THEORY OF DEMAND

1. THEORY OF DEMAND MR. NITIN SETIA

2. TOPIC COVERED
•MEANING OF DEMAND
•DEFINATION OF DEMAND
•INDIVIDUAL DEMAND / MARKET DEMAND
•DETERMINANTS OF DEMAND
•DEMAND FUNCTIONS
•LAW OF DEMAND

3. MEANING OF DEMAND
Demand means desire/want for something ,but in economics demand
refers to effective demand i.e.; the amount buyers are willing to
purchase at a given price over a given period of time.
Demand is:-Demand is desire/want backed by money
(Demand=desire+ ability to pay+ will to pay) Demand is always
related to price and time.

4. DEFINATION OF DEMAND
•In the words of Ferguson, “Demand refers to the quantities of a
commodity that the consumers are able and willing to buy at each
possible price during a given period of time, other things being
equal.”

5. INDIVIDUAL DEMAND / MARKET
DEMANDIndividual demand :It refers to demand from the individuals
/family/house hold. It is a single consuming entity’s demand.
Market demand: It refers to the total demand of all buyers ,taken
together. It is the aggregate of the quantities of a product demanded
by all the individuals buyers at a given price over a given period of
time. it is the sum total of individual demand function Market
demand is more important from the business point of view, sales
depends on market demand ,so does planning future marketing
strategy Prices are determined on the basis of demand for the
product etc.

6. DETERMINANTS OF DEMAND
INDIVIDUAL DEMAND
•Price of the products
•Income
•Taste & Habits
•Preferences
•Relative price of other goods-
substitutes and complementary
goods
•Consumers Expectations
•Advertisement Effect
MARKET DEMAND
•Price of the product
•Distribution of wealth and
income in the community
•Community’s common habits
and scale of preferences
•General standard of living and
spending habits of the people
•Growth of the population
•Age structure/sex ratio of the
population

7. DEMAND FUNCTIONS
At any point of time, the quantity of a given product(good/service)
that will be purchased by the consumers depends on a number of key
variables/determinants.
The most important variables are listed below:
•The ‘own price’ of the product (P).
•The price of the substitute and complementary goods(P s or P c ).
•The level of disposable income(Y d) with the buyers(ie; income left
after direct taxes).
•Change in the buyers’ taste and preferences(T).
•The advertisement effect measured through the level of advertising
expenditure(A) .
•Changes in the population number or number of buyers(N).

8. LAW OF DEMAND
The law of demand states that, all else being equal, as the price of a
product increases (↑), quantity demanded falls (↓); likewise, as the
price of a product decreases (↓), quantity demanded increases (↑).
In simple words, law of demand means inverse relationship between
price and quantity of demand. There is a negative relationship
between the quantity demanded of a good and its price. The factors
held constant in this relationship are the prices of other goods and
the consumer's income. There are, however, some possible
exceptions to the law of demand

9. DEMAND SCHEDULE
PRICE QUANTITY
DEMANDED
1 500
2 400
3 300
4 200
5 100
• It shows the price and demand relationship.
• Tabular representation of price and demand.
DEMAND SCHEDULE FOR GOOD
(X)

10. DEMAND CURVE
• The geometrical representation of demand schedule is called the
demand curve.

11. ASSUMPTION OF LAW OF DEMAND
The law of demand is based on certain assumptions:-
No change in consumer’s income
No change in consumer’s preferences
No change in fashion
No change in the price of related goods
No expectation of future price changes or shortages
No change in government policy etc.

12. EXCEPTIONS TO THE LAW OF
DEMAND
•Giffen goods : In the case of certain inferior goods called Giffen
goods(named after Sir Robert Giffen), in spite of price rise, demand
will also rise. It was seen in Ireland in 19 th . Century people were so
poor that they spent a major part of income on potatoes and a small
part on meat, as price of potatoes, rose the demand also rose since
they could not substitute it for meat which was very expensive.
Giffen’s paradox is seen the case of inferior goods like potatoes,
cheap bread etc.
•Speculation : when people speculate about prices on the commodity
in the future they may not act according to the laws of demand.
Speculating the prices of the commodity will further increase they will
demand more of the commodity for hoarding etc. In the stock
market, people tend to buy more shares when prices are rising in the
hope of bull runs in anticipation of future profits.

13. •Article of snob appeal : Certain commodities are demanded because
they happen to be expensive or prestige goods or snob value having
a status symbol. So increase in price will lead to increase in demand
for such goods. E.g. Diamonds ,exclusive cars etc.
•Consumer psychological Bias: when a customer is wrongly biased
against quality of a commodity a fall in price may not lead to an
increase in demand example clearance of stock , discounted sale ,
etc.

15. EXTENSION AND CONTRACTION OF
DEMAND
Extension and contraction of demand
A variation in demand implies extension or contraction of demand. A
change in demand due to change in price is called extension or
contraction of demand.
It is a movement along the same demand curve due to changes in
price.
In the following diagram , demand increases from a to b and then
decreases to point c indicating various changes to demand due to
price change.

17. INCREASE AND DECREASE IN
DEMANDIncrease and decrease in demand
Changes in demand are a result of the change in the conditions / factors
determining demand other than price. Change in demand thus implies an
increase or decrease in demand with price remaining constant. An increase
/decrease signifies either more or less will be demanded at a given price. This is
represented graphically by movement of the demand curve upwards (in case of
increase in demand) and downward movement of demand curve incase of
decrease in demand.
Reasons for change in Demand:
Changes in income.
Changes in taste, habits and preferences.
Change in distribution of wealth and population.
Change in demand of complimentary / substitute goods.
Change in tax structure.
Change in value of money.
Effect of advertisement and publicity