CHAPTER 6

DEMAND

SYNOPSIS
 Meaning of demand
 The law of demand
 Assumptions to the Law of Demand.

I. MEANING OF DEMAND

1. Definition:

“Demand refers to the desire of a particular commodity

backed by the willingness and ability to pay for it. If any one of
these attributes is missing it will not constitute demand. “

2. Meaning
 The demand for a product or service implies three main conditions.
i. The desire for a particular commodity must exist.
ii. There should be willingness to pay for it.
iii.The means to pay for it must exist.

 Also, demand for a commodity has no meaning unless it is stated in

terms of price i.e. Demand is always at a price.
 A particular quantity of a commodity will be demanded at a
particular price. If the price changes the quantity demanded will
also change.
 A commonly noticed fact is that people generally tend to demand
more at lower prices and less at higher prices.

II. THE LAW OF DEMAND

“The law of demand states that other things being equal, more
will be demanded at lower prices and vice versa.”

“ demand schedule refers to the list of alternative quantities

of a commodity that will be demanded at alternative prices”

DEMAND SCHEDULE

PRICE QUANTITY
(in Rs) DEMANDE
D
( in units)

1 500

2 400

3 300

4 200
5 100
PRICE (in Rs)

QUANTITY DEMANDED ( in Units)

.
  From the basis of the above given schedule a demand curve can
be drawn.
 A typical demand schedule of a group is given above.

1. Explanation of the Demand curve

 On axis X, quantity demanded is mentioned.
 On axis Y, price of quantity demanded is given.
 O is the base of axis X and axis Y.
 Now according to the demand schedule
i. Take quantity demanded- 500 at price Rs 1 at point E
ii. Take quantity demanded- 400 at price Rs 2 at point D
iii. Take quantity demanded- 300 at price Rs 3 at point C
iv. Take quantity demanded- 200 at price Rs 4 at point B
v. Take quantity demanded- 100 at price Rs 5 at point A
 By joining points A, B, C, D and E in the diagram we
get a downward sloping demand curve from left to right.
 This reflects a negative slope and indicates an inverse
relation between price and quantity demanded.
 Also, demand is a dependent variable. Other variables
influence demand.
 Each point on the demand curve shows a different
price quantity relationship.
 Thus the law of demand explains the inverse
relationships between the two variable prices and the
quantity demanded.
 The downward slop of the demand curve shows that
more is demanded at lower prices (extension in demand) and it
also shows that less is demanded at higher prices(contraction in
demand)
 This we can say that when the price falls, demand
expands and when prices rise, less is demanded. This is known as
contraction in demand.
 The change in demand due to the change in price is
known as extension or contraction in demand or Price
Elasticity of Demand.
 i.e. when we move down the demand curve it is
called extension in demand, and when we move up the demand
curve it is called contraction in demand.

For further reference:

 when points A, B, C , D, and E are joined we notice
that the demand curve moves downwards and it has a negative
slope.
 It moves from the left to the right.
  We also notice that when the price is low the
quantity demanded at that price is more.
 But as the price of the commodity steadily increases
from Rs 1 to Rs 2 and so on the quantity demanded at higher prices
becomes lower and lower.
 Hence the demand curve has a negative downward
slope.

III ASSUMPTIONS TO THE LAW OF DEMAND.

 The following are the assumptions to the Law of Demand.

1. Number of Consumers.
 The first condition on which demand for a commodity
depends is the number of consumers. Every demand schedule- or
demand curve is prepared assuming a given number of consumers
in the market.
 The larger the number of consumers, the larger will
be the demand for that commodity.
 But the number of consumers for a product will
depend upon the size of population and also upon the number of
people who enter the market for the particular commodity.

2. Income and Wealth of Consumers

 The second condition on which demand depends is the level of
income and wealth of the consumers.
 If the income of the consumers in the market is high then they
will demand more and if the income of the consumers in the market
is less, then they will automatically demand less.
 Hence a rise in income and wealth will push up demand, while a
decline in the levels of income and wealth of the people will push
down the demand.

3. Taste preferences and habits of consumers.

 The third factor on which demand depends refers to tastes,
preferences and customs or habits of the consumers.
 The demand for every commodity is based on the assumption
that consumers have certain given tastes or preferences.
 If their tastes and preferences change, the demand for the
commodity will also change.
 The same applies to habits and customs. If habits and customs
change then the demand for a particular commodity will be affected
by the change.
  Through continuous advertisements, people’ habits, customs,
tastes and preferences can be changed.

4. Existence of Substitutes- (i) Number of Substitutes and (ii)

Price of Substitutes.
 The fourth condition on which demand depends is the existence
of substitutes. E.g: oranges, bananas, apples etc can be substitutes
for one another.
 Number of Substitutes: The existence of a number of
alternative goods to satisfy a given demand will naturally divide the
total demand. The larger the number of substitutes, the smaller the
demand for each one of them will be.
 Price of Substitutes: The demand for coffee will depend on the
price of tea. If the price of tea is high the demand for tea will come
down and consequently the demand for coffee will rise. If the price
of tea is low then the demand for tea will increase and subsequently
the demand for coffee will decline. Thus a change in the price of
substitutes will also alter the demand curve for a commodity.
5. Expectations about the future.
 The fifth condition on which demand depends is the expectation
of consumers about the future.
 If consumers anticipate changes in supply conditions or in prices,
the demand for a commodity will also change.
 Suppose consumers anticipate shortage in kerosene and
consequently a rise in the price of kerosene.
 They will demand larger quantities of kerosene and will thus
push the prices further up.
 Similarly if people anticipate a fall in the price of any commodity
in the future they may postpone their demand. This will push down
the price even more.
 Thus the demand schedule for a product or the demand curve
will increase or decrease depending on the expectations of the
consumers.
6. General Conditions.
 Finally demand depends upon general conditions such as
fashions, weather conditions, and volume of money in the country.
 If a commodity is in fashion then demand for it will be high, if it
goes out of fashion, the demand for it will come down.
 A change in weather conditions will also change the demand for
goods.

IV EXCEPTIONS TO THE LAW OF DEMAND.

 The following are the exceptions to the Law of Demand.
1. Inflation or Depression
  During inflation, prices rise. If people anticipate a further rise in
prices they would be keen to purchase more of the essential goods
that they normally do. Naturally the prices of these goods will rise
and the people will be anxious to purchase still more. Thus the
demand for goods may increase when prices are rising because of
the change in the anticipation of the people.
 During depression, prices dall but instead of demanding more
goods people may actually demand less for they may anticipate a
further fall in process; naturally prices fall further when demand is
declining.
 Thus a change in the anticipation of people regarding the future
may be responsible for exceptional demands for goods. However
these are not exceptional demands because they go against one of
the assumptions of the law of demand. Viz: the assumption that the
anticipation of the people should remain constant.

1. Goods subject to fashion

 Exceptional demand is also met with in the case of goods subject
to fashion, as for example women dresses. In such cases the
demand may actually decline with the price is cit down during the
off-season. On the other hand the demand may increase when the
price goes up, if the commodity is in fashion.

2. Prestige Goods
 Exceptional demand may be found in the case of prestige gods.
These are goods which have high prices and which are wanted by
the rich for the simple reason of show or distinction. In this group
we may include expensive jewellery, rare pictures etc. The higher
the price the greater will be the prestige attached to the commodity
and accordingly the higher will be demanded for it.

3. Giffin Roberts Paradox

 Exceptional demand may also be met with in the case of ordinary
and commonly consumed food. We know that wheat and rice are
the staple food of the common people; they satisfy hunger and
provide energy more cheaply than other varieties of foodstuffs.
 Suppose the price of wheat rises. The lower income groups will
have to spend more income to get the same amount of wheat; this
means that they will have less income for other foodstuffs. In other
words when the price of wheat goes up, the lower-income groups
demand more and not less wheat. This is the famous Giffen’s
Paradox which states that at a higher price the demand for staple
food increases.