Theory of Demand

Demand vs. Quantity Demanded

Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time, everything else (but price) held constant.

– It is a relationship between prices and quantities. The quantity demand is the amount of a product that

people are willing and able to purchase at one, specific price.

– It is a quantity.

Types of Demand

Direct and Indirect Recurring and Replacement Complementary and Competing Individual and Market Demand

Determinants of Demand

Price of the product Income of the consumer Price of related goods Tastes and preferences Advertising Consumer expectations Population Growth of economy etc.

Law of Demand

Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing and able to purchase during a particular period of time.

– As price of a good rises, consumers buy less.– Depicts the quantity-price relationship with all else assumed to be constant.

The determinants of demand are factors other than price that influence demand: income, tastes, prices of related goods, expectations, and numbers of buyers.

Representations of Demand

Demand Schedule: A table or list of the prices and corresponding quantities demanded of a particular good or service. It is the price-quantity relationship presented in tabular form.

Demand Curve: A graph of the demand schedule with price on the vertical axis and quantity demanded on the horizontal axis.

Demand Schedule andDemand Curve for Videos

QuantityPrice

50$1

40$2

30$3

20$4

10$5

Change in Demand vs. Change in the Quantity Demanded

Aggregation of Demand (I)

Aggregation of Demand (II)

Why demand curve is negatively sloped Law of diminishing marginal utility. Fall in price leads to more purchase and

more buyers. Substitution effect. Income effect.

Price and quantity are negatively related Some reasons include:income effect--as the price of a good declines, the consumer can purchase more of all goods since his or

her real income increased.substitution effect--as the price declines, the good becomes relatively cheaper. A rational consumer maximizes satisfaction by reorganizing consumption until the marginal utility in each good per dollar is equal:

Optimality Condition is MUA/PA = MUB/PB = MUC/PC = ...If MU per dollar in A and B differ, the consumer can improve

utility by purchasing more of the one with higher MU per dollar.

Exception to Law of Demand

Giffen goods : Giffen goods are special type of inferior goods. Eg : Coarse grain, salt etc.

Conspicuous Necessities : Commodities like TV, fridge as through their constant use they have become necessities of life.

Conspicuous consumption : Goods like diamond etc. where with an increase in price of the good, Quantity demanded increases.

Future changes in price : Households act as speculators. Emergencies : Like war, flood negate the operation of law of

demand. Change in fashion Ignorance

Activity A : Which of the following statements depicting demand are correct:

A toy shop selling different types of tous, each priced at Rs. 20 at a hill station makes a business of Rs. 3500 each day.

In CP, the total population is one lakh. A fruit vender sells 50 fruits (of different varieties) in a day.

Activity B: Following are some instances. In each, write how the demand will be affected:

Prices of washing machines go down drastically. Right next to a busy snack centre, a new one comes up. VAT(value-added tax) is announced on all saleable commodities(goods &

services).

Activity C: Some people only buy ‘Branded Products’. Comment.

CASE STUDY : The Demand for Big Macs