THE CONCEPT OF DEMAND

By Anupriya Panda
 Definition and Features of Demand
• Demand for a commodity is defined as the quantity demanded of that commodity which is
demanded at a certain price during any particular period of time.
• For example- A consumer demands 2kg of wheat in a month at the price of Rs. 20/kg.
• This is a perfect example of demand for a commodity as it has all the three components of demand
i.e., quantity, price, and time.
• Demand depends upon the utility of the commodity. A consumer is rational and demands only those
commodities which provide utility.
(Note- Rational means consumers make choices and decisions that maximize their overall utility given their
budget constraints).
• Demand always means effective demand i.e., the desire to own a commodity should always be
backed by purchasing power and willingness to spend it.
• Demand is a flow concept, i.e., so much per unit of time.
• Demand means demand for final consumer goods.
 Types of Demand
• Direct demand is the demand for a final product or service by consumers or end-users. It is not affected by the demand for
other products or services. For example, the demand for food, clothing, and smartphones is direct demand.
• Derived demand is the demand for a product or service that is derived from the demand for another product or service. It is
dependent on the demand for the final product. For example, the demand for steel is derived from the demand for cars,
appliances, and other manufactured goods.
• Autonomous demand is the demand for a product or service that is not affected by changes in income. It is determined by
factors such as population growth, government spending, and technological change. For example, the demand for
healthcare services is largely autonomous, as people will need healthcare services regardless of their income.
• Induced demand is the demand for a product or service that is affected by changes in income. It is determined by how
much disposable income consumers have and how much they spend on the product or service. For example, the demand
for luxury goods is largely induced, as people are more likely to buy luxury goods when they have more disposable
income.
• Individual demand is the quantity of a good or service that a single consumer is willing and able to purchase at each
possible price during a specific time period and Market demand is the total quantity of a good or service that all consumers
in a market are willing and able to purchase at each possible price during a specific time period.
 Types of Demand Contd…
• Cross Demand- When the demand for a commodity depends not on its price but on the price of other related
goods, it is called cross demand. There are two types of cross-demand:
a. Substitute goods are goods that can be used in place of each other. For example, coffee and tea are
substitute goods. If the price of coffee increases, consumers may switch to tea, which would lead to an
increase in the demand for tea.
b. Complementary goods are goods that are used together. For example, cars and gasoline are
complementary goods. If the price of gasoline increases, consumers may drive less, which would lead to a
decrease in the demand for cars.
• Joint demand is the demand for two goods or services that are used together to produce a third good or
service. For example, the demand for printers and printer ink is a joint demand because printers cannot
function without printer ink.
• Composite demand is the demand for a good or service that can be used in multiple ways. For example, wheat
can be used to produce bread, flour, pasta, and other food products. The demand for wheat is therefore
composite because it is affected by the demand for all of the different products that can be made from wheat.
 Determinants of Demand
The determinants of demand, also known as factors affecting demand, are the various factors that influence the quantity of a
good or service that consumers are willing and able to purchase at different price levels. These determinants include:
1. Price of the Product: The most significant determinant of demand is the price of the product itself. As the price of a
product increases, the quantity demanded generally decreases, and vice versa, assuming other factors remain constant. This
relationship is known as the law of demand.
2. Income: The nature of the relationship between income and quantity demand depends upon the nature of the consumer
goods. Most of the consumption goods fall under the category of normal goods. These are demanded in increasing quantities
as consumers’ income increases. Household furniture, clothing, automobiles, consumer durables, etc. fall in this category.
• In the case of normal goods, when income increases. Quantity also increases and vice-versa.
There are some goods for which the quantity demanded rises only up to a certain level of income and decreases with an
increase in money income. These goods are inferior goods. For example, Baajra may become an inferior good for a person
when his income increases above a certain level and he can now afford better substitutes such as wheat.
• In the case of inferior goods, quantity increases up to a certain level and then decreases.
Demand for luxury goods and prestige goods arises beyond a certain level of consumers’ income and keeps rising as
income increases.
• In the case of luxury goods, demand increases when income increases and vice-versa.

3. Tastes and Preferences: The demand for a commodity also depends upon the tastes and preferences of consumers and
changes in them over a period of time. Goods that are modern or more in fashion, command higher demand than goods that
are of old design and out of fashion.
 Determinants of Demand Contd…
Demonstration effect or Bandwagon effect- A person may develop a taste or preference for the iPhone after using it, but he
may also develop it after discovering that using it enhances his prestige
Snob Effect- When a product becomes common for all, people decrease or altogether stop its consumption. For example:
Luxury car
4. Price of Related Goods:
- Substitutes: The price of substitute goods can affect demand. If the price of a substitute rises, demand for the original
product may increase.
- Complements: Complementary goods are typically consumed together. If the price of one complementary good rises,
demand for the other may decrease.
5. Population and Demographics: Changes in the size and demographics of the population can affect demand. An increase
in the population or a shift in demographics can lead to changes in consumer preferences and overall demand for certain
products.
6. Consumer Expectations: Consumer expectations about future prices, income, or economic conditions can influence
demand. For example, if consumers expect prices to rise in the future, they may increase their current demand.
7. Advertising and Marketing: Effective advertising and marketing can create consumer demand by influencing consumer
preferences and perceptions about a product.
 Demand Function
The demand function states the relationship between the demand for a product (the dependent variable) and its
determinants (the independent variables). A demand function is expressed as follows-

D 𝒙 = 𝒇 𝑷𝒙, 𝒀, 𝑷𝒚, 𝑷𝒄, 𝑻, 𝑭 , where

Dx is the quantity demanded of product X

Px is the price of the commodity
Y is the income of the consumer
Py is the price of the substitute
Pc is the price of the complementary goods
T is the taste and preferences of the consumers
F is the future expectations
 Law of Demand
• The law of demand states that there is an inverse relationship between price and the quantity demanded if other
things remain constant (ceteris paribus). This means that as the price of a good increases, the quantity
demanded decreases, and vice versa. The law of demand is called the “first fundamental law of economics.”
• Assumptions of the Law of Demand
1. Ceteris paribus: This means that all other factors that affect demand are held constant. This includes
factors such as income, tastes and preferences, the prices of related goods, and expectations about future
prices.
2. Rational consumers: Consumers are assumed to make rational decisions about how to allocate their
limited resources. This means that they will try to maximize their utility (satisfaction) given their budget
constraints.
3. Consumers have full information: Consumers are assumed to have full information about the prices and
quality of available goods. This means that they are able to make informed decisions about which goods
to purchase.
4. There should not be any expectation of price changes of the commodity in the near future.
 Demand Schedule and Demand Curve
• Demand Schedule: It is the tabular presentation of the demand for a commodity at various prices.
Price (Px in rupees) Qty
800 8
600 15
400 30
300 40
200 55
100 80
• Demand Curve: It is the graphical presentation of the demand schedule.
(Demand Curve)
70
60
50
40
30
20
10
0
0 1 2 3 4 5 6
 Market Demand Schedule and Curve
• Market demand schedule is defined as the sum of individual demands for a product at a price per unit of time, all other
things remaining constant.

Quantity Demanded
Price Consumer-A Consumer-B Consumer-C Total market demand
5 10 8 12 30
4 15 12 18 45
3 20 17 23 60
2 35 25 40 100
1 60 35 45 140

• The market demand curve, like the individual demand curve, slopes downwards to the right.
 Factors behind the Law of Demand
Price: As the price of a good or service decreases, the quantity demanded for that good or service increases, and vice versa.
The factors behind the law of demand can be summarized as follows:
1. Substitution Effect: When the price of a good falls, consumers tend to buy more of that good and less of relatively more
expensive substitutes. This is because the lower price makes the good more attractive compared to its alternatives.
2. Income Effect: As the price of a good decreases, consumers effectively have more real income to spend on goods and
services. This increased purchasing power encourages them to buy more of the now relatively cheaper goods.
3. Diminishing Marginal Utility: Consumers generally experience diminishing satisfaction or utility as they consume more
of a particular good. Consumers are willing to buy more as the price falls because each additional unit provides less
marginal utility, making it more appealing.
 Exceptions of Law of Demand
Veblen Goods: In the case of Veblen goods, higher prices can actually increase demand because consumers associate the high
price with greater prestige or status. Luxury cars, designer clothing, and expensive jewelry are examples. The Veblen goods
are also considered status goods. Examples-
• Luxury Cars: Some high-end automobile brands, like Rolls-Royce or Lamborghini, are considered Veblen goods. The
higher the price, the more desirable they become because of their association with luxury and status.
• Designer Clothing: Certain designer clothing brands, such as Gucci or Chanel, fall into this category. The high prices
contribute to their desirability as status symbols.
Giffen Goods: Giffen goods are rare but can defy the law of demand. In these cases, as the price of a staple or inferior good
(like basic food) rises, people may paradoxically buy more of it because they can no longer afford the more expensive
alternatives. For Example-
• Basic Food Items: In some extreme cases of poverty, staple food items like bread or rice could be considered Giffen goods.
If the price of these basics rises significantly and people cannot afford more expensive alternatives, they may paradoxically
buy more of them, as they need these items to survive, even though they are more expensive.
Exceptions of further price rise in the future: When a consumer expect a continuous rise in the price of a good, they buy
more of it despite the increase in its price with a view to avoiding the pinch of a much higher price in the future. For Example
• Real Estate: When people expect property prices to continue rising rapidly in a particular area, they might rush to buy real
estate there, even at high current prices, to avoid paying even more in the future.
 Movements and Shifts in Demand Curve
1. Movement Along the Demand Curve (Change in quantity demanded):
• A movement along the demand curve occurs when the quantity demanded of a good changes in response to a change in its
own price, while other factors remain constant. It is also known as “Change in Quantity Demanded” or “Movement in
Demand Curve.”
• When demand increases, as a result of a fall in price (other factors remaining constant), it is known as an “Expansion in
Demand Curve.”
• When demand falls, as a result of an increase in price )other factors remaining constant), it is known as a “Contraction in
Demand Curve.”
 Example of Movement of Demand Curve
• Movement along the demand curve occurs when there is a change in the quantity demanded of a good or service in
response to a change in its price, while other factors affecting demand remain constant. Here's an example: Let's consider
the demand for a particular brand of coffee at various price points:
• Demand Curve (Initial): New Scenario: Movement Along the Demand Curve
Price of Coffee Quantity Demanded Price of Coffee Quantity Demanded
10 150 10 100
9 200 9 150
8 250 8 200
7 300 7 250
6 350 6 300

• In this initial scenario, at a price of 10, consumers demand 150 pounds of coffee. Now, suppose the price of this coffee
decreases to 8 per pound due to a promotional sale, while all other factors affecting demand, such as consumer
preferences, income, and the prices of substitute goods, remain unchanged. This price reduction leads to a movement along
the demand curve:
• In this new scenario, at the lower price of 8 per pound, the quantity demanded increases to 200 pounds. This movement
along the demand curve illustrates the basic principle of the law of demand: as the price of a good decreases (with other
factors held constant), consumers are willing to buy more of that good, and as the price increases, they are willing to buy
less.
 Movements and Shifts in Demand Curve Contd…
2. Shift of the Demand Curve:
• A shift of the demand curve occurs when factors other than the price of the good, such as income, preferences, or the prices
of related goods, change, leading to a change in the quantity demanded at every price level. It is also known as “Change in
Demand or “Shift in Demand Curve.”
• When the demand increases, due to changes in other factors (price remains the same), it is known as the “Increase in
Demand Curve” and the demand curve shifts “Rightward.”
• When the demand decreases, due to changes in other factors (price remains the same), it is known as the “Decrease in
Demand Curve” and the demand curve shifts “Leftward.”
 Examples of Demand Shift
When one of the other factors changes and the price remains constant, it can cause a shift in the entire demand curve. Let's consider an example using the
demand for smartwatches:

Initial Demand Schedule (Before a Shift):

Price (rupees) Quantity Demanded (units)

600 10,000
500 15,000
400 20,000
300 25,000
200 30,000
1. Income Increase (Positive Demand Shift): Suppose consumers' incomes increase due to a strong economy. This change might lead to an increase in the
demand for smartwatches across all price levels because people have more money to spend. The demand schedule might then look like this:

Demand Shift Due to Income Increase:

Price (rupees) Quantity Demanded (units)

600 12,000
500 17,000
400 22,000
300 27,000
200 32,000
As you can see, at every price level, consumers are now willing to purchase more smartphones because their incomes have increased.
 Examples of Demand Shift Contd..
2. Consumer Preferences (Positive Demand Shift): Suppose there is a widespread trend where consumers prefer the latest
smartwatch models over older ones. This shift in consumer preferences can increase demand for the newest smartwatches,
even at higher price levels. The demand schedule might look like this:
Demand Shift Due to Consumer Preferences:

Price (in rupees) Quantity Demanded (units)

600 (latest model) 15000

500 (latest model) 20000
400 (latest model) 25000
300 (latest model) 30000
200 (latest model) 35000

• In this case, consumers are willing to buy more smartwatches, especially the latest models, even at higher prices because of
their changing preferences.
 Examples of Demand Shift Contd..
• 3. A demand schedule is a table or chart that shows the quantity of a good or service that consumers are willing and
able to purchase at different price levels, all other factors being equal. When it comes to understanding how a shift in
demand occurs due to substitute goods, you would typically compare two sets of demand schedules: one for the original
good and one for the substitute good. Let's use an example to illustrate this concept. Suppose we are analyzing the demand
for coffee and tea, which are often considered substitute goods because consumers can choose between them. Here are
simplified demand schedules for both coffee and tea at different price levels:
• Demand Schedule for Coffee: Demand Schedule for Tea:

Price (per cup) Quantity Price (Per Cup) Quantity

5 10 5 5
4 20 4 10
3 30 3 15
2 40 2 20
1 50 1 25

• In this example, as the price of coffee decreases, consumers are willing to buy more coffee, and as the price of tea
decreases, consumers are willing to buy more tea. Now, let's analyze how a shift in demand for coffee occurs due to a
change in the price of tea, which is its substitute:
 Examples of Demand Shift Contd..
1. Initial Situation: At a price of 2 per cup, consumers are buying 40 cups of coffee and 20 cups of tea.
2. Change in Price of Tea: If the price of tea suddenly decreases from 2 to 1 per cup (for some reason, let's say a tea
promotion), the demand for tea increases. Consumers may now prefer to buy more tea since it's cheaper.
3. Shift in Demand for Coffee: Due to the decrease in the price of tea (a substitute for coffee), some consumers who
previously bought coffee may switch to buying tea because it's now a better deal. As a result, the demand for coffee may
decrease, leading to a shift in the demand schedule. The new demand schedule for coffee might look something like this:
• Revised Demand Schedule for Coffee:
Price Per Cup Quantity
5 10
4 20
3 30
2 35
1 40

• In this revised demand schedule, you can see that at a price of 2 per cup, consumers are now buying 35 cups of coffee
instead of the previous 40 cups because some have shifted to tea due to its lower price. This example demonstrates how
changes in the price of a substitute good can lead to shifts in the demand for another good. When a substitute becomes
more attractive (cheaper in this case), the demand for the original good may decrease, ceteris paribus (assuming other
factors remain constant).
 Price Elasticity of Demand
• The price elasticity of demand (ep) measures the responsiveness of the quantity demanded of a good or service to changes
in its price. The formula is:
ep= % Change in Quantity Demanded / % Change in Price
ep = (ΔQ / Q) / (ΔP / P) = ΔQ/ ΔP * P/Q, where

ep is the price elasticity of demand

ΔQ is the change in quantity demanded
Q is the initial quantity demanded
ΔP is the change in price
P is the initial price

• If (ep) is greater than 1 (ep > 1), it indicates elastic demand, meaning that consumers are relatively sensitive to price
changes. A small percentage change in price results in a larger percentage change in quantity demanded.
• If (ep) is less than 1 (ep < 1), it indicates inelastic demand, meaning that consumers are relatively insensitive to price
changes. A percentage change in price leads to a smaller percentage change in quantity demanded.
• If (ep) is equal to 1 (ep = 1), it indicates unitary elasticity, where the percentage change in quantity demanded exactly
matches the percentage change in price. Total revenue remains constant as price changes.
 Degree of Price Elasticity

1. Perfectly Elastic Demand (Infinite Elasticity): In this case, the price elasticity coefficient is infinite (ep = ∞). It means
that consumers are perfectly responsive to price changes, and any increase in price results in a complete drop in the quantity
demanded. The shape of the demand curve is a horizontal straight line.
2. Unit Elastic Demand: In this case, the price elasticity coefficient is equal to 1 (ep = 1). It occurs when a given
proportionate change in the price level results in an equal proportionate change in quantity demanded. The demand curve is
in the shape of a rectangular hyperbola.
3. Relative Elastic Demand: When the price elasticity coefficient is greater than 1 in absolute value (ep> 1), it indicates
elastic demand. Consumers are responsive to price changes, and a decrease in price leads to a proportionally larger increase
in quantity demanded, and vice versa.
4. Relative Inelastic Demand: When the price elasticity coefficient is less than 1 in absolute value ( ep < 1), it suggests
inelastic demand. Consumers are relatively unresponsive to price changes, and the quantity demanded changes
proportionally less than the price.
5. Perfectly Inelastic Demand (Zero Elasticity): In this case, the price elasticity coefficient is zero (ep = 0). It means that no
matter how much the price changes, the quantity demanded remains constant. The demand curve is a vertical straight line.
 Some Examples
• Suppose a bookstore decreases the price of a best-selling novel from Rs. 20 to Rs. 15, leading to an increase in the quantity
sold from 1,000 copies to 1,500 copies. Calculate the price elasticity of demand (ep).
• Solution: To calculate ep, we use the formula:
ep= % Change in Quantity Demanded / % Change in Price
Calculate the percentage change in quantity demanded:
% Change in Quantity Demanded=[(1500−1000)/1000]​×100%= 50%
Calculate the percentage change in price:
% Change in Price=[(15−20)/20]×100%= −25%
Now, plug these values into the ep formula:
ep=50%/−25%= −2
The price elasticity of demand (ep) for this novel is -2, indicating that it is elastic (since it is greater than 1 in absolute value).
A 1% decrease in price results in a 2% increase in quantity demanded.
 Cross Elasticity of Demand
• Cross elasticity of demand (exy) measures how the quantity demanded of one good responds to changes in the price of
another related good. It's used to understand the relationship between two goods, whether they are substitutes or
complements. The formula for calculating the cross elasticity of demand is:
exy= % Change in Quantity Demanded of Good X / % Change in Price of Good Y
exy = ΔQx/ ΔPy * Py/Qx, where

exy is the cross elasticity of demand

ΔQ is the change in quantity demanded of good X
ΔP is the change in price of good Y
Qx is the initial quantity demanded of good X
Py is the initial price of good Y

• If exy is positive (exy > 1), it indicates that the two goods are substitutes. An increase in the price of Good Y leads to an
increase in the quantity demanded of Good X, and vice versa.
• If exy is negative (exy < 1), it suggests that the two goods are complements. An increase in the price of Good Y results in a
decrease in the quantity demanded of Good X, and vice versa.
• If exy is zero (exy = 0), it means the goods are unrelated, and changes in the price of one have no effect on the quantity
demanded of the other.
 Some Example
• Let's consider two beverages, tea and coffee. Suppose that, over a given period, the price of coffee increases from Rs 5 to
Rs. 6 per pound, and as a result, the quantity of tea demanded increases from 500 tea bags to 600 tea bags. Calculate the
cross elasticity of demand (exy) between coffee and tea.
• Solution:
exy= % Change in Quantity Demanded of Good X / % Change in Price of Good Y
1. Calculate the percentage change in the quantity demanded of tea:
% Change in Quantity Demanded of Tea} = [(600 – 500)/500] *100 = 20%
2. Calculate the percentage change in the price of coffee:
% Change in Price of Coffee = [(6 – 5)/5]*100= 20%
3. Now, plug these values into the exy formula:
exy = 20%/ 20%} = 1
• The cross elasticity of demand (exy) between coffee and tea is 1, which indicates a positive cross elasticity. A positive exy
suggests that coffee and tea are substitutes for each other. In this case, a 1% increase in the price of coffee leads to a 1%
increase in the quantity demanded of tea, showing that the two goods are related as substitutes. This example demonstrates
how cross elasticity of demand can be used to analyze the relationship between the prices of two related goods and their
effects on each other's demand.
 Income Elasticity of Demand
• Income elasticity of demand (ey) measures how the quantity demanded of a good or service responds to changes in
consumer income. It provides insights into whether a good is a normal good (ey > 0) or an inferior good (ey < 0).
ey = % Change in Quantity Demanded / % Change in Income
ey = (ΔXq / Xq) / (ΔY / Y) = ΔXq/ ΔY * Y/Xq, where

ey is the income elasticity of demand

ΔXq is the change in quantity demanded
Xq is the initial quantity demanded of X
ΔY is the change in income
Y is the initial income

• If ey is positive (ey > 1), it indicates that the good is a normal good. As consumer income increases, the quantity
demanded of the good also increases, and vice versa. Normal goods are further classified into luxury and necessities.
• If ey is negative (ey < 1), it suggests that the good is an inferior good. As consumer income rises, the quantity demanded of
the good decreases, and vice versa.
• If ey is zero (ey = 0), it means the good is income-inelastic, and changes in consumer income have little to no effect on the
quantity demanded.
 Some Example
• Suppose you are analyzing the market for smartphones. Over a year, the average income of consumers in a particular
region increases from $40,000 per year to $45,000 per year. During this time, the quantity demanded for smartphones
increased from 10,000 units to 12,000 units. Calculate the income elasticity of demand (ey) for smartphones.
• Solution:
ey = % Change in Quantity Demanded / % Change in Income
1. Calculate the percentage change in the quantity demanded of smartphones:
% Change in Quantity Demanded = [(12,000 - 10,000)/10,000]*100 = 20%
2. Calculate the percentage change in consumer income:
%Change in Income = [(45,000 - 40,000)/ 40,000] *100= 12.5%
3. Now, plug these values into the ey formula:
• ey = 20%/12.5% = 1.6
The income elasticity of demand (ey) for smartphones is 1.6. An ey greater than 1 (in absolute value) indicates that the good
is a luxury or normal good with high-income elasticity. In this case, a 1% increase in consumer income leads to a 1.6%
increase in the quantity demanded for smartphones. This suggests that smartphones are a luxury item, as an income increase
has a larger impact on the demand for smartphones. This example illustrates how income elasticity of demand can help us
understand whether a good is a necessity, a luxury, or an inferior good based on its responsiveness to changes in consumer
income.