RANI SATI CLASSES

CLASS XI – Economics (Micro) by CA chandan Agarwal

Chapter 3 : THEORY OF DEMAND

Definition of Demand
Demand means the quantity of a commodity that a consumer is willing and able to
buy, at each possible prices during a given period of time.

The definition of demand highlights four essential element of demand :

1. Quantity of the commodity
2. Willingness to buy
3. Price of the commodity
4. Period of time

Demand for a commodity may be with respect to an individual or to the entire market.

 Individual Demand – Individual demand refers to the quantity of a commodity

that a consumer is willing and able to buy, at each possible prices during a given
period of time.
 Market Demand - Market demand refers to the quantity of a commodity that all
the consumers are willing and able to buy, at each possible prices during a given
period of time.

Demand Schedule
Demand schedule is a tabular statement showing various quantities of a commodity
being demanded at various levels of price, during a given period of time.
It shows the relationship between price of the commodity and its quantity demanded.

Demand schedule is of two types :

 Individual demand schedule – It refers to a tabular statement showing various

quantities of a commodity that a consumer is willing and able to buy at various
levels of price, during a given period of time.

 Market demand schedule – It refers to a tabular statement showing various

quantities of a commodity that all the consumer are willing and able to buy at
various levels of price, during a given period of time.
Individual demand schedule

Price of Apples (in Rs) Quantity Demanded of Apple (in Kg)

100 1
80 2
60 3
40 4
20 5

Market Demand schedule

Price of Apples Qty Demanded by Qty Demanded by Market Demand (in Kg)
(in Rs) consumer A (in Kg) consumer B (in Kg) (DA + DB)
100 1 2 1+2=3
80 2 3 2+3=5
60 3 4 3+4=7
40 4 5 4+5=9
20 5 6 5 + 6 = 11

Demand curve
Demand curve is a graphical representation of demand schedule.
Demand curve is of two types :
 Individual demand curve – Individual demand curve refers to a graphical
representation of individual demand scedule.
 Market demand curve – Market demand curve refers to a graphical
representation of market demand schedule. Market demand curve is obtained by
horizontal summation of the individual demand curve.
Determinants of Individual demand / Factors affecting demand

The demand for a commodity increases/decreases due to a number of factors.The

various factors affecting demand are as follows :

1.Price of the Given Commodity – It is the most important factor affecting demand for
the given commodity.Generally, the demand for a commodity rises with the fall in price
and falls with the rise in price of that commodity.There is an inverse relationship
between price and quantity demanded of a commodity.

2.Price of related goods - Related goods for this purpose can be classified as substitute
goods and complementary goods.

 Substitute goods are those goods which can be used in place of one another for
satisfaction of a particular want like tea and coffee, Ink pen and Ball pen, Coke and
Pepsi,etc.There is a positive relationship between price of substitute good and
demand of a given good.When the prices of the substitute goods rise, the demand
for the given commodity also rises and vice versa.For example – If price of a
substitute good (say, coffee) increases, then demand for given commodity (say,
tea) will rise as tea will become relatively cheaper in comparision to coffee.

 Complementary goods are those goods which are used together to satisy a
particular want, like car and petrol, Pen and Ink, Bread and Butter,etc.There is a
negative/inverse relationship between price of complementary good and demand
of a given good.With the rise in price of complementary good the demand for a
given good falls and with the fall in price of a complementary good the demand for
a given good rises.For example, if the price of petrol rises, the demand for cars
falls.

3.Income of the consumer - Demand for a commodity is also affected by income of the
consumer. However, the effect of change in income on demand depends on the nature
of the commodity under consideration.If the given commodity is a normal good, then an
increase in income leads to rise in its demand, while a decrease in income reduces the
demand.If the given commodity is an inferior good, then an increase in income reduces
the demand, while a decrease in income leads to rise in demand.Example: Suppose,
income of a consumer increases. As a result, the consumer reduces consumption of
toned milk and increases consumption of full cream milk. In this case, Toned Milk' is an
inferior good for the consumer and 'Full Cream Milk' is a normal good.
4.Taste and preferences- Taste and preferences of consumers have a strong effect on
the demand of goods.These are influenced by advertisement,change in
fashion,climate,etc.If the change in taste and preferences is in favour of goods the
demand increases whereas if the change in taste and preferences is not in favour of
goods the demand of goods decreases.

5.Expectation of Change in the Price in Future - If the price of a certain commodity is

expected to increase in near future, then people will buy more of that commodity than
what they normally buy. There exists a direct relationship between expectation of
change in the prices in future and change in demand in the current period. For example,
if the price of petrol is expected to rise in future, its present demand will increase.

Factors affecting Market Demand/Determinants of Market demand

Market demand is influenced by all the factors affecting individual demand for a
commodity.In addition, it is also affected by the following factors :

 Size and composition of Population - Market demand for a commodity is affected

by size of population in the country. Increase in population raises the market
demand, while decrease in population reduces the market demand. Composition
of population i.e. ratio of males, females, children and number of old people in the
population also affects the demand for a commodity. For example :- if a market
has larger proportion of women, then there will be more demand for articles of
their use such as lipstick, sarees etc.

 Season and weather - The seasonal and weather conditions also affect the market
demand for a commodity. For example : – during winters, demand for woolen
clothes and jackets increases, whereas, market demand for raincoat and umbrellas
increases during the rainy season.

 Distribution of Income - If income in the country is equitably distributed, then

market demand for commodities will be more. However if income distribution is
uneven i.e. people are either very rich or very poor, then market demand will
remain at lower level.
Law of demand
A/q to law of demand, other factor being constant, Quantity demanded of a commodity
rises with the fall in its price and falls with the rise in price of that commodity.There is an
inverse relationship between price and quantity demanded.
This law is also known as the ‘First law of Purchase’.
Law of demand is one sided as it only explains the effect of change in price on the
quantity demanded. It states nothing about the effect of change in quantity demanded
on the price of the commodity.

Law of demand can be explained using following schedule and diagram.

Price Quantity Demanded

(in Rs) (in units)
5 1
4 2
3 3
2 4
1 5

Assumptions of law of demand

While stating the law of demand, we use the phrase ‘keeping other factors constant or
ceteris paribus’. This phrase is used to cover the following assumptions on which the law
is based:
1. Prices of substitute goods do not change.
2. Prices of complementary goods remain constant.
3. Income of the consumer remains the same.
4. There is no expectation of change in price in the future.
5. Tastes and preferences of the consumer remain the same.

Slope of Demand curve

Slope of a curve is defined as the change in the variable on the Y-axis divided by the
change in the variable on the X-axis. So, the slope of the Demand Curve equals the
Change in Price divided by the Change in Quantity.
i.e.Slope of demand curve = - ∆P/∆Q
Due to inverse relationship between price and demand, the demand curve slopes
downwards. So, slope is Negative.
Exceptions to Law of Demand
As a general rule, demand curve slopes downwards, showing the inverse relationship
between price and quantity demanded. However, in certain special circumstances, the
reverse may occur, i.e. a rise in price may increase the demand. These circumstances are
known as ‘Exceptions to the Law of Demand’.
Some of the Important Exceptions are:
1. Status Symbol Goods or Goods of Ostentation:The exception relates to certain
prestige goods which are used as status symbols. For example, diamonds, gold,
antique paintings, etc. are bought due to the prestige they confer upon the
possessor. These are wanted by the rich persons for prestige and distinction. The
higher the price, the higher will be the demand for such goods.
2. Fear of Shortage: If the consumers expect a shortage or scarcity of a particular
commodity in the near future, then they would start buying more and more of that
commodity in the current period even if their prices are rising. The consumers
demand more due to fear of further rise in prices. For example, during
emergencies like war, famines, etc., consumers demand goods even at higher
prices due to fear of shortage and general insecurity.
3. Ignorance: Consumers may buy more of a commodity at a higher price when they
are ignorant of the prevailing prices of the commodity in the market.
4. Fashion related goods: Goods related to fashion do not follow the law of demand
and their demand increases even with a rise in their prices. For example, if any
particular type of dress is in fashion, then demand for such dress will increase even
if its price is rising.

5. Necessities of Life: Another exception occurs in the use of such commodities,

which become necessities of life due to their constant use. For example,
commodities like rice, wheat, salt, medicines, etc. are purchased even if their
prices increase.

6. Giffen Goods:These are special type of highly inferior goods in which as the price
of the good increases, demand for the good also increases and vice-versa, i.e. they
exhibit a positive price effect.These goods owe their name to sir Robert Giffin who
observed that the factory workers of Britain purchased more of bread when its
price increased, because the price of other staple food that they consumed
increased so much, that they fulfilled all their food requirements by consuming
bread which was still relatively cheaper.
Why people purchase more at less price? Or Why does demand
curve slopes downward? Or What is the rationale for the law of
demand?

1. law of diminishing marginal utility - The law of demand is based on the law of
diminishing MU,which states that as the consumer has more and more units of the
commodity ,its MU goes on decreasing.A consumer will not buy more and more
units of the same commodity at the same price.Instead,he is ready to pay a price
equals to his MU and MU goes on diminishing.Therefore ,he is willing to buy at a
lesserprice for more unit of commodity.

2. Substitution effect - when the price of a commodity falls,it becomes relatively

cheaper than other commodities.It induces consumers to substitute the
commodity whose price has fallen for other commodities which has now become
relatively expensive.The result is that the total demand for a commodity whose
price has fallen increases.This is calles substitution effect.

3. Income effect - when the price of a commodity falls,the consumer can buy the
same quantity of the commodity with lesser money or he can buy more of the
same commodity with the same money.In other words,as a result of fall in price of
a commodity,consumer’s real income or purchasing power increases which
increases the demand for a commodity.

4. Arrival of new consumers - when the price of a commodity falls,more consumers

start buying it because some of those who could not afford to buy it previously
may now afford to buy it.This raises the number of consumers of a commodity at a
lower price and hence the demand for the commodity rises.

5. Different uses of a commodity - if a commodity has many use its demand rises due
to fall in price because it can now be put to other less important use also.Example-
electricity which can be used for different purposes.A rise in price will motivate the
consumers to restrict its use,thus demand falls and a fall in price motivates the
consumers to increase its use,thus its demand rises.
Change in quantity demand / Movement along the same demand
curve
When quantity demanded of a commodity changes due to a change in its price, keeping
other factors constant, it is known as change in quantity demanded. It is graphically
expressed as a movement along the same demand curve. There can be either a
downward movement (Expansion in demand) or an upward movement (Contraction in
demand) along the same demand curve.

 Expansion in Demand - Expansion in demand refers to a rise in the quantity

demanded due to a fall in the price of commodity, other factors remaining
constant. It leads to a downward movement along the same demand curve.It is
also known as 'Extension in Demand' or 'Increase in Quantity Demanded'.

 Contraction in Demand - Contraction in demand refers to a fall in the quantity

demanded due to a rise in the price of commodity, other factors remaining
constant. It leads to an upward movement along the same demand curve. It is also
known as 'Decrease in Quantity Demanded'.
Change in demand / Shift in demand curve
When the demand of a commodity changes due to change in any factor other than the
own price of the commodity, it is known as change in demand. It is expressed as a shift in
the demand curve.
Increase in demand (Rightward shift in demand curve) : Increase in demand refers to a
rise in the demand of a commodity caused due to any factor other than own price of the
commodity.In this case demand curve shifts to right.

Reason for increase in demand

 Rise in price of substitute good.
 Fall in price of complementary good.
 Favourable change in taste and preference of consumer.
 Increase in income in case of normal good and decrease in income in case of
inferior good.
Decrease in demand (Leftward shift in demand curve) : Decrease in demand refers to a
fall in the demand of a commodity caused due to any factor other than own price of the
commodity.In this case demand curve shifts to left.

Reason for decrease in demand

 Fall in price of substitute good.
 Rise in price of complementary good.
 Unfavourable change in taste and preference of consumer.
 Decrease in income in case of normal good and increase in income in case of
inferior good.
Q.What will be the impact of the following changes on the demand curve of:
i. Cars when there is an increase in price of petrol.
ii. Desktop Computers with increase in price of Laptops .
iii. Bread with increase in its price
iv. Trousers due to change in preference in favour of Jeans.
v. Bajra for a poor person when income of such person rises.
vi. Coffee when price of tea falls.
vii. Petrol if its price is expected to rise in near future.
Ans.
i. Demand curve of Cars will shift towards left with increase in price of
petrol (complementary good) as it will become relatively costly to use
both the goods (Car and Petrol) together.
ii. Demand curve of Desktop Computers will shift towards right with
increase in price of Laptops (substitute good) as it will become relatively
cheaper to use desktop computers instead of laptops.
iii. There will be no change in demand curve of Bread. There will be only an
upward movement along the same demand curve.
iv. Demand curve of Trousers will shift towards left as preference in favour
of jeans will decrease the demand for trousers.
v. Demand curve of Bajra for a poor person will shift towards left as with
increase in income, poor person will shift from bajra to other superior
substitutes (like wheat or rice).
vi. Demand curve of Coffee will shift towards left with fall in price of tea
(substitute good) as it becomes relatively costly to use coffee instead of
tea.
vii. Demand curve of Petrol will shift towards right as expectation of price
rise in future will increase the demand of petrol in the present period.

Q.Derive the law of demand from the single commodity equilibrium condition
"Marginal utility = Price".
Ans. According to single commodity equilibrium condition, consumer
purchases that much quantity of a good at which marginal utility (MU) is
equal to price. Given, MU = price. Now suppose, price falls. It will make MU
greater than the price and will encourage the consumer to buy more. It shows
that when price falls demand rises.
Kinds of Demand

 Cross Demand: Cross demand refers to a relationship between the

demand of a given commodity and the prices of related commodities,
assuming other things remaining the same.

 Joint Demand: When two or more goods are demanded simultaneously

to satisfy a particular want, then such a demand is called joint demand.
For example, demand for sugar, milk, and tea leaves is a joint demand,
as they are demanded together to prepare tea.

 Composite Demand: When a commodity can be put to several uses, its

demand is known as composite demand. For example, demand for
electricity is a composite demand as it can be used for various purposes
like lighting rooms, running the refrigerator, TV, AC, etc.

 Derived Demand: Demand for a commodity, which depends on the

demand for other goods, is known as derived demand. For example,
demand for labour producing cloth is a derived demand as it depends on
the demand for cloth.

 Competitive Demand: When two goods are close substitutes of each

other and increase in demand for one of them will decrease the demand
for the other, then the demand for any one of them is known as
competitive demand. For example, increase in demand for coffee might
reduce the demand for tea. It happens because purchase of more of one
commodity (say, coffee) leads to a lesser requirement for the other
commodity (say, tea).