Lecture No.

9
Demand – meaning, definition, types of
demand - income demand, price demand,
cross demand.
Demand schedule, demand curve. Law of
demand –exceptions ,contraction and
extension, increase and decrease in
demand, determinants of demand
 The accomplishment of any business enterprise generally depends on sales
and sales is governed by market demand behaviour.
 Market demand analysis is one of the fundamental necessities for the
existence of any business enterprise.
 Analysis of market demand for a product/service is essential for the
management in order to take decisions regarding production, cost allocation,
product pricing, advertising, inventory holdings and other factors.
 How much the business enterprise must work hard to produce largely
depends upon the demand for its product.
 If demand fails to fulfill the number of items produced, then the two must be
balanced by creating a new demand through better advertisement and
publicity.
Meaning of demand analysis
 In case, the future demand for the product is likely to be more, the more the
inventories that the firm should hold. If the demand for the product is high, a
higher price can be charged, with other things remaining the same.

Demand analysis is the process of understanding the customer demand

for a product or service in a target market.
Companies use demand analysis techniques for understanding the market.

Demand analysis has two significant applications in managerial

decision making:
 Forecasting Demand
 Manipulating Demand
Market demand analysis assists the manager to take decisions
regarding:
(a) sales forecasting with a sound basis and greater accuracy:
(b) guidelines for demand manipulation through advertising and sales
promotion programmes;
(c) production planning and product improvement:
(d) pricing policy;
(e) determination of sales quotas and performance appraisal of personnel in
the sales department; and
(f) size of market for a given product and matching market share
Meaning of
Demand
 Demand in economics means a desire to possess a good supported by
willingness and ability to pay for it.
If you have a desire to buy a certain commodity, say, a tractor, but do not have
the adequate means to pay for it, it will simply be a wish, a desire or a want and
not demand.
 Demand is an effective desire, i.e., a desire which is backed by willingness and
ability to pay for a commodity in order to obtain it.
In other words, "Demand means the various quantities of a good that would be
purchased per unit of time at different prices in a given market.
There are thus three main characteristics of demand in economics.
1.Willingness and ability to pay. Demand is the amount of a commodity for
which a consumer has the willingness and also the ability to buy.
2.Demand is always at a price. If we talk of demand without reference to price,
it will be meaningless. The consumer must know both the price and the commodity.
He will then be able to tell the quantity demanded by him.
3.Demand is always per unit of time. The time may be a day, a week, a month,
or a year.
According to Bowden , Demand means “Propensity of the consumers to buy
different quantities of a particular good at different unit prices.
Individual's Demand for a commodity
 The various quantities of a commodity that a consumer would be willing to
purchase at all possible prices in a given market at a given point in time other thing
being equal.
Demand Schedule: Tabular representation of the quantity demanded of a
commodity at various prices. The individual demand for a commodity varies
inversely with the price ceteris paribus.
 Demand curve: Is the graphical representation of demand schedule.

Demand curve will have a downward slope. DD is the demand curve.

Here price is independent variable
Quantity is dependent variable
D=f(P)
Hypothetical demand schedule
Price in Qty. Demanded per
Rs./Kg week in Kgs
20 0.25
16 0.50
12 0.75
8 1.00
4 1.25
2 1.50
The Market Demand for a Commodity
The market demand for a commodity is obtained by adding up the total quantity
demanded at various prices by all the individuals over a specified period of time in
the market. It is described as the horizontal summation of the individuals‟
demand for a commodity at various possible prices in market.
Price Individual demand schedule/Week Market
(Rs./Kg) Demand
A B C A+B+C Market Demand
schedule for
20 0.25 0.5 0 0.75 tomatoes
16 0.50 1.0 0 1.50
12 0.75 1.5 0 2.25
8 1.00 2.0 1 4.00
4 1.25 2.5 2 5.75
2 1.50 3.0 3 7.50
Autonomous demand Derived demand
The goods whose demand is not linked The demand for certain goods is
with the demand of other goods are related with the demand for other
supposed to have autonomous demand goods.

Eg. Consumer goods Demand for fertilizers &pesticides etc.,

linked with agri products
Demand for their own sake Goods that are required to produce
other goods
Composite Demand: The demand for a commodity that can be put to several uses.
Eg. Water: Cooking, Drinking, Power production, Washing 2.coal 3.Electricity
 Direct Demand: The demand for ultimate object is called as Direct demand.
 Joint demand: When several goods are demanded together for a common purpose.
Eg. Coffee: Milk, Sugar, Coffee powder
Kinds of Demand
1.Price Demand: It refers to various quantities of a good or service that a consumer would
be willing to purchase at all possible prices in a given market at a given point in time,
ceteris paribus.
2.Income Demand: It refers to various quantities of a good or service that a consumer
would be willing to purchase at different levels of income, ceteris paribus.
3.Cross Demand : It refers to various quantities of a good or service that a consumer
would be willing to purchase not due to changes in the price of the commodity under
consideration but due to changes in the price of related commodity. For example: Demand
for tea is more not because price of tea has fallen but because price of coffee has risen.
Law of Demand
1. The law of demand states that as price
increases (decreases) consumers will purchase
less (more) of the specific commodity. Demand
varies inversely with price.
As price falls from P1 to P2 the quantity demanded
increases from Q1 to Q2. This is a negative
relation between price and quantity, hence the
negative slope of the demand schedule as predicted
by the law of demand.
Demand curve has a negative slope, i.e, it
slopes downwards from left to right depicting that
with increase in price, quantity demanded falls and
The reasons for a downward sloping demand curve can be explained as follows
1. Income effect- Consumers income constant (Real Income)
 With the fall in price of a commodity,
 the purchasing power of consumer increases.
 Thus, he can buy same quantity of commodity with less money
or
 he can purchase greater quantities of same commodity with same money.
 Similarly, if the price of a commodity rises,
 the purchasing power of consumer decreases.
 it is equivalent to decrease in income of the consumer as now he has to spend more for
buying the same quantity as before.
 This change in purchasing power due to price change is known as income
effect.
2.Substitution effect-
When price of a commodity falls, it becomes relatively cheaper compared to other
commodities whose prices have not changed.
Thus, the consumer tend to consume more of the commodity whose price has fallen ,i.e, they
tend to substitute that commodity for other commodities which have now become relatively
dear.
3.Law of diminishing marginal utility–
It is the basic cause of the law of demand.
The law of diminishing marginal utility states that as an individual consumes more and more
units of a commodity, the utility derived from it goes on decreasing.
So as to get maximum satisfaction, an individual purchases in such a manner that the
marginal utility of the commodity is equal to the price of the commodity. When the
price of commodity falls, a rational consumer purchases more so as to equate the marginal
utility and the price level. Thus, if a consumer wants to purchase larger quantities,
then the price must be lowered.
Changes in demand for a commodity can be shown through the demand curve in
two ways:
(1) Movement along the demand curve(Extension and contraction ) and
(2) Shifts of the demand curve (Increase and decrease)
(1) Movement along the Demand Curve: (Extension and contraction )
Demand is a multivariable function.
If income and other determinants of demand such as tastes of the consumers,
changes in prices of related goods, income distribution etc remain constant and
there is a change only in price of the commodity, It refers to the changes in the quantity
demanded due to changes in the price. It can be either extension or contraction of
demand.
Extension means buying more commodity at lower price. While contraction means buying
less at a higher price.
The terms extension and contraction refers to the movement on the same demand curve.,
then we move along the same demand curve, In this case, the demand curve remains
 Downward movement from A to B is extension, Upward movement from B to A is
contraction.

(2) Shifts of the demand curve (Increase and decrease)

 It refers to change in demand not due to change in price, but due to change in the
values of other variables. It can increase or decrease in demand.
Increase in demand means More demand at same price or same demand at higher price.
Decrease in demand means less demand at same price or same demand at lower price.
 When there is an increase in demand
Demand curve shifts upwards to the right side of initial
demand curve DD.
D1D1 represents new demand curve-increase in
demand.
At OP price –quantity demanded OQ.
Increase in demand means purchase same quantity
OQ at higher price OP1 or Purchase of more quantity OQ1
at same price OP.
 The decrease in demand indicates shifts of demand
curve towards left i.e downwards to initial demand curve.
New demand curve D2D2
Means decrease in demand means purchase of same
quantity OQ at less price OP2 or Purchase less quantity
 Determinants of demand (Factors affecting the demand)
Changes in demand is due to factor other than the price factors of the same product.
1. Individual tastes and preferences: a preference for a particular good may affect the
consumer‟s choice and he / she may continue to demand the same even in rising prices
scenario. These are influenced by fashions, population changes, advertisements, customs,
habits, popularity.
2. Income: Higher the income of the consumer the more will be quantity demanded of the
good. The only exception to this will be inferior goods whose demand decreases with an
increase in income level. The proportion of income spent on food and other necessaries
decreases with increase in income level of consumer.
3. Price of related goods: The change in the price of one good influence the consumption
of other good
If the goods are Substitutes: The rise in the price of one good results in increase in
demand for other goods. Meat & Chicken Coffee & Tea (+Ve)
If the goods are complements: There are certain goods which need to be used together
Complementary goods: If the price of gasoline goes up the quantity demanded of
automobiles will go down. Thus the price of complements have an inverse
relationship with the demand of a good.
4. Price of the good: This is the most important determinant of demand. The relationship
between price of the good and quantity demanded is generally inverse.
5. Expectations about future prices & income: If the consumer expects prices to rise
in future he / she may continue to demand higher quantities even in a rising price scenario
and vice versa.
6. Habit: Large no. of smokers in a region influence the demand for tobacco& its products.
7. Region: In high altitude regions demand for wine , woollen clothing & meat etc. would be
persistent.
8. Season: Demand for sweaters increases in winter and decreases in summer.

Exceptions to the law of demand

Unlike other laws, law of demand also has few exceptions i.e. there is no inverse
1. Giffen goods: These are inferior goods whose quantity demanded decreases with
decrease in price of the good. This can be explained using the concept of income effect
and substitution effect. Rise in price demand also rises. Fall in price demand
also falls.

2. Prestigious goods: Commodities which are regarded as status symbols: Expensive

commodities like jewellery, AC, cars, etc., are used to define status and to display one's
wealth. These goods doesn't follow the law of demand and quantity demanded increases
with price rise as more expensive these goods become, more will be their worth as a
status symbol.

3. High priced commodities: If the product is superior &health conscious he go for

that even the price is high. High quality goods are purchased at high prices Price
delusion.
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