Demand - Economy - SSC CGL Tier 2 - Study Material, Online Tests, Previous

Table of Contents
1. Meaning
2. Types of Demand
3. Demand Schedule
4. Demand Curve
5. Law of Demand
6. Factors Affecting Demand
7. Significance of the Law of Demand
8. Exceptions to the Law of Demand
9. Determinants of Demand
10. Advantages of the Law of Demand
11. Limitations of the Law of Demand
12. Change in Demand
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Meaning

Demand arises when a buyer expresses a desire for a specific commodity at a given price and is both willing and able to purchase it within a particular period. Demand therefore has two essential aspects:

• Willingness to buy: the consumer's desire or preference for the product.
• Ability to pay: the consumer's purchasing power or real resources to finance the purchase at the prevailing price.

The level of demand shown by consumers depends on their needs, tastes and purchasing power. To stimulate demand in a market, the following conditions are necessary:

• Desire for the commodity: consumers must want the good.
• Means to purchase the commodity: consumers must have sufficient income, credit or wealth.
• Willingness to use those means: consumers must be prepared to spend their resources on that particular good rather than on alternatives.

Types of Demand

• Individual demand: the quantity of a product a single consumer wants to buy at a particular price and time. Influenced by the individual's income, price and tastes. Example: Mr. A demands 200 units per week of a product priced at Rs. 40.
• Market demand: the aggregate demand of all consumers for a product at a given price and time. It is calculated by summing individual demands, other factors held constant. Example: five consumers buying a total of 150 litres of mustard oil per month.
• Organisational demand: the demand for a product by a particular organisation during a period. Example: demand for Maruti Suzuki cars by corporate buyers or fleet operators.
• Industry demand: total demand for a product from all firms within an industry. Example: cumulative demand for passenger cars across manufacturers such as Maruti Suzuki, Toyota, etc.
MULTIPLE CHOICE QUESTION
Try yourself: What is the definition of income demand?
A
The quantity of a product an individual can buy at a given price point.
B
The demand for a product influenced by the demand for associated products.
C
The quantity of a good or service an individual can buy at a given income level.
D
The demand influenced by the price of similar products.
View Solution
Correct Answer: CHide Explanation ⌃
- Income demand refers to the eagerness of an individual to purchase a specific quantity of a product at a given income level.
- It represents the quantity of a good or service that an individual can afford to buy based on their income.
- This concept focuses on the relationship between an individual's income and their willingness to purchase a particular quantity of a product.
- It is important for businesses to understand income demand as it helps them determine the affordability and purchasing power of their target customers.
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• Income demand: the quantity a consumer is prepared to purchase at a particular income level; shows how demand changes with income.
• Autonomous and derived demand: autonomous demand is demand that arises independently (final consumer demand); derived demand arises because of demand for another good (e.g., demand for steel derived from demand for cars).
• Price demand: the quantity of a good a buyer will purchase at a given price.
• Perishable and durable goods demand: perishable goods are consumed quickly (e.g., food, petrol); durable goods last over time (e.g., machinery, cars).
• Cross demand: demand affected by the price change of related goods. Example: if the price of coffee rises, demand for tea may increase.
• Seasonal and long-term demand: seasonal demand occurs in short periods (e.g., umbrellas in monsoon); long-term demand persists over extended periods and is influenced by structural factors like technology and habit changes.

Demand Schedule

A demand schedule is a table showing the quantity demanded of a product at different prices during a specified period. It normally has two columns: price and quantity demanded. A demand schedule helps to construct the demand curve.

Demand Curve

A demand curve is the graphical representation of the relationship between the price of a commodity (vertical axis) and the quantity demanded (horizontal axis) in a period. It usually slopes downward from left to right, indicating an inverse relationship between price and quantity demanded.

Law of Demand

The Law of Demand states that, ceteris paribus (all other factors held constant), an increase in the price of a commodity causes a decrease in the quantity demanded, and a decrease in price causes an increase in quantity demanded. Thus price and quantity demanded are inversely related.

The demand curve illustrates this inverse relationship: higher prices correspond to smaller quantities demanded and lower prices correspond to larger quantities demanded.

Factors Affecting Demand

• Income effect: when price falls, the real purchasing power of consumers rises, enabling them to buy more; this tends to increase quantity demanded.
• Substitution effect: when the price of a good falls, it becomes relatively cheaper compared with substitutes, so consumers switch towards it, increasing its demand.
• Diminishing marginal utility: as a person consumes more units of a good, the additional satisfaction from each extra unit declines; a lower price is required to induce additional purchases, which contributes to the downward slope of demand.
• Consumer preferences and tastes: changes in tastes shift demand; a good becoming fashionable raises demand at the same prices, while a fall in popularity reduces demand.

Significance of the Law of Demand

• Price Elasticity of Demand (PED): measures how responsive quantity demanded is to a change in price. PED helps firms and policymakers understand demand sensitivity to price changes.
• Business decisions: firms use the law to set prices, forecast sales and estimate revenue and profit responses to price changes.
• Policy implications: governments use the law when designing taxes and subsidies; taxes raise prices and reduce demand, while subsidies lower prices and stimulate demand.
• Market analysis and strategy: the law guides pricing strategy, product positioning and forecasting, aiding firms to respond to consumer behaviour.

Exceptions to the Law of Demand

Some goods do not follow the usual inverse relationship between price and quantity demanded; their demand curves may slope upward in certain ranges. Two notable exceptions are:

• Giffen goods: inferior goods that constitute a large share of a consumer's budget and have few close substitutes. Named after Sir Robert Giffen, these goods may see quantity demanded rise when the price rises because the income effect (reduced real income) outweighs the substitution effect. Empirical evidence for genuine Giffen goods is limited and situation-specific.
• Veblen goods: luxury goods whose high price adds to their desirability as status symbols. Named after Thorstein Veblen, demand for these goods may increase with price because higher price conveys prestige. Examples include certain luxury cars, exclusive watches and designer clothing.

Determinants of Demand

• Price of the commodity: generally, a higher price reduces quantity demanded and a lower price increases it.
• Price of related commodities: substitutes and complements affect demand. If the price of a substitute rises, demand for the original good typically increases. If the price of a complement rises, demand for the original good typically decreases.
• Income of consumers: higher incomes usually increase demand for most goods (normal goods), while demand for some goods falls as income rises (inferior goods).
• Consumers' tastes and preferences: trends, advertising and changes in social tastes shift demand toward or away from particular goods.
• Population and demographics: changes in population size, age structure or household formation can raise or lower demand for specific goods.
• Expectations about future prices and incomes: if consumers expect prices to rise or incomes to increase, current demand may rise; expectations of lower future incomes or prices can reduce current demand.

Advantages of the Law of Demand

• Price-setting guidance: helps sellers and firms decide on pricing strategies.
• Predictive insights: enables forecasting of how quantity demanded will change with price movements.
• Policy relevance: assists policymakers such as finance ministers in assessing the likely demand effects of taxes, subsidies and price controls.

Limitations of the Law of Demand

• Contextual exceptions: in special situations such as war, famine, panic buying, speculative bubbles or when basic survival goods are involved, the law may not correctly predict behaviour.
• Exceptional goods: for Giffen and Veblen goods the usual inverse relationship may not hold.
• Assumption dependency: the law assumes ceteris paribus - if other determinants change (income, tastes, expectations), the predicted relationship may fail.

Change in Demand

A change in quantity demanded is a movement along the same demand curve caused only by a change in the good's own price. A change in demand is a shift of the entire demand curve and results from changes in factors other than the good's own price.

Major factors that cause a shift in the demand curve include:

1. Changes in the price of related goods:

   If a substitute becomes more expensive, demand for the related good increases and the demand curve shifts right. If a substitute becomes cheaper, demand shifts left. For complements, an increase in the price of one reduces demand for the other, shifting its demand curve left; a fall in the complement's price shifts demand right.

2. Changes in income:

   For normal goods, an increase in consumer income shifts the demand curve right (more demanded at each price); a decrease shifts it left. For inferior goods, demand falls as income rises and rises as income falls.

3. Shifts in preferences:

   When consumers' tastes change in favour of a good (for example, a move to fuel-efficient cars when petrol prices rise), demand increases and the curve shifts right. When tastes move away, demand shifts left.

4. Changes in expectations:

   Expectations about future prices, income or job security affect current demand. Positive expectations (secure jobs, rising incomes) raise demand now and shift the curve right; negative expectations shift it left.