1 Introduction Demand In common parlance, Desire, want and demand are used interchangeably. However- Desire can be without the capacity to buy the good whereas Want may/may not translate into demand. For demand to happen- There should be a desire to get a commodity. Ability to get that commodity. Willingness to use means to acquire commodity. It occurs at a particular price & particular time. So-the demand for a commodity is the quantity that consumer will purchase from the market at various given prices in a given period of time. Common man’s Meaning of Demand Essentials of Demand Economist’s view of Demand

2 Determinants Demand D x =f (P x, P r, Y, H, T, A, C…)  Price of the Commodity (Px)  Price of related commodities (Pr)  Income of the consumer (Y)  Habits and customs (H)  Taste and Fashion (T)  Advertisement and promotions (A)  Climate (C)………and so on

3 Law of Demand Demand Law of Demand expresses the functional relationship between price and quantity demanded. The law of demand states that there is an inverse relationship between Price and Quantity demanded ceteris paribus. With increase in prices, demand of a commodity decreases. With fall in prices, demand of a commodity increases. Ceteris Paribus or other things which are assumed as constant- 1.Price of related commodities 2.Income of the consumer 3.Taste, Habits, customs & Climate…so on Demand Schedule Demand Curve Price of X Of X

4 Reasons for negative slope of Demand curve Demand 1.Law of diminishing marginal utility- It states that as the consumers buy more and more units of a commodity, its utility from the extra unit of commodity falls. 2.Price effect- As the price falls, consumers buy more or as the price rise, consumers buy less. 3. Income effect- With fall in price of a good, the real income of a consumer goes up. 4. Substitution effect- When price of good falls and the price of its substitutes remain the same, the consumers will buy more of that good. 5. Alternative uses of commodity- Many uses of a commodity causes the demand curve to move downwards from left to right.

5 Limitations of Law of Demand Demand 1.Fear of Shortage or speculation- Fear of shortage may force consumers to buy the commodity at even higher prices and stock, making the demand curve slope upward from left to right. 2. Articles extending prestige- Articles affording snob value or distinction to rich may be demanded more at higher price and will drop in demand if the price decrease as the goods will lose its exclusive appeal. 3. Ignorance effect- Sheer ignorance sometimes causes consumers to buy at higher prices. 4. Necessities of life- Demand of goods of necessity like milk, wheat, rice etc will not fall even with rise in prices as people will be forced to cut expenditures/consumption of other goods. 5. Other exceptions- Consumer biases, change in income, taste and new substitutes may also cause situations where law of demand will not hold. Price

6 Price Elasticity of Demand Demand Meaning- Price elasticity of demand relates to responsiveness of quantity demanded of a good to the change in its price. Degrees of Elasticity of Demand- 1.Perfectly Elastic Demand- At a given price, the change in quantity demanded may increase or decrease endlessly. Here Elasticity of demand = Infinity 2.Perfectly Inelastic demand- Whatever the change in price, there is no change in demand. Here Elasticity of demand = 0 Cont……. 1. Perfectly elastic demand 2. Perfectly Inelastic demand

7 Price Elasticity of Demand Demand 3. Unitary Elastic Demand- Under this, proportionate change in quantity demanded and the price is exactly the same. Here Elasticity of demand=1 4. Less elastic Demand- With big change in price, there is small change in quantity demanded proportionately. Here elasticity of demand < 1 5. More elastic Demand- A small change in price causes a big change in quantity demanded. Here elasticity of demand > 1 3. Unitary elastic demand 5. More elastic demand 4. Less elastic demand

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