Meaning…

Refers to the desire, backed by the necessary ability to pay.

Demand is a buyer's willingness and ability to pay a price for a

specific quantity of a good or service.

Demand refers to how much (quantity) of a product or service

is desired by buyers at various prices. The quantity
demanded is the amount of a product people are willing to
buy at a certain price.
The relationship between price and quantity demanded is
known as the demand.
Aspects of Demand…
Desire for specific commodity.
+
Sufficient resources to purchase the desired
commodity.
+
Willingness to spend the resources.
+
a. Availability of the commodity at
(i) Certain price (ii) Certain place (iii)
Certain time.
Willing to purchase:
Being willing to purchase simply means that one likes
an item enough to want to buy it, and this is usually
what people think of when they encounter the
concept of demand. However, it's important to
remember that, while it's good to want things, desire
to purchase is not the only requirement for economic
demand.
Able to purchase:
Wanting to purchase an item doesn't mean a whole
lot if one doesn't have the means to make the
transaction happen. Therefore, ability to purchase is
another important factor of demand. Economists
don't specify how an individual must be able to pay
for an item- she can pay with cash, check, credit card,
money borrowed from friends or taken from the piggy
bank, etc.
Ready to purchase:
Demand is, by its nature, a current quantity, so an
individual is only said to demand something if she is
willing and able to purchase it now as opposed to
some point in the future.
Types of Demand
 -Consumer Goods and producer goods
 Perishable and durable goods
 Autonomous and derived demand
 Individual demand and market Demand
 Firm and Industry demand

 Others:
1. Income demand
- Demand for normal goods (price –ve, income +ve)
- Demand for inferior goods (eg., coarse grain)

 Cross demand
- Demand for substitutes or competitive goods (eg.,tea & coffee, bread and
rice)
- Demand for complementary goods (eg., pen & ink)

 Joint demand (same as complementary, eg., pen & ink)

 Composite demand (eg., coal & electricity)
 Direct demand (eg., ice-creams)
 Derived demand (eg., TV & TV mechanics)
 Competitive demand (eg., desi ghee and vegetable oils)
Demand Schedule and Curve
Demand curve: Price of Quantity
a curve showing the Good Demand
relation between the ed
price of a good and
quantity demanded 3 200
during a given period, 4 150
other things constant.
Suppose we are making
5 100
pizza. 6 75
7 50
The geometrical representation of demand schedule is called
the demand curve.
Determinants of Demand

Economic demand- how much of an item one is

willing, ready and able to purchase- depends on a
number of different factors. For example, people
probably care about how much an item costs when
deciding how much to purchase. They might also
consider how much money they make when making
purchasing decisions, and so on.
Determinants of Demand
Price of Product
Income of Consumer
Price of Related Good
 Complementary Goods
 Substitute Goods
Tastes and Preferences
Advertising
Consumer’s expectation of future Income and Price
Growth of Economy
Seasonal conditions
Population
Price as a Determinant of Demand
Price, in many cases, is likely to be the most
fundamental determinant of demand, since it's
often the first thing that people think about when
deciding how much of an item to buy. The vast
majority of goods and services obey what
economists call the law of demand- that, all else
being equal, the quantity demanded of an item
decreases when the price increases and vice versa.
(There are some exceptions to this rule, but
they are few and far between.)
Income as a Determinant of Demand
People certainly look at their incomes when
deciding how much of an item to buy, but the
relationship between income and demand isn't as
straightforward as one might think. Do people
buy more or less of an item when their incomes
increase? As it turns out, that's a more
complicated question than it might initially seem.
For example, if a person were to win the lottery,
he would likely take more rides on private jets
than he did before. On the other hand, the lottery
winner would probably take fewer rides on the
subway than before.
Economists categorize items as normal goods or
inferior goods on exactly this basis. If a good is a
normal good, then the quantity demanded goes up
when income increases, and the quantity demanded
goes down when income decreases. If a good is an
inferior good, then the quantity demanded goes down
when income increases and goes up when income
decreases.
In our example, private jet rides are a normal good and
subway rides are an inferior good. There are two things to
note about normal and inferior goods:
What is a normal good for one person may be an inferior
good for another person, and vice versa. For an overall
market, a good is normal if market demand increases
when income increases, on average, for the people in that
market, and a good is inferior if market demand decreases
when average income increases.
It's possible for a good to be neither normal nor inferior-
for example, it's quite possible that the demand for toilet
paper neither increases nor decreases when income
changes!
Prices of Related Goods as Determinants of
Demand
When deciding how much of a good they want to
purchase, people take into account the prices of
both substitute goods and complementary goods.
Substitute goods, or substitutes, are goods that
are used in place of one another. For example,
Coke and Pepsi are substitutes because people
tend to, well, substitute one for the other.
Complementary goods, or complements, on the
other hand, are goods that people tend to use
together. DVD players and DVDs are examples of
complements, as are computers and high-speed
internet access.
The key feature of substitutes and complements
is the fact that a change in price of one of the
goods has an impact on the demand for the other
good. For substitutes, an increase in the price of
one of the goods will increase demand for the
substitute good. (It's probably not surprising that
an increase in the price of Coke would increase
the demand for Pepsi as some consumers switch
over from Coke to Pepsi.) It's also the case that a
decrease in the price of one of the goods will
decrease demand for the substitute good.
For complements, an increase in the price of one of
the goods will decrease demand for the
complementary good. Conversely, a decrease in the
price of one of the goods will increase demand for the
complementary good. (For example, decreases in the
prices of video game consoles serves in part to
increase demand for video games.)
Goods that don't have either the substitute or
complement relationship are called unrelated goods.
In addition, sometimes goods can have both a
substitute and a complement relationship to some
degree- for example, gasoline is a complement to even
fuel-efficient cars, but a fuel-efficient car is a
substitute for gasoline to some degree.
Tastes as a Determinant of Demand
How much of a particular good or service also
depends on an individual's taste for the item. In
general, economists use the term "tastes" as a catchall
category for consumers' attitude towards a product.
In this sense, if consumers' tastes for a good or service
increase, then their quantity demanded increases, and
vice versa.
Expectations as a Determinant of Demand
Today's demand can also depend on consumers'
expectations of future prices, incomes, prices of
related goods, and so on. For example, consumers
demand more of an item today if they expect the price
to increase increase in the future. Similarly, people
who expect their incomes to increase in the future
will often increase their consumption today.
Number of Buyers as a Determinant of
Market Demand
Although not a determinant of individual demand,
the number of buyers in a market is clearly an
important factor in calculating market demand. Not
surprisingly, market demand increases when the
number of buyers increases, and market demand
decreases when the number of buyers decreases.
Law of Demand
States that a quantity of a good demanded during a
given period relates inversely to its price, other things
constant.
Price increases  Quantity Demanded decreases
Price decreases  Quantity demanded increases
Creates a downward sloping demand curve
Demand Curve
A curve showing the relation between
Price the price of a good and the quantity
demanded.
6

5 Point on the line that matches the schedule

Every point on the line matches the schedule.
4 It is a price/quantity demanded that consumers
are willing and able to buy.
3
Demand
0 Quantity
50 75 100 150 200
Movement Along the Demand Curve
Caused by a change in price
Only a change in price
Move from one point to another on the same graph
Called a
Change in quantity demanded.
Movement along the Demand Curve

Price

B
6

5 A

Demand

0
75 100 Quantity
Demand
Individual demand
The demand of an individual consumer
Market demand
Sum of individual demands of all consumers in the
market
Aggregate or Market Demand Curve

The market demand curve describes the quantity

demanded by the entire market for a category of goods or
services. An example of this is gasoline prices overall.
When the cost of oil goes up, all gas stations must raise
their prices to cover their costs. Even if the price drops
50%, drivers aren't going to increase the amount bought
by that much. That's why, when the price skyrockets from
$3.20 - $4.00 a gallon, people get very upset. They can't cut
back their driving to work, school and the grocery store
very easily, and so they are forced to pay more for gas.
By the way, this lowers their incomes for things other
than gas. Income is another determinant of demand,
so that means the demand curve for other things they
would like to buy, like ice cream, will drop. This is
called a demand shift. In this case, the entire demand
curve for ice cream shifts to the left. Since buyers
have less income, they will purchase a lower quantity
of ice cream even at the same price.
Change in Demand
Shift in demand Curve
Movement along with demand curve
Shifts in the Demand Curve
A demand curve isolates the relation between prices
of a good and quantities demanded when other
factors that could affect demand remain unchanged.
Factors called assumptions or determinants
Changes in determinants
Results in changes to the RELATIONSHIP BETWEEN
PRICE AND QUANTITY DEMANDED.
At each and every price a DIFFERENT quantity is
demanded.
Results in a shift in the demand curve
New curve must be drawn
Changes in Demand
Increase in demand
At each and every price
MORE of the good is
Price
demanded
Shifts to the right

P Qd1 Qd2 5
A B

D2
4 150 200
D1
5 100 150 Quantity
100 150
6 75 100
Causes of Increase in Demand
Increase in consumer
income
Causes consumers to
buy more of the
product at each and
every price.
Normal goods
Inferior goods
Change in consumer income
Normal goods
A good for which demand
increases as consumer
income rise

Inferior goods
A good which demand
increases as consumer
income falls
Changes in Price of Related Goods
Substitutes
Goods that are not
consumed jointly
Goods that are related in
such a way that an increase
in the price of one shifts the
demand curve for the other
rightward.
Increase in price of Coke
leads to increase in
demand for Pepsi
Changes in Price of Related Goods
Substitutes
Suppose that the price of Coke rises from 1 to 1.50, then
the demand for Pepsi will decrease from 75 to 100.

Price
1

D1 D2

75 100
Qty
Changes in the price of related goods
Complements
Goods that are
related in a such a
way that an increase
in the price of one
shifts the demand of
the other leftward
Two goods that are
consumed jointly.
An decrease in the
price of one will
increase demand
for the other
Changes in Price of Related Goods
Complements
 An decrease in the
price of DVD players,
increases the demand
for DVDs
 Suppose that DVD
players decrease in 20
price from 145 to 100,
now the demand for
DVDs will decrease
from 750 at 20 to 900. D D2

750 900
Changes in Consumer Expectations
Such as expectations in
Prices and income
Affect how consumers spend
their money and their
demand
If product cheaper today
than tomorrow, then
increase in demand
Changes in consumer tastes
Consumer preferences
likes and dislikes in
consumption assumed to
be constant along a given
demand curve assumed
constant along a given
demand curve
Changes in taste will
cause a shift in the
demand curve as
different quantities are
demanded at each and
every price.
Changes in taste
Consumers prefer
platform shoes.
At 50, demand
increases from 100
50
to 200.

D2
D

100 200
Change in the number and composition of
consumers
The market demand curve is the sum of the
individual demand curves.
If the number of consumers falls then the sum will be
smaller thus shifting the demand curve
Changes in Demand
Decrease in demand
At each and every price
Less of the good is
Price
demanded
Shifts to the Left

P Qd1 Qd2 5 A
D1
4 150 110
D2
5 100 90 Quantity
90 100
6 75 60
Causes of Decrease in Demand
Decrease in consumer
income
Causes consumers to
buy less of the product
at each and every price.
Exceptions to law of demand
 Some special varieties of inferior goods are termed as Giffen goods.
Cheaper varieties of this category like bajra, cheaper vegetable like
potato come under this category. A few goods like diamonds etc are
purchased by the rich and wealthy sections of the society. The prices
of these goods are so high that they are beyond the reach of the
common man.
 Certain things become the necessities of modern life. So we have to
purchase them despite their high price. A consumer’s ignorance is
another factor that at times induces him to purchase more of the
commodity at a higher price. Emergencies like war, famine etc.
negate the operation of the law of demand. Households also act
speculators. A change in fashion and tastes affects the market for a
commodity. When a broad toe shoe replaces a narrow toe, no amount
of reduction in the price of the latter is sufficient to clear the stocks.
 Though as a rule when the prices of normal goods rise, the demand
for them decreases but there may be a few cases where the law may
not operate.
The law of demand does not apply in every case and situation.
The circumstances when the law of demand becomes ineffective
are known as exceptions of the law. Some of these important
exceptions are as under.

 (1) Prestige goods/Veblen goods. There are certain commodities

like diamond, sports, cars etc., . which are purchased as a mark of
distinction in society. If the price of these goods rise, the demand for
them may increase instead of falling.
 (2) Price expectations. If people expect a further rise in the price of a
particular commodity, they may buy more inspite of rise in price: The
violation of the law in this case is only temporary.
 (3) Ignorance of the consumer. If, the Consumer is ignorant *about
the rise in price of goods, he may buy more at a higher price.
 (4) Giffen goods. If the prices of basic goods, (potatoes, bajra, sugar
etc) on which the poor spend a large part of their incomes declines,
the poor increase the demand for superior goods, hence when the
price of Giffen good falls, its demand also falls. There is a positive
price effect in the case of Giffen goods. •
Elasticity – the concept
The responsiveness of one variable to changes in
another
When price rises, what happens
to demand?
Demand falls
BUT!
How much does demand fall?
Types..
Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Promotional elasticity of demand
Expectations elasticity of demand
Kinds Of Price Elasticity Of Demand
1) Perfectly elastic demand (Ed= ∞)
2) Perfectly inelastic demand (Ed=0)
3) Elasticity of demand equal to utility(Ed=1)
4) Relatively inelastic demand (Ed<1)
5) Relatively elastic demand(Ed>1)
Measurement Of Price Elasticity Of
Demand
There are main methods like
1. Percentage method or proportionate method
2. Total outlay method or total revenue method
3. Geometric method or point method
4. Arc elasticity of demand
Percentage method or proportionate
method
Price elasticity of demand (ep)
Proportionate change in quantity demanded of good X
Proportionate change in price of good X
(Q2-Q1)
Q1
=
(P2-P1)
P1
Where Q1 and P1 are original quantity and price
respectively, and Q2 and P2 are the new quantity
and price respectively
Perfectly elastic demand
y
When the
Perfectly elastic
P demand curve demand for a
R product changes
I
D
–increases or
D
C decreases even
E when there is no
change in price,
it is known as
perfect elastic
0 x
demand.
Y
D
When a change in
price, howsover
Perfectly inelastic
P demand curve large, change no
R
changes in quality
demand, it is known
I
as perfectly inelastic
C demand
E

0 D X
demand
Y
D When the
Relatively inelastic
demand curve
proportionate
change in demand
P
is less than the
R proportionate
I changes in price, it
C is known as
relatively inelastic
E
demand
D

O X
demand
y
When the
P Relatively elastic proportionate
demand curve
R
D
change in
I
demand is more
C
than the
E
proportionate
D
changes in price,
it is known as
0 x
relatively elastic
demand
demand.
Y

WHERE
P D1) Perfectly elastic
R demand
D
D1 D2)Relatively elastic
I
demand
C
D2 D3)Elasticity of demand
E D3
equal to utility
D4
D4)Relatively inelastic
0 D5 X demand
DEMAND D5)Perfectly inelastic
demand
Factors Affecting Price Elasticity Of
Demand
Nature of the Commodity
Availability of Substitutes
Variety of uses of commodity
Postponement
Influence of habits
Proportion of Income spent on a
commodity
Range of prices
Factors Affecting Price Elasticity Of
Demand
Income Groups
Elements of time
Pattern of income distribution
Practical Importance of the
Concept of Price Elasticity Of
Demand
The concept is helpful in taking Business Decisions
Importance of the concept in formatting Tax Policy of
the government
For determining the rewards of the Factors of
Production
To determine the Terms of Trades Between the Two
Countries
Practical Importance of the
Concept of Price Elasticity Of
Demand
Determination of Rates of Foreign Exchange
For Nationalization of Certain Industries
In economic Analysis ,the concept of price elasticity
of demand helps in explaining the irony of poverty in
the midst of plenty.
Determinants of Price Elasticity
of Demand
Demand for a commodity will be more
elastic if:
It has many close substitutes
The share of the commodities in buyers’
budget is high
Nature of the commodities, luxuries
More time is available to adjust to a price
change
Determinants of Price Elasticity
of Demand
Demand for a commodity will be less elastic
if:
It has few substitutes
The share of the commodities in buyers’
budget is low
Nature of the commodities, Essentials
Less time is available to adjust to a price
change
Types Of Income Elasticity Of Demand
Positive Income elasticity of demand
Negative Income elasticity of demand
Zero Income elasticity of demand
Y
D

P
A

D
Income

B S
O Quantity Demanded X
Positive Income elasticity of demand

Income Elasticity Equal to Unity or

One (Edy =1)
Income Elasticity Greater Than Unity
Or One (Edy >1)
Income Elasticity Less Than Unity or
One (Edy < 1)
Price

Total Revenue

B S

Quantity Demanded (000s)

Y
D
Income

O X
D

Quantity Demanded
Proportionate change in Demand
Income Elasticity Of Demand
= Proportionate change in Income
i.e. ∆q ∆y
Income Elasticity Of Demand +
= Q Y
Measurement Of Income Elasticity Of
Demand
Here , ∆q = Change in the quantity
demanded.
Q = Original quantity demanded.
∆y = Change in income.
Y = Original income.
For e.g. ,when Income of the consumer =
2,500/- , he purchases 20 units of X, when
income = 3,000/- he purchases 25 units of X
Measurement Of Income Elasticity Of
Demand
Thus
Income Elasticity of Demand
∆q ∆y
= +
Q Y

= (5/20) + (500/2500)
= 1.5
therefore here the IED is 1.5 which is more
than one.
Factors Affecting Income Of Demand
Income Itself Only.
Price Of the Commodity
Importance Of the Concept of Income
Elasticity Of Demand
In production planning and management
In forecasting demand when change in
consumers income is expected
In classifying goods as normal and inferior
In expansion and contraction of the firm
by the figure of income elasticity of
demand
Markets situations could be studied with
(8) Elasticity Of Substitution
The selection between two product or
thing is called substitution
So Elasticity of Substitution measures the
rate at which the particular product is
substituted .
Thus EOS is the degree to which one
product could be substituted in context of
price and proportion
Elasticity Of Substitution
Elasticity of Substitution
= Proportionate change in the quantity
ratios of goods x & y DIVIDED BY
Proportionate change in the price ratios of
goods x & y.
Types of Elasticity Of Substitution
Zero Elasticity of Substitution.
Infinite Elasticity Of Substitution
Elasticity of Substitution greater than
unityor1
Elasticity of Substitution is equal to one
Elasticity of Substitution is less than one
Change in QUANTITIY ratio of good x
Y

E4
E3

E5

E2

E1
&y

X
O
Change in PRICE ratio of good x & y
Relationship Between Price Elasticity,
Income Elasticity and Substitution
Elasticity
As Price is depended on income and
substitution effect similarly Price Elasticity
is depended on Income Elasticity an
Substitution Elasticity .
These relationship can be represented by
Ep = Kx E1 + ( 1 – Kx ) es
Price elasticity of demand depends
on:

Proportion of income spent on particular

good say X.
Income elasticity of demand.
Elasticity of substitution.
Proportion of income spent on product
other than X.
Cross Elasticity of Demand
Cross elasticity of demand express a
relationship between the change in the
demand for a given product in response
to a change in the price of some other
product
E.g. if the X tea demand reduces
tremendously than it effect could be seen
in demand of sugar and milk.
Types of Cross Elasticity of Demand
Cross Elasticity of Demand Equal to Unity
or One
Cross Elasticity of Demand Greater than
Unity or one
Cross Elasticity of demand less than unity
or one
Proportionate change in Demand
for product X
Cross Elasticity of Demand
= Proportionate change in Price of
i.e. product Y

Cross Elasticity of Demand ∆qx ∆p y

+
= Qx Py
Y
D
Price of Y

O X
Demand for Y
Y
D
Price of Y

D
O X
Demand for Y
Y
D
Price of Y

O X
Demand for Y
Importance of Cross Elasticity Of
Demand
The concept is of very great importance in
changing the price of the products having
substitutes and complementary goods .
In demand forecasting
Helps in measuring interdependence of price of
commodity .
Multiproduct firms use these concept to
measure the effect of change in price of one
product on the demand of their other product
Advertising Elasticity of Demand
Advertising elasticity of demand is the
measure of the rate of change in
demand due to change in advertising
expenditure
The amount of change in demand of goods
due to advertisement is known as
Advertisement Elasticity of Demand .
Proportionate change in Demand
for product
Advertising Elasticity of Demand
= Proportionate change in
i.e. Advertising expenditure

∆qx ∆a
Advertising Elasticity of Demand ÷
= Q A
Y
S
Sales

O X
Advertising
Factors Affecting Advertising Elasticity
Of Demand
The stage of the Product’s Market
Development .
Reaction of market Rival Firms.
Cumulative Effect of Past Advertisement.
Influence of Other Factors.
Importance of the Advertising
Elasticity Of Demand in Business
Decisions
It is useful in competitive industries.
Though advertisement shifts the demand
curve to right path but it also increases the
fixed cost of the firm.
Limitation of Advertising Elasticity
of the Demand
The impact of advertising on sales is
different under different conditions, even if
other demand determinants are constant.
Like wise, it is difficult to establish any co-
relationship between advertising
expenditure and volume of sales when
there counter advertisements by rival firm
in the market . The effect on sales depend
on what the rivals are doing.
Review of Demand
A change in quantity demanded is not a change
in demand
Change in quantity demanded is caused by a
change in price
Change in quantity demanded is a movement
along the demand curve
Change is demand is caused by a change in the
determinants
Change in demand shifts the demand curve