Concept of Demand

CONCEPT OF DEMAND

By
Dr. Kumar Ratnesh

Managerial Economics- 502

Unit-2
1
DEMAND
 Desire backed by ‘willingness’ and ‘ability’ to
pay for a commodity.
 It implies:
 Desire to acquire it
 Willingness to pay for it
 Ability to pay for it.
2
Demand by Market Segment and
Total Market.
 Geographical spread
 Product uses
 Distribution channel
 Customer size
 Product variety
3
TYPES OF DEMAND
1. Consumer goods and Producer goods
 Consumer goods- Goods & services used for final
consumption.
 Producer goods- Goods used for production of
other goods.
2. Perishable and Durable goods.
3. Autonomous and Derived demand
 Autonomous- Goods whose demand is not tied up
with the demand for some other goods.
4. Individual’s demand & Market demand
 Mkt dd is the summation of dd for a good by all
individual.
 Price of X and dd by buyer1,2,3 and all buyers market
4 dd.
5. Firm & Industry
demand
 All firms producing a particular good.
 Eg.- DD for Hyundai car and all types of car.
6. Demand by market segment and total market.
 Geographical spread
 Product uses
 Distribution channel
 Customer size
 Product variety
5
DEMAND FUNCTION
 The DD function is an algebraic expression of the relation
between the demand for a commodity and its various
determinants.
Dx = f(PX , PS, PC, Y, T,E,U )
Dx = Demand for X item

PX = Price of X item
PS = Price of substitute goods
PC = Price of complimentary
goods Y= Income of consumer
T= Taste or preference of consumer
E= Price expectation of the user
U= All other factors
6
DETERMINANTS OF DEMAND
 Price of the commodity
 Price of the related commodities
 Substitute goods.
 Complimentary goods.
 Income of the consumer d  y
 Normal goods.
 Necessites.
 Inferior goods.
 Tastes & preferences of consumer.
 Expectations about future price.
7
DETERMINANTS OF DEMAND
 Sizeand regional distribution of population.
 Composition of population.
 Distribution of income.
8
CAUSES OF CHANGE IN DEMAND
 INCREASE IN DEMAND:
• In income & wealth of the people.
• In the population.
• In the prices of substitute goods.
• In the prices of complementary goods.
• Expectations of rise in prices in future.
• Changes in tastes, preferences, habit,
customs in favor of a commodity.
9
CAUSES OF CHANGE IN DEMAND
 DECREASE IN DEMAND:
• In income & wealth of the people.

• In the population.
• In the prices of substitute goods.
• In the prices of complimentary goods.
• Expectations of fall in prices in future.
• Changes in tastes, preferences, habit,
customs, against a commodity
10
CHARACTERISTICS
CONCEPT OF DD DEMONSTRATES THE FOLLOWING:
 Demand is always with reference to a

price.
 Demand is referred to in a given period
of time.
 Consumer must have the necessary
purchasing power to back his desire for
the commodity.
11
.
LAW OF DEMAND
 The inverse relationship between the price and
quantity demanded of a commodity, other things
remaining the same (ceteris paribus).
 In other words, when the (price of goods) s,

dd
s and when p , dd , provided factors other
than the price do not changed.
12
Downward sloping in DD
curve
13
Reason for downward sloping
Curve
1. Law of diminishing marginal utility.
 As a consumer keeps on consuming successive units of
the
same commodity, consumption of other commodities
remaining constant, MU diminishes.
2. Income effect.
3. Substitution effect.
4. Changes in the number of consumers.
5. Diverse uses of commodity.
14
EXCEPTIONS TO LAW OF
DEMAND
1. Prestige is directly associated with price
of goods.
2. Giffen paradox
3. Emergency
4. Expectations about future price
15
CHANGE IN DEMAND & CHANGE IN
QUANTITY DEMANDED
CHANGE IN DEMAND CHANGE IN QUANTITY
DEMANDED
 Change in demand
 Change in quantity
essentially happens due to
a change in the factors demanded happens
affecting demand. essentially due to a change
in the price of that
commodity.
 Change in demand causes 
Change in quantity
a shift in the Demand
demanded causes a
Curve ,i.e., an increase in
movement along
demand causes the
the demand curve.
demand curve to shift
outwardswhereas a
16 inward shift.
MOVEMENT ALONG DD
CURVE
 A movement along a demand curve occurs when
the ONLY factor that changes
17
It is just an arrow along the demand curve in the
correct direction. As price increases the
movement would be to the left, as price
decreases the movement would be to the right.
If the quantity decreases it is known as

contraction.
If the quantity increases it is known as
expansion
18
SHIFT IN DD CURVE
19
In this diagram the shift from demand curve D1 to
demand curve D2 is represented by an actual
translation across the plane. This particular
diagram features an inward shift to the left, or a
shrink in demand. An outward shift would be an
increase in demand.
This shift is caused by any actual changes in the

determinants of demand.
20

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CONCEPT OF DEMAND

Managerial Economics- 502

Dx = f(PX , PS, PC, Y, T,E,U )

Dx = Demand for X item

• In income & wealth of the people.

 Demand is always with reference to a

 In other words, when the (price of goods) s,

4. Expectations about future price

If the quantity decreases it is known as

This shift is caused by any actual changes in the

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