical value of
relatively elastic demand ranges between zero to one
(ep<1).
 Marshall has termed relatively inelastic demand as
elasticity being less than unity.

26. Types of Price elasticity
5. Unitary Elastic Demand:
 When the proportionate change in demand
produces the same change in the price of the
product, the demand is referred as unitary elastic
demand. The numerical value for unitary elastic
demand is equal to one (ep=1).

27. Income Elasticity of Demand
 Income elasticity is calculated as the ratio of the percentage
change in quantity demanded to the percentage change in
income.
 A negative income elasticity of demand is associated with inferior
goods ; an increase in income will lead to a fall in the demand and
may lead to changes to more luxurious substitutes.
 A positive income elasticity of demand is associated with normal
goods; an increase in income will lead to a rise in demand. If
income elasticity of demand of a commodity is less than 1, it is a
necessity good. If the elasticity of demand is greater than 1, it is a
luxury good or a superior good.
 A zero income elasticity of demand occurs when an increase in
income is not associated with a change in the demand of a good.
These would be sticky goods.

28. Types of Income Elasticity
1. High income elasticity of demand:
 In this case increase in income is accompanied by relatively
larger increase in quantity demanded. Here the value of
coefficient Ey is greater than unity (Ey>1). E.g.: 20%
increase in quantity demanded due to 10% increase in
income.
2. Unitary income elasticity of demand:
 In this case increase in income is accompanied by same
proportionate increase in quantity demanded. Here the
value of coefficient Ey is equal to unity (Ey=1). E.g.: 10%
increase in quantity demanded due to 10% increase in
income.

29. Types of Income Elasticity
3. Low income elasticity of demand:
 In this case proportionate increase in income is
accompanied by less than increase in quantity
demanded. Here the value of coefficient Ey is less than
unity (Ey<1). E.g.: 5% increase in quantity demanded
due to 10% increase in income.
4. Zero income elasticity of demand:
 This shows that quantity bought is constant regardless
of changes in income. Here the value of coefficient Ey
is equal to zero (Ey=0). E.g.: No change in quantity
demanded even 10% increase in income.

30. Types of Income Elasticity
5. Negative income elasticity of demand:
 In this case increase in income is accompanied by
decrease in quantity demanded. Here the value of
coefficient Ey is less than zero/negative (Ey<0). E.g.:
5% decrease in quantity demanded due to 10%
increase in income.

31. Cross Elasticity of Demand
 Recall the intuition of subsidiary and complementary
goods.
 The cross elasticity of demand or cross-price elasticity
of demand measures the responsiveness of the quantity
demanded for a good to a change in the price of another
good.
 It is measured as the percentage change in quantity
demanded for the first good that occurs in response to a
percentage change in price of the second good.