theory of demand
desire
it means wish of a person to have a commodity but doesn't have enough money to buy a commodity e.g. if a consumer wants to buy a color T.V. but he is not having money to buy it i.e. desire.
want:-
it means desire to have a commodity and also have enough money to buy a commodity but not ready to spend it .
example:- if a person wants to buy a color T.V. and he is having money to buy it but he is not ready to spend it on color T.V. i.e. want .
demand
the demand for a particular good refers to desire to buy a commodity backed with sufficient purchasing power and willingness to spend .
example :-A consumer demand a color T.V. in a month at price of rs 20,000.
conditions for demand to take place or elements of demand
1. desire for the good
2.purchasing power to buy the good
3.readiness to spend the money
4.availability of the good in the market at particular price at particular time.
Q:-what do you understand by quantity demanded?
Ans it refers to the specific amount of quantity to be purchased against specific price of the commodity e.g. demand for the commodity x refers to 10 units of x if px =5, 8 units x if Px =6
quantity demanded of a commodity x refers to 8 units of 'x' if px= 6 Rs
demand function or factors influencing demand or determinants of demand
A demand function explains the relationship between the demand for a commodity and the factors affecting demand . these factors are also called determinant of demand. they are:
Dx=f [px, Y, T, ..., ..]
1. prices if the commodity itself (p)
2.income of the consumer (y)
3.taste, preference and fashion [T]
4.size and composition of population (N)
5.price of the related commodity (PR)
6.expected price [E]
7.distribution of income (yd)
1. PRICE OF THE COMMODITY ITSELF(P):
there is an inverse relationship between the price of the commodity and the quantity demanded. it means, generally with rise in price, quantity demanded falls and vice-versa also
2. INCOME OF THE CONSUMER (Y):
Income of the consumer affects demand for normal goods and inferior goods in different ways. both cases can be discussed as follows :
in case of normal goods as income increases demand increases as income decreases demand decreases.
in case of inferior goods as income increases demand decreases and vice versa
3. CHANGE IN PRICE OF RELATED GOODS (PR):
there are two types of related goods.
i) substitute goods :- those goods which can be used in place of one another are known as substitute goods. Ex. tea and coffee, Reynolds and Rotomac, Pepsi and coke, fountain pen and ball pen.
in case of substitute goods as price of (x) goods increases demand of (Y) good increases . as price of Pepsi increases demand of coke increases.
ii) complementary goods:
those goods which cannot be used in absence of one another are known as complementary goods or those goods which are used together to satisfy a particular demand are called complementary goods. Ex. bike and petrol, ink and pen, camera and roll, tea and sugar, cell phone and battery etc.
in case of complementary goods as price of (X) increases demand of (Y) good decreases. as price of petrol will increases demand of bike will decreases.
4. CHANGE IN TASTE AND FASHION:
it is affected by three factors
individuals likes and dislikes
you tend to buy more or less of commodity because your likes and dislikes tend to change
trends and fashion
you are influenced by emerging trends and fashion. you simply want to trendy accordingly your prefer to more of commodity.
climatic condition
your taste and preference tend to change in climatic environment. in winter there is more demand of tea and coffee while in summers cold drinks and ice creams are demanded more.
5.SIZE AND COMPOSITION OF POPULATION (N):
if size of population increases, there will be more requirements of goods and services, hence quantity demanded will be higher. composition of population determines the types of consumer goods demanded. i.e. baby related goods, young or old related goods . if old people are increasing demand for medicines will increases.
6.EXPECTED PRICE (E):
when the expected price of a commodity is higher than the market price, the consumer prefer to demand early, hence in this case quantity demanded increases. when the expected price is likely to be less than the market price, the consumer prefer to postpone the demand , hence quantity demanded decreases.
7. DISTRIBUTION IF INCOME (YD):
market demand is influenced by distribution of income. if income is equally distributed demand for commodity is expected to high. if income is not equally distributed demand for a commodity ie expected to low.
8.GOVERNMENT POLICIES :
favorable government policies leads to increase on demand and vice versa. when government policies are favorable then government gives subsidies therefore p[rice decrease and demand increase. due to unfavorable policies government impose taxes therefor price increase and demand decreases.
9.SEASON AND CLIMATE :
favorable season and climate leads to increase in demand and vice versa. in winters demand for woolen garments will increase and in summers demand for ice cream will increase.
10. ECONOMIC FLUCTUATIONS:
if a economy passing through a period of boom there will be increase in demand and vice versa .
DEMAND FUNCTION
it expresses relationship between demand of a commodity and various factors affecting it .it is of two types
individual demand function
it shows the demand of a commodity by an individual consumer in the market and its various determinants
D=F(P,Pr,Y,T,E)
D = demand of a commodity
F = function
P = price of a commodity
Pr = price of related goods
Y = income of consumer
T = taste of consumer
E = expectations
market demand function
it shows the relationship between market demand of a commodity to various determinants:
D =F(P,Pr,Y,T,E,N,S,G,YD)
D =demand of a commodity
F = function
P = price of a commodity
Y =income
Pr = price of related goods
T =taste and preferences
E = expectations
N = population
S = season and climate
g = government policy
Yd = distribution of income
law of demand
others things being equal when with the increase in price demand decrease and with the fall in price demand increases i.e. there is a inverse relationship between price and demand i.e. law of demand.
dx = f (PX) cetris paribus
Dx = demand of 'x' commodity
px = price of 'x' commodity
assumptions of the law
i) no change in income of consumer
ii) no change in population
iii) no expectations regarding future change in price of commodity
iv) no change in price of related goods
v) no change in government policy
vi) no change in season and climate
vii) no change in distribution of income
viii) no change in fashion and taste
EXPLANATION OF THE LAW
i) demand schedule
ii) demand curve
meaning of demand schedule
it is schedule in which others things remaining the same express the relationship between different amounts of commodity demand at different prices.
it is of two types
i) individual demand schedule
ii) market demand schedule
meaning of demand schedule
it shows demand of an individual consumer in the market at different prices and others things being equal.
price demand
1 50
2 40
3 30
4 20
5 10
its clear from the table that when price increases from Rs 1 to 2, 3, 4, 5 demand decreases from 50 to 40, 30, 20, and 10.
market demand schedule
it shows demand of all consumers in the market at different prices for this its assumed that there are 2 consumers in the market i.e. A and B and by joining their demand market demand is obtained.
market demand =A'SD + B'SD
price of commodity A's demand B's demand market demand
1 50 60 50+60= 110
2 40 50 40+ 50= 90
3 30 40 30+40= 70
4 20 30 20+30= 50
its clear from the table that as price increases from Rs 1 to 2, 3, 4, 5 market demand decreases from 110 to 90, 70, 50.
B. demand curve
it is a graphic presentation of demand schedule expressing the relation between different quantities at different prices.
i) individual demand curve
the graphic presentation of individual demand schedule is called individual demand curve.
its clear from the diagram the demand curve is sloping downward that is inverse relationship between price and demand.
ii) market demand curve
the graphic presentation of market demand schedule is called market demand curve.
in the diagram i) A's demand, AA is sloping downward. in the diagram ii)B's demand curve BB and in the diagram iii) market demand curve MM is slopind downward.
causes of operation of law of demand or causes of downward sloping demand curve
there is inverse relationship between price and demand i.e. with increase in price demand falls and with the decrease in price demand increase. as shown in the diagram
the following are the causes of downward sloping demand curve
1. LAW OF DIMINISHING MARGINAL UTILITY: according to this law as the consumer in a given time increases the consumption of a same commodity, the utility from each successive unit goes on diminishing. therefore, the consumer will buy more and more units of commodity only when he has to pay less and less price for each success unit, that's why he will demand more at less price.
2.CHANGE IN NO. OF CONSUMERS
when the p[rice of commodity falls some new consumer enter into the market therefore demand increases. on the other hand when price of commodity increases some old consumers will exit the market and therefore demand will decreases.
3. SUBSTITUTION EFFECT :
an increase in price of the commodity say pepsi also means that price of its substitutes say coke has fallen in relation to that of pepsi even though the price of coke remains unchanged. so people will buy more of coke and less of pepsi .this is called substitution effect.
4.INCOME EFFECT:
a fall in price leads to increase in real income of consumer with the result that he buys more when price falls . similarly increases in price leads to fall in real income and as a result demand falls.
5.DIFFERENT USES OF A COMMODITY:
a commodity having different uses is generally used at for large scale for e.g. milk is used for tea, coffee, curd, cheese etc. if price of milk goes up its consumption ids restricted to very important uses say teas consequently demand for milk falls which proves that with the increase in price demand falls.
EXCEPTIONS OF THE LAW OF DEMAND
1. IGNORANCE OF CONSUMER : if consumer is not aware of competitive price of commodity he may purchase more of commodity at higher price it may also he due to thinking of consumer that high price commodities are alwats superior.
2. COSTLY ITEMS OR ARTICLE OF DISTINCTION OR PRESTIGE GOODS: these are those goods which are purchased by rich people to distinguish them from poor people such as diamond sets, costly carpets, cars etc. demand of those commodities increase with increase in price.
3. CHANGE IN FASHION TASTE AND PREFERENCES: such change in behaviors of consumer are also responsible for making law of demand ineffective.
4. GIFFEN GOODS: these are low quality goods such as coarse grains. coarse wheat etc. in case of such goods when price falls demand falls because people start purchasing superior brands of commodity with extra purchasing power, therefore in this case demand curve is positively sloping.
5.BASIC NECESSITIES OF LIFE: there are certain basic necessities of life such as salt, sugar etc. in case of such goods demand of commodity remains the same irrespective of change in price.
MISCELLANEOUS FACTORS
if others factors affecting demand change, the law of demand fails.
change in demand
meaning of change in quantity demanded:
when demand changes due to change in price that is called qty. demanded.
its of 2 types
1. EXTENSION DEMAND:
others thing being equal with fall in price demand extends is called extension in demand
price demand
5 1
1 5
its clear from the table that when price falls from Rs5 to 1 demand extends from 1 unit to 5 units. in the diagram downward/forward rightward movement along the same demand curve A to B is showing extension of demand.
2. contraction of demand
others thing being equal, when with the increase in price demand falls that is called contraction of demand.
price demand
1 5
5 1
it is clear from the tables that when price increase from Rs 1 to Rs 5, then demand falls from 5 to 1 unit. in the diagram upward movement along the same demand curve from point B to A is showing contraction of demand.
difference between extension and contraction of demand
extension of demand contraction of demand
cause it is caused by fall in price it is caused by increase in price
price demand price demand
5 1 1 5
1 5 5 1
movement : there is a downward movement : there is an upward
movement along the same curve. movement along the same curve.
change in demand
when demand changes due to factors other than price i.e. called change in demand. it is of two types.
i) increase in demand
ii) decrease in demand
increase in demand
when demand increases due to factors other than price i.e. increase in demand. it is explained in two ways.
1. same price more demand
when at the same price, more quantity is demanded i.e. called increase in demand.
price demand
3 3
3 4
it is clear fro m the table remaining the price same i.e. 3 Rs. demand increases from 3 to 4 unit. in the diagram right side/ upward forward shifting of demand curve from DD to D1D1 is showing increase in demand.
2. same price same demand
when at the more price is same qty. is demanded i.e. also called increase in demand.
price demand
3 3
4 3
it is clear from the table that when price increases from 3 to 4 Rs demand remains the same i.e. 3 units. in the diagram right side shifting/ forward shifting/ upward shifting/ of demand curve from DD to D1D1 is showing increase in demand.
causes of increase in demand
causes of right side shifting of demand curve
1. increase in income of consumer
2. increase in wealth of consumer
3. when taste and preference shift in favor of commodity
4. when price of commodity is expected to increase in near future.
5. increase in no. of consumer
6. when price of substitute good increase
7. when price of complementary good falls
decrease in demand
when demand decrease due to factors other than price is that is called decrease in demand.
explanation
ii is explained in 2 parts
2. same price less demand
when at the same price less qty. demanded that is called decrease in demand.
price demand
3 3
3 2
it is clear from the table that remaining the price same demand decrease from 3 units to 2 units.
in the diagram left side/ backward shifting of demand curve from dd to d1d1 is showing decrease in demand..
2. less price same demand :
when at the less price same qty. is demanded i.e. called decrease in demand
price demand
3 3
2 3
it is clear the diagram that left side/ backward/ downward/ shifting of demand curve from DD to D1D1 is showing decrease in demand.
causes of decrease in demand
or
left side shifting of demand curve
1. decrease in income of consumer
2. decrease in wealth of consumer
3. when taste and preferences shift against the commodity
4. when price of commodity is expected to decrease in near future
5. decrease in no. of consumer in the market
6. when price of substitute goods decreases
7. when price of complementary goods increases
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