Chapter 3- Demand - Chapter Notes, Micro Economics, Class 12 - Commerce PDF Download

THEORY OF DEMAND

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.

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THREE ALTERNATIVE WAYS OF EXPRESSING DEMAND
 (1) DEMAND FUNCTION (2) DEMAND SCHEDULE (3) DEMAND CURVE

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DEMAND FUNCTION

It shows mathematical or functional relationship between DEMAND AND ITS VARIOUS DETERMINANTS (FACTOR AFFECTING DEMAND)

(1) DEMAND OF COMMODITY AND PRICE OF OWN COMMODITY ( D_X & P_X)

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 

i.e. P_X Q.D ,P_X Q.D

 The law explains the cause for Movement along Demand Curve

ASSUMPTION :: all other thing ( P_Y, Y , T, F.E, Pop, Y_d) 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

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The curve is DOWNWARD SLOPING FROM LEFT TO RIGHT indicating negative relation
 between quantity demanded and price of the commodity

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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 doesnot 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 ( D_X & 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 is
another example.

(3) DEMAND OF COMMODITY AND INCOME OF THE CONSUMER ( D_X & Y )

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 . If any commodity
is purchased by consumer because of his low income level , then this commodity is termed as
an inferior commodity for that person .For example : Bajra is a normal commodity for a rich
person but if low income of a person forces him to consume bajra every day , then bajra
will be an inferior commodity for him
EFFECT OF INCREASE IN INCOME ON DEMAND CURVE
(a) The demand for Normal Goods increases and thus DEMAND CURVE SHIFTS
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
L 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

[ panel (b)]

(b) Demand for Inferior Goods increases and rightward shift at given or existing price

[ panel (a)]

(4) DEMAND OF COMMODITY AND FUTURE EXPECTATION ABOUT PRICE (D_X & 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

(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.

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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

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(7) DEMAND OF COMMODITY AND DISTRIBUTION OF INCOME ( D_X & Y_d )
It effects MARKET DEMAND and cause shift in Demand curve.

EQUAL DISTRIBUTION OF INCOME :: Demand for goods will come from every
segment 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 and
that 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 SUBSTITUTION OF 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 becomes
relatively 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 :: With fall in price, goods with different uses like milk
(a) Will be used more for specific purposes like direct consumption and baby food
(b) Will 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”

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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 ”

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REMOVE YOUR CONFUSION

INFERIOR GOODS

GIFFEN GOODS

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 curves
Suppose there are two buyers A and B in the market with their respective demand schedule

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

i.e OA + OB = OM .

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

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(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

(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