Lecture-9

Demand Analysis
Learning Objective: Theory of demand, demand schedule and
curve, and market demand price
DEMAND:
Demand indicates desire to buy backed by adequate purchasing power,
willingness to buy and ability to buy. Thus demand for a product refers to the
amount of it which will be bought per unit of time at a particular price.

DEMAND SCHEDULE: The demand schedule lists possible prices, along with
quantity demanded at each price.
Demand Schedule
Price ( Rs )
10
8
6
5
4

Quantity Kgs.)
20
25
30
35
40

The diagrammatic representation of demand schedule is demand curve.

Individual demand refers to the demand for a commodity by an individual
consumer. Whereas, market demand, is the sum of the individual demands of
all consumers in the market.
Demand schedule enables to ascertain the likely changes in the demand as a
result of price change. It also enables to understand easily and correctly the
law of demand and elasticity of demand. From a practical point of view the
market demand schedule proves of great use to businessmen, especially to
monopolists.

LAW of DEMAND:
Law of says that quantity demanded varies inversely with price, other things
constant i. e. higher the price, the smaller the quantity demanded or lower the
price, the larger the quantity demanded (Alfred Marshall )

Exception to the law of demand:

Other things remaining the same are very important assumption of the law of demand.
These assumption or exceptions are:
Scarcity: In times of scarcity, although prices are rising, yet people tend to buy
more of the scarce goods.
Necessaries of life: Some goods are essential and consumer must consume them
at all costs.
Ignorance: Some time consumers buy more things at high price out of ignorance.
Self Display: Certain things are used for self display as in case of diamonds, , the
higher the price, greater may be their attractiveness.
Giffens; Paredox : Giffens; Paredox provides an exception to the law of demand.
It is said when the price of Giffen goods/ inferior goods fall, the demand for such
goods also falls and risr with a rise in the ir prices.
Factors affecting the demand:
There are many factors which affect the demand for a good. The main factors are price of
substitutes, income, consumers taste, season, population, technology, distribution of
wealth etc.
Substitution Effect: When the price of a good falls, its relative price makes
consumers more willing to purchase this good and when the price of a good
increases, its relative price makes consumers less willing to purchase this good.

The changes in the relative prices the price of one good compared to the prices
of other goods causes the substitution effect

Income Effect: Money income means number of r received per period of time
whereas; real income means income measured in terms of the goods and services
it can buy. When the price of good decreases, real income increases and when the
price of good increases, real income declines. When there is fall in the price of a
good, money income of the consumer goes up so he can either purchase more
with the same amount of money or the same quantity with less of money. This is
known as income effect of price fall.
Change in Quantity demanded means the movement along the same demand. A
movement along a demand curve occurs when own price changes, holding other
factors as constant. This result into
a. Extension of Demand

When price fall from P0 to P1, then quantity demanded increases from
OM0 to OM1.This is known as extension in demand.
b. Contraction of demand: When price increases say from P0 to P1 then quantity
demanded decreases from O M0 to OM1. This is called contraction in demand.

Change in demand: Whenever demand change on account of other factors like income,
fashion, population etc.
Types of changes in demand
a. Increase in demand: With an increase in income, the demand curve shifts to the
right. With this demand curve shifts to the right, the quantity demanded increases
for all prices. In most cases, an increase in income shifts the demand curve to the
right. In this case, the good is called as a normal good.

b. Decrease in demand: As income increases consumers tend to buy less of the

inferior goods as they can now afford more expensive normal goods. That is, an
increase in income shifts the demand curve for an inferior good to the left.

Price
10
8
10
10

Quantity
50
75
50
75

Effect on Demand
Extension in demand

Price
10
15
10
10

Quantity
50
30
50
40

Effect on Demand
Contraction in demand

Increase in demand

Decrease in demand

Exceptional demand curve: (Geffens paradox)

The Giffen Paradox holds that the demand increases when the price rises and vice
verse. This behaviour is observed in the following four cases.

The good may be a necessary item for life.

Expected shortage in the future
Adds prestige to the owner and
Out of sheer ignorance

Types of demand:
1.

Price demand :
Demand is only related with price of the product, keeping other factors
constant. Price is indirectly proportionately related with quantity demanded

2. Income demand :
D= f (y / other factors held constant). When income increases, the demand
for superior goods increases and vice versa
3. Cross demand :

D= f (price of related commodity / other factors held constant) e.g Demand

for tea in relation to the prices of coffee
4.

Derived Demand:
The demand for raw material depends on the demand for final good at the
consumer level. The demand for the raw material at the producer level is
known as derived demand. (E.g.). More demand for paper will reflect the
higher demand for pulpwood

5. Composite demand :
A commodity can be put to several uses and that commodity may be
demanded to satisfy any one or more of such uses; (E.g.) Electricity may be
demanded for several of the household, industrial and decorating purposes
Downward from left to right
Questions
Demand curve slopes
a) Downward from left to right
b) Upward from left to right
c) Downward from right to left
d) Upward from right to left
2. The following are the exceptions to the Law of Demand. Which of the following is not
correct?
a) Expected change in future prices
b) Status symbol commodity

c) Ignorance of the consumer

d) Change in the prices of the commodity
3. The sum of the individual demands of all consumers in the market is
a) Individual demand curve
b) Market demand curve
c) Both a and b
d) None of the above
4. The diagrammatic representation of demand schedule is
a) Demand curve
b) Cost curve
c) Production curve
d) Supply curve
5 The change in the price of a commodity causes
a) Change in demand
b) Change in quantity demanded
c) Both a and b
d) All the above
Answers
1 a)
2d)
3 b)
4 a)
5 b)