Law of Demand Dr. V.S. Karpe By Dept. of Economics Sarvajanik Arts & Commerce College, Visarwadi, Tal. Navapur, Dist. Nandurbar

Willing to purchase at various prices during a period of time Demand Willing to purchase at various prices during a period of time Able to purchase at various prices during a period of time

Types of demand Direct demand: When a commodity is demanded for its own sake by the final consumer like TV, to refrigerators, eatables etc. Derived demand: The demand for a particular commodity might be strongly related to the demand for a related product for eg. Demand for steel is linked to the demand for new vehicles. Recurring demand: Consumable goods have recurring demand eg., milk, rice etc Replacement demand: Consumer durables are replaced after some wear and tear eg., furniture, bikes, cars

Types of demand Complementary demand: Goods that are jointly demanded. Demand for one commodity is dependant on the demand for the other. Competing demand: Goods that compete with each other to satisfy any particular want are called substitutes.

Definitions of demand Demand refers to the quantities of a commodity that consumers are able to buy at each possible price during a given period of time, all other things being equal. Demand is the ability and willingness to buy specific quantity of good at alternative prices in a given period of time, ceteris paribus

Determinants of demand Price of the commodity Price of the related commodities Level of income of the household Tastes and preferences of the consumers Other factors

Determinants of demand Price of the commodity Ceteris paribus, D α 1/P This happens because of income and substitution effect

Determinants of demand Price of related commodities Complementary goods ( Pen and ink) Price of one good - Decreases Demand of other goods - Increases Substituting goods ( tea and coffee) Price of one good - Decreases Demand of other goods - Decreases

Determinants of demand Level of income of the households Average Income Increases Quantity demanded of a good Increases Exception: Inferior goods Average Income Increases Quantity demanded of a good Decreases

Determinants of demand Tastes and preferences of consumers Other factors - Size of the population - Composition of the population

Law of Demand Law of demand states that people will buy more at lower prices and buy less at higher prices, ceteris paribus. - Samuelson The law of demand states that quantity demanded increases with a fall in price and diminishes when price increases, other things being equal. - Marshall

Assumption to law of demand Law of demand holds good when “other things remain the same”, meaning thereby, the factors affecting demand, other than price are assumed to be constant. Demand function: Dx = f(Px ,Pr, Y, T,E) Where, Dx = Demand for the commodity Px = Price of the commodity Pr= Price of related goods Y= Income of the consumer T= Tastes and preferences of the consumer E= Expectation of the consumer

Explanation Quantity demanded α 1/Price According to law of demand, ceteris paribus Quantity demanded α 1/Price However, this relation is not proportional, meaning that it is not necessary that when price falls by half, demand for the goods would be doubled. This simply indicates the direction of change in demand as a result of a change in price.

Demand Schedule Demand Schedule is a series of quantities which a consumer would like to buy per unit of time at different prices Two aspects of demand schedule - Individual demand schedule - Market demand schedule

Individual demand schedule It is defined as a table which shows the quantities of a given commodity which a consumer will buy at all possible prices at a given time Price per unit ( in Rs.) Quantity demanded (in units) 1 4 2 3

Market demand schedule It is defined as the quantities of a given commodity which all consumers will buy at all possible prices at a given point of time. By aggregating individual consumers demand, the market demand schedule is constructed

Price of a commodity 'X' (in Rs.) Demand of A Demand of B Market demand ( in units) 1 4 5 9 2 3 7 It indicates that when price of ‘X’ is Rs. 1, Demand of A is 4 units and Demand of B is 5 units. The market demand is 9 units.

Demand Curve It slopes downward to the right A demand curve is a locus of points showing various alternative price – quantity combinations. It shows the inverse relationship between price and quantity demanded. It slopes downward to the right

The demand curve slopes downwards from left to right meaning that when price is low demand is high and when price is high demand is low

Why does demand curve slope downward? Income effect: It is the effect that a change in a person’s real income caused by the change in the price of a commodity has on the quantity of that commodity. The increase in demand on account of increase in real income is known as Income effect. Substitution effect: It is the effect that a change in the relative prices of the substitute goods has on the quantity demanded.

Why does demand curve slope downward? Different uses: Demand for commodities with alternative uses tends to extend consequent upon a fall in their prices. Size of the consumer group: When the price of a commodity falls, then many consumers who are unable to buy that commodity at its previous price come forward to buy it.

Exceptions to the law of demand Veblen goods: goods like jewelry, diamonds and gems are considered as articles of distinction. These goods command more when prices are high. Giffen Goods: Inferior goods which display a direct price demand relationship are called as Giffen goods. Expectation of rise or fall in price in future: If prices are likely to rise more in the future then even at the existing higher price people may demand more units of the commodity

Exceptions to the law of demand Conspicuous necessities: Some goods due to their constant usage have become necessities of life. For eg, even though the prices of TV sets, refrigerators, cooking gas etc., have been continuously rising, their demand does not show any tendency to fall. Demand for necessaries: The law of demand does not apply much in case of necessaries as irrespective of price changes, people have to consume minimum quantities of these commodities. Speculative goods: In the speculative market, particularly in stocks and shares, more will be demanded when prices are rising and less will be demanded when prices are falling.

Expansion and Contraction in demand Price decreases , QD increases Downward movement along the demand curve Contraction Price increases, QD decreases Upward movement along the demand curve

Increase and decrease in demand Price same, QD increases due to change in other factors RIGHTWARD SHIFT Decrease Price same, QD decreases due to changes in other factors LEFTWARD SHIFT

Distinction between extension and increase in demand Extension in demand Increase in demand Rise in demand due to fall in price of the commodity, other things become equal Expressed by a movement from a higher point to a lower point on the same demand curve Increase in demand due to other factors other than price. Expressed by the upward shift of the entire demand curve Distinction between extension and increase in demand

Distinction between contraction and decrease in demand Contraction in demand Decrease in demand Relates to a fall in demand in response to a rise in the price of a commodity, other things being equal Expressed by the movement from a lower point to a higher point on the same demand curve Refers to a fall in demand in response to changes in other factors other than price Distinction between contraction and decrease in demand

Quiz 1. Demand for a commodity refers to: Desire for the commodity Need for the commodity Quantity demanded of the commodity Quantity of the commodity demanded at a certain price during any particular point of time

Quiz 2. Contraction of demand is the result of: Decrease in the number of consumers Increase in the price of the good concerned. Increase in the prices of other goods. Decrease in the income of purchasers

Quiz 3. Which of the following pairs of goods is an example of substitute goods? Tea and sugar Tea and coffee Pen and ink Shirt and trousers

Quiz 4. The law of demand assumes other things to remain constant, establishes the relationship between: Income of the consumer and the quantity of a good demanded by him. Price of a good and the quantity demanded by him Price of a good and the demand for its substitute Quantity of a good and the price of its complementary goods

Quiz 5. If the price of Pepsi decreases relative to the price of Coke and Sprite, the demand for: Coke will decrease Sprite will decrease Coke and Sprite will decrease Coke and Sprite will increase