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Theory of Demand
Chapter 3
Theory of Demand
Chapter 3
Demand
Demand refers to the quantity of a commodity that a consumer is willing and able to buy at each
possible price during a given period of time.
v
Demand schedule: -
Demand schedule refers to the tabular representation of quantity demanded of a commodity at
different possible price.
There are two types of demanded schedule:i. Individual demand schedule
ii. Market demand schedule
Individual demand schedule
Individual demanded schedule refers to the tabular representation of quantity demanded of a
commodity by an individual consumer in the market at different possible price.
Individual demand schedule
Price of commodity (Rs)
Quantity of commodity(unit)
1
2
3
4
4
3
2
1
v Market demand schedule
Market demanded schedule refers to the quantity demanded of commodity by all consumers in
the market at different possible price.
Price of commodity
1
2
3
4
Market demand curve
A,s demand
B’s demand
4
3
2
1
Assumption: There are only 2 buyers in the market
5
4
3
2
Market demand
4+5=9
3+4=7
2+3=5
1+2=3
S.P Chandravanshi’s Complete guide for Economics for class XII for sure success
v Demand curve: Demanded curve refers to the graphical representation of quantity demanded at their different
possible price.
There are two types of Demand curve.
i. Individual demand curve.
ii. Market demand curve.
v Individual demands curve
Individual demanded curve refers graphical representation of quantity demanded by an
individual consumer in the market at different possible prices.
v Market demand curve: Market demanded curve refers to graphical representation of quantity demanded by all
consumers in the market at different possible prices.
v Demand function
v Demand function refers the functional relationship between demand for a commodity and its
various determinants.
Theory of Demand
Chapter 3
There are two types demanded function
i. Individual demand function
ii. market demand function
1) Individual demand function: Individual demand function means functional relationship between demand for a commodity by
an individual consumer in the market and its various determinants.
It may be expressed as,
?? ? ???? ??? ???????
Where,
?? ? ??? ??? ?????? ? ??????
? ? ??????????????????ℎ??.
??? ??????? ??? ? ??????
??? ??????? ??????? ?????.
?? ????? ??? ?ℎ??????? ??.
? ? ????????? ???????????
? ? ?????????????
1. ?? (Price of the commodity):- price of the commodity is most important determinants for a
demand because to purchase of any goods or commodity depends on price of the commodity
firstly.
2. ?? ?(Price of related goods):- change in price of related goods also effects on the demand for a
commodity.
it includes two types of goods .
i. Substitute goods.
ii. Complementary goods.
3. Substitute goods: - Substitute goods mean those which are similarly to other and work also
similarly.
Ex: - tea and coffee, ink pen and ball pen.
4. Complementary goods:- complementary goods are those which are incomplete without other
goods.
Ex; - pen and ink car and petrol etc.
5. Income of the consumer: - Income of the consumer is important determinants for demand for a
commodity because a consumer will buy more goods ar commodity due to decrease in price and
will buy less quantity of goods due to rise in price.
6. Tastes and Preferences: - ????????? ??????????include change in fashion, customs, habits etc,
if a commodity is in fashion or is preferred by the consumers, and then demand for such
commodity rises.
7. Expectation: - it is also important factor which effect on the demand for commodity. it a consumer
expect in future to rise in price, they will increase the demand and vice-versa.
S.P Chandravanshi’s Complete guide for Economics for class XII for sure success
2) Market demand function: Market demand function is the functional relationship between demand for a commodity and its
various determinants.
It is expressed as ?? ? ???? ??? ????????????
8. Distribution of income: - it also effects on the demand because more of the commodity is demand
it the distribution of income is equal and less quantity of commodity is demand in case of unequal
distribution of income.
9. Population rise: - more quantity of the commodity is demanded due to increase in population of
vice-versa.
10. Law of demand: - the low of demand states that other things remaining constant, quantity
demand of a commodity increase with fall price and diminishes with rise in price.
Assumption of low of demand: - there are following assumption of the low of demand.
1.
2.
3.
4.
5.
6.
7.
8.
Tastes and preferences of the consumer remain constant.
There is no change in the income of the consumer.
Price of related goods does not change.
Consumers do not expect any change in the price of the commodity in the more
future.
There is no expectations of change in price in future
All the unit of the goods are homogeneous
Commodity should be normal goods not the Giffin goods.
There should not change in the population.
why more of a good is purchased when its price falls?
Or
Why does demand curve slope downwards?
As we know that law of demand indicates inverse relationship between price and quantity
demanded of a good.
Downwards Slops of demand indicates that more is purchased in response to fall
in price. The reason behind downwards slope of the demand curve of the demand curve or why
more of goods are purchased as its price falls are:1. Low of Diminishing marginal utility: - according to Marshall, as a consumer, in a given time,
increase the consumption of a commodity, the utility from each successive unit goes on
diminishing. A consumer gets maximum satisfaction, when price of a commodity if equal to its
marginal utility. Thus we can say that a consumer will pay less and less price for each successive
unit.
2. Substitution effects:-Hicks and Allen have explained the law in terms
of Substitution on effects and income effect. When the price of a commodity falls, it became
relatively cheaper than other commodities.
Theory of Demand
Chapter 3
3. Income effect: - it is also an important causes of slope downwards of demand curve, when the
price of commodities falls, the consumer can buy the same quantity of the commodities with
lesser
money or he can buy more of same commodity with same amount of money.
4. Size of consumer’s group: - When price of a commodity falls, those consumers also begin to
purchase
se it who were not buying it. Thus we can say that size of consumer group is also an important
causes for more demand of commodity due to falls in demand.
5. Different users: - There are so many goods which have alternative user. e. g. grams are used for
human consumption as well as consumption of horses, and milk is important for children as well as
for tea and sweets. So such goods are used in limited purpose when price are high. If their prices
fall they will be used for varied purpose and demand for such commodity will increase thus
different uses of a commodity make the demand curve slop downwards.
Exceptions of law of demand: As we know that, law of demand indicates the inverse relationship between demand and price of
the commodity, However, there are certain cases where law of demand does not apply, in this
case more quantity of good is demanded when price rises, and decrease the demand of a
commodity due to fall in price, which is called exceptions of law of demand. The following are the
important exceptions to the low of demand.
Article of distinction or prestigious goods: - this is such type of goods which is symbol of status.
Prof. Veblen gave the example of diamond firstly. Such goods are demanded more due to rise in
price. And decrease in demand due to fall in price because they will not be considered as status
goods.
Ignorance:- some times because of ignorance of the consumer, more quantity of commodity are
demand when its price rises, because they think that the goods having low price will not be of
good quality. And the goods having high price must be of good quality.
Fear of shortage: - sometimes some goods are demanded more in the fear of scarcity or shortage
in the near future which breaks the law of demand.
Demand for necessaries: - the low of demand does not apply in case of necessaries of life. For
example, commodities of consumption e. g. rice, wheat, salt, medicine etc.
Future Expectations in the change in Price: - this situation does not apply the law of demand if a
consumer expect about increase in price of the commodity, then they will demand more and viceversa
Giffin goods: - Giffen goods are those which are of inferior quality. Its price effect is positive and
income effect is negative, Giffen goods are those in which demand false with fall in price and rise
in demand with rise in price. Giffen goods are those which income effect is negative affect, in this
case decrease in demand with rise in income and increase in demand with falls in income.
So, Giffen goods are main exceptions of low of demand.
S.P Chandravanshi’s Complete guide for Economics for class XII for sure success