MANAGERIAL
ECONOMICS
SESSION 2- The Market Forces of Demand
and Supply
CONCEPT OF DEMAND
Dr Vani Aggarwal
Text/Reference Book
Chapter -2 Dominick Chapter 3- Mark
Salvatore & Hirschey,
Siddhartha K Managerial
Rastogi, Managerial Economics, 12th
Economics, 8th Edition, South-
Edition, Oxford Western, Cengage
University Press Learning
Concept of Demand
Factors Affecting Demand
Content
Law of Demand
Change in demand
3
KEY CONCEPTS
•Demand
•Demand Schedule
•Demand curve
•Demand function
•Direct demand
•Derived demand
•change in the quantity demanded
•shift in demand
WHAT IS DEMAND?
DEMAND-MEANING
• Prof. Hibdon "Demand means the various quantities of goods
that would be purchased per time period at different prices
in a given market".
• Demand in economics means a desire to possess a good
supported by willingness and ability to pay for it. If your
have a desire to buy a certain commodity, say a car, but you
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 effective desire, i.e., a desire which is backed by
willingness and ability to pay for a commodity in order to
obtain it.
CHARACTERISTICS OF DEMAND
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.
Individual Demand and Market
Demand
Total Market Demand and Market
Segment Demand
Derived Demand and Direct
Demand
Industry Demand and Company
TYPES OF Demand
DEMAND Short-Run Demand and Long-Run
Demand
Price Demand
Income Demand
Cross Demand
Individual Demand and Market Demand: The
individual demand refers to the demand for goods
1
and services by the single consumer, whereas the
market demand is the demand for a product by all
the consumers who buy that product. Thus, the
market demand is the aggregate of the individual
demand.
Total Market Demand and Market Segment
Demand: The total market demand refers to the
2 aggregate demand for a product by all the
consumers in the market who purchase a specific
kind of a product. Further, this aggregate demand
can be sub-divided into the segments on the basis
of geographical areas, price sensitivity, customer
size, age, sex, etc. are called as the market
segment demand.
Derived Demand and Direct Demand: When the demand for a
product/outcome is associated with the demand for another
3 product/outcome is called as the derived demand or induced demand.
Such as the demand for cotton yarn is derived from the demand for
cotton cloth. Whereas, when the demand for the products/outcomes is
independent of the demand for another product/outcome is called as the
direct demand or autonomous demand. Such as, in the above example
the demand for a cotton cloth is autonomous
Industry Demand and Company Demand: The industry demand
refers to the total aggregate demand for the products of a particular
4 industry, such as demand for cement in the construction industry.
While the company demand is a demand for the product which is
particular to the company and is a part of that industry. Such as
demand for tyres manufactured by the Goodyear. Thus, the company
demand can be expressed as the percentage of the industry demand
Short-Run Demand and Long-Run Demand: The short term
demand is more elastic which means that the changes in price or
income are reflected immediately on the quantity demanded.
5 Whereas, the long run demand is inelastic, which shows that
demand for commodity exists as a result of adjustments following
changes in pricing, promotional strategies, consumption patterns,
etc.
Price Demand: The demand is often studied in parlance to price, and is
therefore called as a price demand. The price demand means the amount of
commodity a person is willing to purchase at a given price. While studying the
6
demand, we often assume that the other factors such as income of the consumer,
their tastes, and preferences, the prices of other related goods remain
unchanged. There is a negative relationship between the price and demand Viz.
As the price increases the demand decreases and as the price decreases the
Income Demand: The income demand refers to the
willingness of an individual to buy a certain quantity at a
7 given income level. Here the price of the product,
customer’s tastes and preferences and the price of the
related goods are expected to remain unchanged. There
is a positive relationship between the income and
demand. As the income increases the demand for the
commodity also increases and vice-versa.
Cross Demand: It is one of the important types of demand
wherein the demand for a commodity depends not on its own
price, but on the price of other related products is called as the
cross demand. Such as with the increase in the price of coffee
8 the consumption of tea increases, since tea and coffee are
substitutes to each other. Also, when the price of cars
increases the demand for petrol decreases, as the car and
petrol are complimentary to each other.
Think Like an
Economist!
Problem 1:
• Memory chip maker Micron
Technology Inc. enjoys strong
demand for its products from
manufacturers of computers
and intelligent electronics.
Identify the type of Demand.???
Answer –Problem 1
• Direct demand is consumption demand for goods and services.
• Direct demand is demand by consumers based on the satisfaction
or utility derived from consumption.
• Derived demand is indirect in the sense that it represents demand
by producers based on the usefulness of inputs in the production
of goods and services for final consumption.
• Derived demand arises when it becomes profitable for a firm to
use a given input in the production of some other valuable
product.
DETERMINANTS OF DEMAND
Price of the Product
Income of the Consumers
Prices of related goods or services
Consumer Expectations
Number of Buyers in the Market
1. Price of the Product:-
• People use price as a parameter to make decisions if all other
factors remain constant or equal. According to the law of
demand, this implies an increase in demand follows a reduction
in price and a decrease in demand follows an increase in the
price of similar goods.
• The demand curve and the demand schedule help determine the
demand quantity at a price level. An elastic demand implies a
robust change quantity accompanied by a change in price.
• Similarly, an inelastic demand implies that volume does not
change much even when there is a change in price.
2. Income of the Consumers
Rising incomes lead to a
This relationship
rise in the number of
between income and
goods demanded by
demand is not linear in
consumers. Similarly, a
nature. Marginal utility
drop in income is
determines the
accompanied by
proportion of change in
reduced consumption
the demand levels.
levels.
3. Prices of related goods or services
Complementary products – An
increase in the price of one Substitute Product – An increase
product will cause a decrease in in the price of one product will
the quantity demanded of a cause an increase in the demand
complementary product. for a substitute product.
Example: Rise in the price of Example: Rise in price of tea will
bread will reduce the demand for increase the demand for coffee
butter. This arises because the and decrease the demand for
products are complementary in tea.
nature.
Consumer Expectations & Number of
Buyers in the Market
Expectations of a higher
income or expecting an The number of buyers has a
increase in prices of goods will major effect on the total or
lead to an increase the net demand. As the number
quantity demanded. Similarly, increases, the demand rises.
expectations of a reduced Furthermore, this is true
income or a lowering in prices irrespective of changes in the
of goods will decrease the price of commodities.
quantity demanded.
DEMAND FUNCTION
• Demand function is a function that describe how much of a commodity will
be purchased at the prevailing prices of that commodity and related
commodities, alternative income levels, and alternative values of other
variables affecting demand.
• Price is not the only factor which determines the level of demand for a
good. Other important factor is income. The rise in income will lead to an
increase in demand for a normal commodity.
DEMAND FUNCTION
1] Price of the given commodity:- Other things remaining constant, the rise in price of the
commodity, the demand for the commodity contracts, and with the fall in price, its demand
increases.
2] Price of related goods:- Demand for the given commodity is affected by price of the
related goods, which is called cross price demand.
3] Income of the individual consumer:- Change in consumer’s level of income also
influences their demand for different commodities. Normally, the demand for certain goods
increase with the increasing level of income and vice versa.
4] Tastes and preferences:- The taste and preferences of individuals also determine the
demand made for certain goods and services. Factors such as climate, fashion,
advertisement, innovation, etc. affect the taste and preference of the consumers.
5] Expectation of change in price in the future:- If the price of the commodity is expected
to rise in the future, the consumer will be willing to purchase more of the commodity at the
existing price. However, if the future price is expected to fall, the demand for that
commodity decreases at present.
LAW OF DEMAND
• There is an inverse relationship between quantity
demanded and its price.
• The people know that when price of a commodity goes up
its demand comes down.
• When there is decrease in price the demand for a
commodity goes up.
• There is inverse relation between price and demand . The
law refers to the direction in which quantity demanded
changes due to change in price.
LAW OF DEMAND
A consumer may demand one dozen oranges at $5 per dozen
. He may demand two dozen when the price is $4 per dozen.
A person generally buys more at a lower price. He buys less
at higher price. It is not the case with one person but all
people liken to buy more due to fall in price and vice versa.
This is true for all commodities and under all conditions.
The economists call it as law of demand. In simple words
the law of demand states that other things being equal more
will be demanded at lower price and lower will be demanded
at higher price.
LAW OF DEMAND
Alfred Marshal says that the amount demanded increase
with a fall in price, diminishes with a rise in price.
C.E. Ferguson says that according to law of demand, the
quantity demanded varies inversely with price.
Paul A. Samuelson says that law of demand states that
people will buy more at lower prices and buy less at higher
prices, other things remaining the same.
ASSUMPTIONS OF THE LAW
There is no There is no There is no There is no
change in change in the change in substitute of
income of price of quality of the
consumers. product. product. commodity.
There is no
The prices of The size of
There is no change in
related population
change in taste and
commodities remains the
customs. preference of
remain the same. same.
consumers.
The climate
The tax rates and other
and weather
fiscal measures remain the
conditions are
same.
same.
EXCEPTION OF THE LAW
IGNORANCE
INFERIOR DEMONSTRATI
OF LESS SUPPLY
GOODS ON EFFECT
CONSUMERS
OUT OF
DEPRESSION SPECULATION
FASHION
EXCEPTIONS TO THE LAW
• Inferior goods:- The law of demand does not apply in case of inferior goods. When price of inferior
commodity decreases and its demand also decrease and amount so saved in spent on superior commodity.
The wheat and rice are superior food grains while maize is inferior food grain.
• Demonstration effect:- The law of demand does not apply in case of diamond and jewelry. There is more
demand when prices are high. There is less demand due to low prices. The rich people like to demonstrate
such items that only they have such commodities.
• Ignorance of consumers: - The consumer usually judge the quality of a commodity from its price. A low
priced commodity is considered as inferior and less quantity is purchased. A high priced commodity is treated
as superior and more quantity is purchased. The law of demand does not apply in this case.
• Less supply:- The law of demand does not work when there is less supply of commodity. The people buy
more for stock purpose even at high price. They think that commodity will become short.
• Depression:- The law of demand does not work during period of depression. The prices of commodities are
low but there is decrease in demand. it is due to low purchasing power of people.
• Speculation:- The law does not apply in case of speculation. The speculators start buying share just to raise
the price. Then they start selling large quantity of shares to avoid losses
• Out of fashion :- The law of demand is not applicable in case of goods out of fashion. The decrease in prices
cannot raise the demand of such goods. The quantity purchased is less even though there is falls in prices.
DEMAND SCHEDULE
• PROF. ALFRED MARSHALL, “Demand schedule is a list of prices and
quantities”. In other words, a tabular statement of price-quantity
relationship between two variables is known as the demand
schedule.
DEMAND CURVE
• A curve indicating the total quantity of a product that all consumers are
willing and able to purchase at the prevailing price level, holding the prices
of related goods, income and other variables as constant.
• A demand curve is a graphical representation of a demand schedule. The
price is quoted in the ‘Y’ axis and the quantity demanded over time at
different price levels is quoted in ‘X’ axis. Each point on the curve refers to
a specific quantity that will be demanded at a given price.
WHY DEMAND
CURVE IS
DOWNWARD
SLOPING?
REASONS:
• Marginal utility decreases:- When a consumer buys more units of a commodity,
the marginal utility of such commodity continue to decline. The consumer can buy
more units of commodity when its price falls and vice versa. The demand curve falls
because demand is more at lower price.
• Price effect:- When there is increase in price of commodity, the consumers reduce
the consumption of such commodity. The result is that there is decrease in demand
for that commodity. The consumers consume more or less of a commodity due to
price effect. The demand curve slopes downward.
• Income effect:- Real income of consumer rises due to fall in prices. The consumer
can buy more quantity of same commodity. When there is increase in price, real
income of consumer falls. This is income effect that the consumer can spend
increased income on other commodities. The demand curve slopes downward due to
positive income effect.
• Same price of substitutes:- When the price of a commodity falls, the prices of
substitutes remaining the same, consumer can buy more of the commodity and vice
versa. The demand curve slopes downward due to substitution effect.
Demand Demand curve
shows price
Curve and quantity
relation
Determinatio holding
everything
n else constant.
Quantity
Demand Change in
Quantity
demanded
falls if price
rises.
Curve Demanded
Quantity
demanded
rises if price
falls.
Role of Non- Change in non-
price variables
Price will define a
new demand
Variables curve.
Movements Along Demand
Curve
• A rise in price causes upward
Relation movement along a given demand
Between the curve.
• A price decline causes downward
Demand Curve movement along a given demand
and Demand Demand
curve. Curve Shifts
Function • Demand increases if a non-price
change allows more to be sold at
every price.
• Demand decreases if a non-price
change causes less to be sold at
every price.
Exercise 1: Draw a demand curve
•Market Demand Curve
for Brown Bread
Market demand curve D
shows that at lower prices,
greater quantities are
demanded. This is reflected
in the negative slope of the
demand curve and is
referred to as the “law of
demand.”
Change in Demand for Brown
Bread
Consumers demand more packets of brown bread at each price when the demand curve shifts to
the right from D to D’. Thus, at P = ₹10, consumers purchase 12 million packets of brown bread
with D’ instead of only 6 million with D.
Changes in Demand
Market Demand Shift:
• Movement of the whole curve to the left or right so that more or less of the
commodity would be demanded at any price.
Entire demand curve for a commodity would shift with a
change in:
• Consumers’ incomes
• Consumers’ tastes
• The price of related commodities
• The number of consumers in the market, or in any other variable held
constant in drawing a market demand curve
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Practice Exercise-1
Derive the demand Schedule
from the following demand
function:
QD = 80 – 10P
Demand Schedule
Now Draw Demand Curve
(D)!
Practice Exercise-2
Given the following demand Schedule of a commodity:
P (Rs) 6 5 4 3 2 1 0
QD 0 10 20 30 40 50 60
Draw a demand curve (D’).
After this, plot the two demand curves together (D and D’).
Analyse, does this represent an increase in demand or
increase in quantity demanded? Why?
Video on Law of Demand
https://www.youtube.com/watch?v=Ng3XHPdexNM
Q1. How the demand line for Hula Hoops changed from the introduction of
the Hula Hoops into the marketplace to the height of their popularity in 1958.
Q2. What factors affected the demand for hula hoops?
Q3. Draw the demand curve for hula hoops and change is demand for hula
hoops. Is it a movement along the curve or shift in demand curve?
• Q1. Which of the following cause
demand to increase:
a)An increase in consumers’
income
DISCUSSION b)An increase in the price of
QUESTIONS substitutes
c)An increase in the price of
complements
d)An increase in the number of
consumers in the market
• The demand for a commodity
increases (i.e., shifts to the
right) with an increase in
consumers ’ incomes, with an
increase in the price of
substitute commodities, and
Solution 1 with an increase in the number
of consumers in the market. An
increase in the price of
complementary commodities
will reduce the demand for the
commodity.
• Q2. A fall in the price of a
commodity, holding everything
else constant, results in and is
referred to as
DISCUSSION a)An increase in demand
QUESTIONS b)A decrease in demand
c)An increase in quantity
demanded
d)A decrease in the quantity
demanded
• A fall in the price of a
commodity, holding
everything else constant,
Solution 2 results and is referred t o as
an increase in the quantity
demanded.
Q3. When an individual’s income
rises while everything else
remains the same, that person’s
demand for a normal good
DISCUSSION
a)Rises
QUESTIONS b)Falls
c)Remains the same
d)Any of the above
• When an individual’s
income rises, while holding
everything else the same,
that person’ s demand for a
Solution 3 normal good increases or
shifts to the right, so that
the individual will demand
more of the good at each
price of the good.
Think Like an Economist!
The Ford Escape Hybrid
is the first gas-electric
hybrid SUV produced
and sold in North
America. How would
Ford estimate the
demand influence of
growing environmental
awareness by
consumers?
Solution
• Variables are included in a demand function because they are thought to
affect the quantity of a product that will be purchased. Some variables
such as income, education, age, family size, and so on, are included in
an attempt to identify socio-economic relations that influence demand.
• To the extent that environmental awareness is higher among the highly
educated, or among those with high incomes, demand influences of
environmental awareness could be captured by those variables.
Otherwise, consumer interviews might identify characteristics of
consumers with strong environmental concerns.
• Other factors , like price, price of competing goods, advertising
expenditures, and so on, are included to account for closely linked
economic forces as well as broader market conditions.
Think Like an Economist!
The Energy Department estimates that domestic
demand for natural gas will grow by more than 40%
between now and 2025.
Distinguish between a demand function and a
demand curve.
What is the difference between a change in the
quantity demanded and a shift in the demand curve?
Solution
• A demand function is a statement of the relation between the
demand for a product and all variables (factors) that affect
demand.
• The demand curve, on the other hand, is an expression of the
relation between price and the quantity demanded, holding
constant the effect of all other demand influencing variables.
• Movement along a demand curve describes the relation between
price changes and the quantity demanded.
• Shifts in a demand curve or changes in demand indicate the effect
on demand of changes in one or more of the nonprice variables in
the demand function.
