DEMAND �LAW OF DEMAND

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Mrs Sangeeta Sarpal

PGT (ECONOMICS)

JNV,PATIALA

Demand

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Demand for a commodity is the desire to purchase a commodity with sufficient purchasing power and the willingness to spend money.

Demand is the different quantities of a commodity to be purchased at different prices.

Demand and Quantity Demanded

Demand is the different quantities of a commodity that a consumer is ready to buy at different prices.Whereas the Quantity Demanded refers to a specific quantity to be purchased by a consumer at a specific price.

Price (RS) Quantity(Units)

1 5

• 2 4

3 3

4 2

5 1

Demand Schedule

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Demand schedule is a table which shows the different quantities of a commodity to be purchased at different prices by a consumer.

Individual Demand Schedule

The demand schedule of a consumer is called

the individual demand schedule.

Price of a product Quantity Purchased

1 5

2 4

3 3

4 2

5 1

Market Demand Schedule

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The demand schedule of two or more consumers is called market demand schedule.Suppose there are two consumers in the market : Consumer A and Consumer B, then the market demand schedule :

MARKET DEMAND SCHEDULE

Demand Curve

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Demand curve is the curve which shows the different quantities of a commodity purchased by the consumer at different prices.

INDIVIDUAL DEMAND CURVE

The individual demand curve is a curve which shows the

different quantities of a commodity that a particular consumer is ready to buy at different prices.

Price

Quantity

o

D

D

MARKET DEMAND CURVE

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Market Demand curve is the curve which shows the demand of all the consumers in the market. So it is the summation of all the individuals demand curves in the market.

Suppose there are two consumers in the market : Consumer A and Consumer B then the total demand of two consumers in the market in curve is called Market Demand curve.

MARKET DEMAND CURVE

• Fig 1 A Fig 2 B Fig 3 Market Demand
• OX = demand OY = Price

Price

Quantity

Quantity

Quantity

D

D

MD

Factors Affecting Demand

A.INDIVIDUAL DEMAND:

Income of the consumer

Price of the Product

Price of the substituted good

Price of the complementary good

Taste and Preference of the consumer

Expectations

B.MARKET DEMAND:

Size of the population

Distribution of income;

Equal distribution—More demand

Unequal distribution—Less demand

LAW OF DEMAND

• Law of demand states that other things being equal demand for a good extends with a fall in price and contracts with a rise in price.
• D_x = f( P_x,Y,T,E,P_r……)
• Demand is the function of the price of a product,income of the consumer,taste and preference,future expectation etc assumed to be constant.
• In simple words we can say law of demand explains the inverse relation between price and demand of a commodity.
• According to Marshall :- “The law of demand states that amount demanded increase with fall in price and diminishes with rise in price, being other things remaining the same.

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ASSUMPTION OF LAW OF DEMAND

• No change in the income of the consumer
• No change in the price of related goods
• No expectation of any change in the future price of the commodity
• No change in the taste and preference
• Normal Goods

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EXPLANATION OF LAW OF DEMAND

INDIVIDUAL DEMAND CURVE

price

MAIN POINTS OF THE LAW OF DEMAND

• Inverse relation ship
• Qualitative and Not quantitative
• No proportional Relation ship
• Comparison with the game of sea and saw
• One sided

EXCEPTIONS

• Ignorance
• Demonstration effect
• The Giffen’s paradox
• Fear of shortage
• Conspicuous Necessities

CAUSES OF THE OPERATION OF THE LAW OF DEMAND

• Law of Diminishing Marginal Utility
• Income Effect
• Substitution Effect
• New Buyers
• Different Uses

SIGNIFICANCE OF LAW OF DEMAND

• Beneficial for Manufacturer
• Price Determination
• To the Finance Minister
• To the Farmers

CHANGE IN QUANTITY DEMANDED AND CHANGE IN DEMAND

• A CHANGE IN THE QUANITY OF DEMANDED SHOWS THE EFFECT OF CHANGES IN THE PRICE OF THE COMMODITY ON ITS DEMAND WHILE OTHER DETERMINANTS OF DEMAND LIKE INCOME,TASTE AND PRICE OF RELATED GOODS REMAIN CONSTANT.
• THE QUANTITY DEMANDED AT A GIVEN PRICE IS SHOWS BY A POINT ON DEMAND CURVE
• CHANGE IN DEMAND IS REFLECTED IN A SHIFT IN THE DEMAND CURVE TO THE LEFT OR THE RIGHT
• CHANGE IN DEMAND IS NOT CAUSED BY THE CHANGE IN THE PRICE OF THE GOOD

CHANGES IN QUANTITY DEMANDED

• ALSO KNOWN AS MOVEMENT ALONG THE DEMAND CURVE
• EXTENSION AND CONTRACTION OF DEMAND
• OTHER THINGS REMAINING THE SAME WHEN THE QUANTITY DEMANDED CHANGES DUE TO CHANGE IN PRICE ONLY
• CHANGE IS SHOWN BY DIFFERENT POINTS ALONG THE SAME DEMAND CURVE
• FALL IN PRICE IS FOLLOWED BY EXTENSION IN DEMAND
• RISE IN PRICE IS FOLLOWED BY CONTRACTION IN DEMAND

EXTENSION OF DEMAND

• EXTENSION OF DEMAND REFERS TO RISE IN QUANITY DEMANDED AS A RESULT OF FALL IN PRICE OTHER THINGS REMAINING THE SAME.

EXTENSION OF DEMAND CURVE

PRICE

QUANTITY

5

1

1

5

EXTENSION OF DEMAND

O

CONTRACTION OF DEMAND

• CONTRACTION OF DEMAND REFERS TO FALL IN QUANITY DEMANDED AS A RESULT OF RISE IN PRICE OTHER THINGS REMAINING THE SAME.

CONTRACTION OF DEMAND CURVE

PRICE

QUANTITY

5

1

1

5

CONTRACTION OF DEMAND

O

D

CHANGE IN DEMAND/SHIFT IN DEMAND CURVE

• A CHANGE IN ANY DETERMINANT OF THE DEMAND OTHER THAN PRICE WILL SHIFT ENTIRE DEMAND CURVE TO THE RIGHT OR TO THE LEFT
• INCREASE IN DEMAND IS SHOWN AS RIGHTWARD SHIFT
• A DECREASE IN DEMAND CUVE WILL SHIFT THE ENTIRE DEMAND CUVE TO THE LEFT

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INCREASE IN DEMAND

• INCREASE IN DEMAND MEANS RISE IN DEMAND IN RESPONSE TO CHANGES IN OTHER DETERMINANT OF DEMAND OTHER THAN PRICE OF THE PRODUCT. INCREASE IN DEMAND REFERS TO RIGHTWARD SHIFT IN DEMAND CURVE
• REASON OF INCREASE IN DEMAND:-
• INCREASE IN INCOME
• RISE IN PRICE OF SUBSTITUTE GOODS
• FALL IN THE PRICE OF COMPLEMENTARY GOODS
• FAVOURABLE CHANGES IN TASTE AN PREFERENCE
• EXPECTATION OF RISE IN PRICES

INCREASE IN DEMAND

• THE DEMAND MAY INCREASE IN TWO WAYS
• SAME PRICE MORE DEMAND

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MORE PRICE SAME DEMAND

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INCREASE IN DEMAND

PRICE

D

5

1

4

2

3

3

4

D1

o

Quantity

DECREASE IN DEMAND

• DECREASE IN DEMAND MEANS FALLL IN DEMAND IN RESPONSE TO CHANGES IN OTHER DETERMINANT OF DEMAND OTHER THAN PRICE OF THE PRODUCT. DECREASE IN DEMAND REFERS TOLEFT WARD SHIFT IN DEMAND CURVE
• REASON OF DECREASE IN DEMAND:-
• DECREASE IN INCOME
• FALL IN PRICE OF SUBSTITUTE GOODS
• RISE IN THE PRICE OF COMPLEMENTARY GOODS
• UNFAVOURABLE CHANGES IN TASTE AN PREFERENCE
• EXPECTATION OF FALL IN PRICES
• DECREASE IN POPULATION

DECREASE IN DEMAND

• THE DEMAND MAY DECREASE IN TWO WAYS
• SAME PRICE LESS PURCHASE

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LESS PRICE SAME PURCHASE

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DECREASE IN DEMAND

• D

PRICE

D

5

1

4

2

3

3

4

2

D1

Quantity

O

DISTINCTION BETWEEN EXTENSION AND INCREASE IN DEMAND

• EXTENSION OF DEMAND : MEANS RISE IN DEMAND IN RESPONSE TO FALL IN THE PRICE OF COMMODITY OTHER THINGS BEING EQUAL.WITH THE EXTENTION IN DEMAND ,DEMAND CURVE MOVES TO THE DOWNWARD ON THE SAME DEMAND CURVE.
• INCREASE IN DEMAND REFERS TO RISE IN DEMAND IN RESPONSE TO CHANGE IN DETERMINANT OF DEMAND LIKE TASTES AND PREFERENCE OF THE CONSUMER ,INCOME OF THE CONSUMER,PRICE OF SUSBSTITUTE OTHER THAN THE PRICE OF THE PRODUCT.
• WITH THE INCREASE IN DEMAND ,DEMAND CURVE SHIFT UPWARD.

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EXTENSION AND INCREASE IN DEMAND

• D

PRICE

QUANTITY

D

P

Q

P1

Q1

D1

INCREASE IN DEMAND

O

CONTRACTION AND DECREASE IN DEMAND

• CONTRACTION IN DEMAND : FALL IN DEMAND IN RESPONSE TO RISE IN THE PRICE OF COMMODITY OTHER THINGS BEING EQUAL
• MOVEMENT FROM LOWER POINT TO HIGHER POINT OF THE SAME DEMAND CURVE
• DECREASE IN DEMAND MEANS FALL IN DEMAND IN RESPONSE TO CHANGE IN DETERMINANTS OF DEMAND OTHER THAN PRICE
• DOWNWARD SHIFT OF THE ENTIRE DEMAND CURVE

DISTINCTION BETWEEN CONTRACTIONAND DECREASE IN DEMAND

PRICE

QUANTITY

D

P1

Q1

P

Q

D1

DECREASE IN DEMAND

O

• THANK YOU