Demand
# What is demand?
Demand means desire to have a commodity or service back by purchasing
power/capacity & willingness to spend.
According to Professor Benham,
‘Demand for anything, at a given price is the
amount of it which will be bought per unit of time at that price.’
According to Professor BOber,
‘By demand we mean the various quantities of a
given commodity or service which consumers would buy in one market in a given
period of time at various prices, or at various incomes, or at various prices of
related goods.’
# What is demand function?
Demand function:
The functional relationship between the price & demand is
known as the demand function. It is represented as:
D =f (P)
Therefore, demand is a function of price i.e. it varies with price.
Here, D= demand
P= price
However, it is broadly represented as:
Dx=f (Px,I,T,S,....…)
Where,
Px= Price of commodity
I = Income of a person
T = Taste of a person
S = Substitution effect
# What is the law of demand?
Law of demand expresses the relation between the quantity of a commodity
demanded & its price. The law states that,
‘Demand varies inversely with price; not necessarily proportionately.’
Therefore, this law indicates the inverse relationship between price & quantity
demanded.
The law can also be stated thus:
‘A rise in the price of a commodity or service is followed by a reduction in demand, and a
fall in the price is followed by an increase in demand, if conditions of demand remain
constant.’
It may also be added that no proportionality in the change is implied. We can only
say that demand will extend when price falls, but we cannot say how much. For
example, if the price falls by 10%, it does not follow that the demand will increase
exactly by 10%. In fact, it depends on the elasticity of demand.
Limitation of the law:
There are, however, certain exceptions of law of demand in
which demand does not vary with the price change. These cases are indicated by
exceptional (upward rising) demand curves. This law will be applicable only when
the conditions of demand remain constant. The exceptions of law of demand may
be indicated as the followings:
(i) Change in taste or fashion
(ii) Change in income
(iii) Change in other price
(iv) Discovery of substitutes
(v) Anticipatory(mgq nevi Av‡MB) changes in price
(vi) Distinction(c„_K c„_K) use of a commodity
(vii) Point of social dignity
# What is the demand schedule?
Demand schedule means a list of different amounts of a commodity at different
prices at a particular time. In order to observe simple relation between price &
amount of demand we use demand schedule. For example, a demand schedule is
given below:
Price Amount of demand
10/- 1 unit
8/- 2 units
5/- 6 units
3/- 8 units
This is a hypothetical (KvíwbK) demand schedule. It shows that rise in the price is
followed by a reduction in demand, and a fall in the price is followed by an
increase in demand.
# What is the demand curve?
Demand curve is the geometrical representation of the demand schedule showing
the different rates of prices with the amount. For drawing a demand curve we must
have the base of demand schedule.
A hypothetical demand schedule is given below:
Price Amount of demand
10/- 1 unit
8/- 2 units
5/- 6 units
3/- 8 units
The demand schedule given above can be represented in the form of a demand
curve as shown below:
Y D
10 a
8 b
Price
5 c
d
3
D/
O X
1 2 6 8
Amount of demand
To represent the demand curve graphically amount of demand is measured along
OX axis & price along OY axis. Values are plotted along these axes on the basis
of demand schedule & we get a,b,c,d points. It is seen that when price is 10/-,
amount of demand is 1 unit; when price is 8/-, amount of demand is 2 units; when
price is 5/-, amount of demand is 6 units; when price is 3/-, amount of demand is 8
units. By joining the locus we get a curve DD/. This is the demand curve which
slopes downwards to right.
Therefore, by the demand curve we understand that when price falls, more goods
are purchased. This demand curve is also known as the ‘Average Revenue Curve’ as
the price paid by the consumer is revenue (ivR¯^/Avq) per unit for the seller.
# Why does demand curve slope downwards to the right?
Demand curve slopes downwards to the right because:
(i) Law of diminishing marginal utility:
Demand curve slopes downwards to the right in accordance with
the law of diminishing marginal utility. Most of the purchasers are governed by
this law. When the price falls, new purchasers enter the market & old purchasers
will probably purchase more. That means when price falls, more quantities will be
demanded
(ii) Income effect:
A unit of money goes farther & a consumer can afford to buy
more. He is able & willing to buy more because the thing being cheaper, his real
income increases. It is called the income effect & hence, demand curve slopes
downwards to the right.
(iii) Substitution effect:
Demand curve slopes downwards to the right due to the
substitution effect. That means when the price of a commodity decreases, but the
price of substitute goods of that particular commodity remains the same as before;
then people will buy that particular commodity more than before. This is called the
substitution effect.
(iv) Increase of purchasing:
The income & substitution effect combine to increase the ability
& willingness of the consumer to buy more of the commodity whose price has
fallen. As a result, increase of purchasing occurs & hence, demand curve slopes
downwards to the right.
A representation of a simple demand curve sloping downwards to the right is shown below:
. Y
D
L P
Price
L/ P/
P//
L//
D/
O X
Q Q/ Q//
Amount of demand
Fig: Downward sloping demand curve
