ELEMENTS OF DEMAND
(1) EFFECTIVE DESIRE :: For instance, I may have the desire for a car, but it will become demand only when I have the adequate money and I am willing to spend that money to purchase that car.
(2) AT A PRICE :: Demand in economics is always at a price. It makes no sense if it is not related to a price. For example, you may be willing to purchase a shirt if it is available for Rs. 500, but you may not buy it at all if the shirt is priced at Rs. 800.
(3) FLOW CONCEPT :: Demand is always expressed with reference to a particular time period. Demand is a flow concept e.g., 200 cars per day, or 1400 cars per week, or 72,000 cars per year. Thus, if we say that demand for a car is 200, it is an incomplete statement.
THREE ALTERNATIVE WAYS OF EXPRESSING DEMAND
(1) DEMAND FUNCTION (2) DEMAND SCHEDULE (3) DEMAND CURVE
It shows mathematical or functional relationship between DEMAND AND ITS VARIOUS DETERMINANTS (FACTOR AFFECTING DEMAND)
(1) DEMAND OF COMMODITY AND PRICE OF OWN COMMODITY (DX & PX)
LAW OF DEMAND “ Other thing being constant, quantity demanded and price of the commodity is INVERSELY RELATED. In other words with, rise in price quantity demanded falls and with fall in price quantity demanded rises
⇒ The law explains the cause for Movement along Demand Curve
With decrease in price from OP to OP1, quantity demanded for apples increase from OQ to OQ1
With increase in price from OP to OP2, quantity demanded for apples decreases from OQ to OQ2
ASSUMPTION :: all other thing (PY, Y , T, F.E, Pop, Yd) being constant (ceteris peribus)
DEMAND SCHEDULE :: It is tabular presentation of Quantity demanded at different price during given time.
DEMAND CURVE :: It is graphical presentation of quantity demanded at different price.It REPRESENT DEMAND SCHEDULE ON A CURVE
|The curve is DOWNWARD SLOPING FROM LEFT TO RIGHT indicating negative relation between quantity demanded and price of the commodity|
LAW OF DEMAND IS QUALITATIVE , NOT QUANTITATIVE :: LOD makes a qualitative statement only that is it INDICATES ONLY THE DIRECTION OF CHANGE in the amount demanded and does not indicate the mangnitude of change .Thus it fails to answer “ HOW MUCH CHANGES will result due to change in price of good concerned
LAW OF DEMAND IS ONE SIDED as it explains the effect on quantity demanded due to change in price. It FAILS TO STATE THE EFFECT ON PRICE DUE TO CHANGE IN QUANTITY DEMANDED. Thus it assume quantity demanded to be passive factor
(2) DEMAND OF COMMODITY AND TASTE OF THE CONSUMER(DX & T)
These term are USED IN BROAD SENSE and includes fashion, trends, climate changes , advertisement and other source.
For example :: if a consumer has to consumer more of a product due to health reason even if the consumer doesnot like it, is also considered a taste change.
⇒ The physical fitness craze leading to an increase in DEMAND FOR BICYCLES isanother example.
|FAVOURABLE CHANGE :: In this case demand for the product increases due to||UNFAVOURABLE CHANGE :: In this case demand for the product decreases due to|
|(1) PERSONAL LIKING for the product like some people prefer LG product or wish to have Coca Cola after watching advertisement in T.V done by favourite actor||(1) Personal disliking for the product|
|(2) CLIMATIC CONDITION changes li ke demand for woolen clothes in winter season||(2) Climatic condition changes like demand for A.C in winter season|
|(3) CHANGE IN TRENDS AND FASHION|
like increase in demand for cotton and
|(3) Change in trends and Fashion like decrease in demand for Nylon clothes|
⇒ Favourable changes causes RIGHTWARD SHIFT of demand curve at existing (given) price.
⇒ Unfavourable changes causes LEFTWARD SHIFT of demand curve at existing (given) price.
|DD is original demand curve .It increases to D1D1 rightward indicating increase in demand from OL to OM at given price due to favourable change in taste of consumer||DD is original demand curve .It decreases to D2D2 leftward indicating decrease in demand from OL to ON at given price due to unfavourable change in taste of consumer|
(3) DEMAND OF COMMODITY AND INCOME OF THE CONSUMER (DX & Y)
|NORMAL GOODS||INFERIOR GOODS||INEXPENSI VE|
|Def :: These are those goods which have POSITIVE INCOME EFFECT. In other words with increase in income the demand for the goods increases Y Dx // Y Dx|
Example :: Full cream Milk More income means more Pen, Shirt, Car , Furniture
|Def :: These are those goods which have NEGATIVE INCOME EFFECT. In other words with increase in income the demand for the goods decreases Y Dx // Y Dx|
Example :: (a) Bazra, Jowar, ,Maize (b) Tonned Milk
|Def :: T hese ar e t hose goods which are income inelastic i.e with increase or decrease in income demand remains constant Y or Y Dx is fixed|
Example :: Demand for Salt , Sugar , Match box Newspaper
HOW DOES DEMAND WORKS IN INFERIOR GOODS :: With increase in income family would prefer to shift its consumption from inferior to superior goods like wheat or rice and hence demand for inferior goods decreases
INFERIOR GOODS IS A RELATIVE CONCEPT :: No commodity is inferior W hether a good is normal or inferior is determined by the income level of the consumer. A good which is a normal good for a consumer with a lower income, may become an inferior good for a consumer with higher income.
→ For example, coarse cloth may be a normal good for a low income consumer, but for a high income consumer it may be an inferior good as she can afford a better quality cloth.
EFFECT OF INCREASE IN INCOME ON DEMAND CURVE
(a) The demand for Normal Goods increases and thus DEMAND CURVE SHIFT S RIGHTWARD at given (existing) price. In panel (a) DD is original demand curve with income of Rs 300. It increases to D1D1 rightward indicating increase in demand of normal goods from OL to OM with increase in income to Rs. 400 at given price OP.
(b) The demand for Inferior Goods decreases and thus DEMAND CURVE SHIFTS LEFTWARD at given ( existing) price. In panel (b) DD is original demand curve with income of Rs 300.It decreases to D2D2 leftward indicating decrease in demand of inferior goods from OL to ON with increase in income to Rs. 400 at given price OP.
EFFECT OF DECREASE IN INCOME ON DEMAND CURVE
(a) Demand for Normal Goods decreases and leftward shift at given or existing price
(b) Demand for Inferior Goods increases and rightward shift at given or existing price
(4) DEMAND OF COMMODITY AND FUTURE EXPECTATION ABOUT PRICE (DX& F.E)
(a) If the expectation is that FUTURE PRICE WILL RISE, the consumer will INCREASE HIS CURRENT DEMAND as he may PREFERS TO STORE the commodity at existing price and thus DEMAND CURVE WILL SHIFT RIGHTWARD. Ex. Announcement of rise in price of Petrol increase its demand
(b) If the expectation is that FUTURE PRICE WILL FALL, the consumer will PREFER TO POSTPONE ITS DEMAND and hence DEMAND CURVE WILL SHIFT LEFTWARD at existing price.
(5) DEMAND OF COMMODITY AND PRICE OF RELATED //OTHER COMMODITY (DX & PY)
⇒ It is also known as CROSS - PRICE EFFECT which means the effect on demand curve due to change in price of realted goods .Thus It is studied with reference to two types of goods
|SUBSTITUTE OR COMPETITIVE|
|COMPLEMENTARY OR JOINT|
Def : These are those goods which CAN BE REPLACED WITH EACH OTHER as these goods can satisfy demand with equal ease
Ex : (a)Tea,Coffee (b) CNG,Petrol (c) Pepsi ,Coke
Def : The se ar e those good s wh ich are DEMANDED JOINTLY and THUS CANNOT BE REPLACED with each other (the cross elasticity is zero)
Ex :: (a) Tea,Sugar (b) Car,Petrol (c) Pen ,Ink
|CROSS PRICE EFFECT :: Positive relation.|
In other words, Rise in price of tea would shift customer to coffee and hence demand for coffee will increase and vice- versa
|CROSS PRICE EFFECT :: Negative relation.|
In other words, Rise in price of Car would decrease demand for car and hence demand for petrol will also decrease.
⇒ We can say good X (coffee) is a substitute of good Y (Tea) if an increase in the price of good Y (Tea) increases the demand for good X (coffee)
⇒ We can say good X (petrol) is acomplement of good Y (Car) if an increase in the price of good Y (car) decreases the demand for good X (petrol)
(6) DEMAND OF COMMODITY AND POPULATION (DX & POP.)
It effects MARKET DEMAND and refers the number of consumers who buys the product and thus cause shift in Demand curve. These are the DEMOGRAPHIC EFFECTS on the demand for the goods. It has FURTHER TWO ASPECTS
⇒ MARKET SIZE :: Increase in population size increases demand for goods and services and vice- versa. Ex . more houses for more public means more demand for Cement, Brick, Steel, Marble etc. These will cause the demand for the abovenoted GOODS TO SHIFT TO RIGHT
⇒ COMPOSITION :: It refers to proportion of male, female, children and old age people in total population. If population of old age increase then demand for stick , medicine will increase and if population of children increases then demand for toys will shift rightward.
|Many MNC’s firm today look at Indian and Chinese market as very profitable and lucrative because of their market sizes ,which refers to large number of consumers in these countries|
(7) DEMAND OF COMMODITY AND DISTRIBUTION OF INCOME (DX & Yd)
It effects MARKET DEMAND and cause shift in Demand curve.
⇒ EQUAL DISTRIBUTION OF INCOME :: Demand for goods will come from everysegment of country and hence market demand will rise. This will cause rightward shiftward of demand curve
⇒ UNEQUAL DISTRIBUTION OF INCOME :: Demand will come only from rich class andthat too of luxurious items. Overall market demand will decrease as larger section of people have low income. This will cause leftward shiftward of demand curve.
WHY DEMAND CURVE SLOPES DOWNWARD or
WHY DEMAND CURVE HAVE NEGATIVE SLOPE or
WHY PEOPLE PURCHASE MORE AT LESS PRICE or
REASONS BEHIND LAW OF DEMAND or
EXPLAIN THE INVERSE RELATIONSHIP
(1) LAW OF DIMINISHING MARGINAL UTILITY ( D.M.U) :: This law states as consumer goes on purchasing additional unit of same commodity at a given point of time, the additional utility he derives decreases and hence consumers wants to pay less. In other words DEMAND CURVE IS ESSENTIALLY THE MARGINAL UTILITY CURVE AND SLOPES DOWNWARD.
(2) SUBSTITUTION EFFECT : It refers to SUBST ITUT ION O F CHEAPER COMMODITY FOR DEARER COMMODITY. Thus as price of coffee decreases, consumer will shift from Tea to Coffee and hence demand for coffee will increase.
⇒ In simple words , it refers to substitution of one commodity for other when it becomesrelatively chaeper
(3) INCOME EFFECT :: It refers to increase or decrease in REAL INCOME THAT IS PURCHASING POWER of consumer. With fall in price , Purchasing power increases and hence consumer can demand more with same income.
Eg l.ets say consumer income is Rs.20. If price of apple is Rs 2 / unit , consumer can demand (20 / 2) =10 apples .Now if price falls to Rs 1 /unit, the consumer can demand (20 / 1) =20 apples with same income.
|PRICE EFFECT = INCOME EFFECT + SUBSTITUTION EFFCT|
(4) SIZE OF CONSUMER :: With fall in price
(a) old consumer purchases more of good
(b) New customer enter the market and begins with purchase.
The combined effect is that there is increase in consumer base and thus market demand increases.
(5) DIFFERENT USES OF COMMODITY :: W ith fall in price, goods with different uses like milk
(a) Will be used more for specific purposes like direct consumption and baby food
(b) W ill also be used for other purposes like Curd , Cheese and Sweets Making .
Thus demand will increase
EXCEPTION TO LAW OF DEMAND :: It refers to some cases where Law of Demand doesnot operates i.e where demand curve have POSITIVE PRICE EFFECT AND SLOPES UPWARD
(1) ARTICLE OF DISTINCTION :: Those goods which REPRESENTS STATUS SYMBOL Eg - DIAMOND /jewellery / costly carpets / VINATGE CAR.
Such goods are demanded at high prices by wealthy consumers to distinguish them from average consumers and thus when the price of goods falls they no longer remains Status goods, and hence their demand falls. Thus these are ARTICLE OF SNOB APPEAL.
This was FOUND OUT BY VEBLEN IN HIS DOCTRINE OF “CONSPICUOUS CONSUMPTION” and hence this effect is called Veblen effect or prestige goods effect.
(2) IGNORANCE :: Sometimes out of ignorance consumer purchase more at high price. This is due to consumers believe that high priced commodities are of superior quality.
(3) EMERGENCIES :: In case of War, Famines , Drought , earthquakes or any other natural calamities, consumer behaviour becomes abnormal and they purchase goods at any price.
(4) HABITUAL PERSON :: Habitual goods like Cigarette for Chain Smoker is purchased without consideration of price
(5) IRRATIONAL & IMPULSIVE PURCHASES: Impulsive purchase means ‘purchase by impression’. At times consumers tend to make impulsive (without any calculation about price and usefulness of the product)
(6) SPECULATIVE GOODS :: In the speculative market, particularly in stock and shares, more will be demanded when the prices are rising and less will be demanded when the price declines.
(7) GIFFEN GOODS :: It is a SPECIAL TYPE OF INFERIOR GOOD whose price effect is positive. In other words these are those goods which have
(a) NEGATIVE INCOME EFFECT (being inferior good that is there is inverse relationship between income of the consumer and demand for the commodity
(b) Negative income effect is greater than substitution effect.
(c) POSITIVE PRICE EFFECT (that is LOD fails)
|⇒ In case of a Giffen good demand curve will be upward rising to right|
Example :: Bajra Consumption In Rajasthan
Thus it can be concluded that “ALL GIFFEN GOODS ARE INFERIOR GOODS BUT ALL INFERIOR GOODS ARE NOT GIFFEN GOODS”
|GIFFEN PARADOX :: Sir Robert giffen observed that when the price of bread increased , then the low wage workers brought more of bread and cut down their consumption of meat and other expensive food items. This was against the LOD as hence it was referred as “ GIFFEN PARADOX ”|
REMOVE YOUR CONFUSION
MARKET DEMAND CURVE
It is graphical presentation of demand of a particular commodity by ALL THE CONSUMER in the market AT DIFFERENT PRICES during given time.It is presentation of market demand schedule.
⇒ Graphically it is derived by Horizontal submission of individual demand curvesSuppose there are two buyers A and B in the market with their respective demand schedule Price Q.D (A) Q.D (B)
At price Rs 1 , quantity demanded by consumer A is 50 units ( Pt.A) and by consumer B is 100 units (pt B) and hence overall market demand ( assuming that there are only two consumer in the market) is 50 + 100 = 150 units
⇒ Thus by repeating this process at each possible price market demand curve isderived which is horizontal submission of individual demand curve.
MARKET DEMAND IS FLATTER than the individual demand curves. It happens because as prices changes , proportionate change in market demand is more than proportionate change in individual demand
|B.O.D||INDIVIDUAL DEMAND||MARKET DEMAND|
|Meaning||It refers to quantities of commodity that a consumers is able and willing to buy at each possible price (different price) within a given period of time, other things being equal.||It refers to quantities of commodity that all the consumers in the market are able and willing to buy at each possible price (different price) within a given period of time, other things being equal|
|Follows or not Law of demand||It may or may not follow LOD. It can be possible that an individual consumer may demand more even at higher price||It always follow LOD that is market demand always falls with rise in price and vice -versa|
|Factors affecting||It is affected by generally five factors and not by all factors||It is affected by all factors including Population|
|Nature of the Curve||Compartively to market demand , it is less flatter||Compartively to individual demand, it is more flatter|
CHANGE IN QUANTITY DEMANDED VS CHANGE IN DEMAND
|B.O.D||MOVEMENT ALONG DEMAND|
CURVE // CHANGE IN QUANTITY
|SHIFT IN DEMAND CURVE //|
CHANGE IN DEMAND
|(1) MEANING||The quantity demanded increases or decreases due to fall or rise in price only,||The quantity demanded increases or decreases due to change in other factor keeping price constant|
|(2) CAUSE||It occurs due to change in price of good only||It occurs due to change in other factors like PY, Y , T, F.E, Pop, Yd|
|(4) TYPES OF|
|(a) Extension of demand (increase in quantity demanded) :: When demand increases due to fall in price.|
It is downward movement
(b) Contraction of demand (decrease in quantity demanded) :: When demand decreases due to rise in price. It is upward movement
|(a) Increase in Demand :: W hen demand increases due to other factors like favourable change in taste etc.It is a rightward shift |
(a) Decrease in Demand :: W hen demand decreases due to other factors like unfavourable change in taste etc.It is a leftward shift
(Q) IDENTIFY THE FOLLOWING AS CHANGE IN QUANTITY DEMANDED OR CHANGE IN DEMAND
(1) Less icecream is purchased in winter
(2) consumer income falls and number of car purchased declines
(3) samsung reduces its price 10% during diwali and hence its sale increase
(4) A tuition academy raises its fee and as a result no of students fall
(5) Increase in air travellers due to rise in price of railway fare
(6) Jet airways decreases its airfare and attracts more passengers
DISTINGUISH BETWEEN INCREASE IN QUANTITY DEMANDED AND INCREASE IN DEMAND
|B.O.D||EXTENSION OR INCREASE IN|
|INCREASE IN DEMAND|
|(1) MEANING||The quantity demanded increases due to FALL IN PRICE OF GOOD only,||The quantity demanded increases due OTHER FACTORS like favourable change in taste etc|
|(4) TYPES OF|
|It is DOWNWARD MOVEMENT and thus refers to more purchase at less price||It is RIGHTWARD SHIFT and thus refers to More purchase at same (given) price.|
DECREASE IN Q. DEMANDED
|DECREASE IN DEMAND|
|(1) MEANING||The quantity demanded decreases due to RISE IN PRICE OF GOOD only,||The quantity demanded decreases d ue OTHER FACTORS like unfavourable change in taste|
|(4) TYPES OF|
|It is UPWARD MOVEMENT and thus refers to less purchase at more price||It is LEFTWARD SHIFT and thus refers to less purchase at same (given) price.|
(Q) Identify as Expansion , Contraction , Decrease or Increase in demand
CAUSES FOR INCREASE IN DEMAND // RIGHTWARD SHIFT// OUTWARD SHIFT // WHY PEOPLE PURCHASE MORE AT SAME (GIVEN) PRICE
(1) Increase in price of substitute goods which makes it dearer and hence demand for own good increases
(2) Decrease in price of Complementary goods
(3) Increase in income if good is Normal
(4) Decrease in income if good is inferior
(5) Taste gets favourable
(6) Future expectation that price will rise and hence current demand increases
(7) Population of the country and hence market sizes increases
(8) Distribution of income gets equal
CAUSES FOR DECREASE IN DEMAND // LEFTWARD SHIFT // WHY PEOPLE PURCHASE LESS AT SAME (GIVEN) PRICE