Download Theory of Demand

Theory of Demand
Meaning and Definition of Demand
According to Benham: “The demand for anything, at a given price, is the amount of
it, which will be bought per unit of time, at that price.”
According to Bobber, “By demand we mean the various quantities of a given
commodity or service which consumers would buy in one market in a given period
of time at various prices.”
Demand Schedule
Demand Schedule: a tabular presentation showing different quantities of a
commodity that would be demanded at different prices.
Types of Demand Schedules
Individual Demand Schedule: Shows various quantities of a commodity that would
be purchased at different prices by a household.
Price
Demand
1
10
2
8
3
6
4
4
5
2
Market Demand Schedule: Shows the various commodities that would be
purchased at different prices by all the buyers of that commodity. It is composed of
the demand schedules of all the individuals purchasing that commodity
Price
Demand of A Demand of B Demand of
market(A+B)
1
10
15
25
2
8
12
20
3
6
10
16
4
4
8
12
5
2
6
8
Demand Curve
Meaning of Demand Curve:
A demand curve is a graphical depiction of the demand of
schedule or the plotting of the demand schedule is called the demand curve. It is
the curve showing different quantities demanded at alternative prices.
Types of Demand Curve:
Individual Demand Curve:
Individual demand curve is
a graphical depiction of the Individual demand of schedule.
Market Demand Curve : Market demand curve is a graphical depiction
of the market demand schedule.
Factors Determining Demand
(i) Price of the commodity – Normally there is an inverse relationship between the
price of the commodity and the quantity demanded. (Px)
(ii) Income of the Consumer – Determines the purchasing power of the consumer.
Generally, there is a direct relationship between the income of the consumer and
demand. (Y)
(iii) Consumer’s taste and preference (T)
(iv) Price of related commodities (Pr)
(v) Consumer Expectation (expected change in price)
(v) Distribution of income
(vi) Size and composition of population
(vii) Other Factors e.g., natural calamities
Qdx = f (Px, Y , T,E, PR, DI, P )
law of Demand
Prof. Samuelson: “Law of demand states that people will buy more at lower price
and buy less at higher prices, others thing remaining the same.”
Ferguson: “According to the law of demand, the quantity demanded varies inversely
with price”.
Assumptions:
•
•
•
•
•
No change in tastes and preference of the consumers.
Consumer’s income must remain the same.
The price of the related commodities should not change.
The commodity should be a normal commodity.
Explanation of Law of demand:
By demand schedule and demand curve
Exceptions of the law of demand :
•
•
•
•
•
Inferior goods
Articles of Distinction
Expectation regarding future prices
Emergencies
Ignorance.
Why does demand curve slope downwards?
(1)
(2)
(3)
(4)
(5)
Law of Diminishing Marginal Utility.
Income effect
Substitution effect
Size of consumer group
Different uses
Difference between Contraction and decrease in demand
Contraction of demand
1.Cause by own price
Decrease of demand
1. .Cause by determinants like
fashion etc. income, fas
2. Increase in own price
2. Several causes like income,
fashion etc.
3Diagrammatically it is upward 3.It is backward shift in demand
Movement.
Curve
Difference between Extension and Increase in demand
Extension of demand
1.Cause by own price
Increase of demand
1. .Cause by determinants like
fashion etc. income, fas
2. Decrease in own price
2. Several causes like income,
fashion etc.
3Diagrammatically it is downward 3.It is a forward shift in
demand
Movement.
curve
Elasticity of Demand
A.Price Elasticity of Demand:
Measures how much the quantity demanded of a good changes when
its price changes.
Or
It may be defined as “Percentage Change in Quantity demanded over
percentage change in price”
Methods of Measurement of Price Elasticity of Demand
Total Expenditure Method Proportionate Method
Geometric Method
Total Expenditure Method :
To measure elasticity of demand, one finds out how much and in what
direction total expenditure
Three possible situations
• 1.Elastic (Ed > 1)
• 2. Unitary elastic (Ed=1)
• 3. Inelastic (Ed < 1)
Px
(Rs.)
Dx
(Units)
T.E.
(Rs.)
Direction
of T.E.
Ed
6
5
1
2
6
10
Opposite
Ed > 1
4
3
3
4
12
12
Constant
Ed = 1
Diagram
2
1
5
6
10
6
Same
Ed < 1
Proportionate Method:
= Percentage change in demand or;
Percentage change in price
= Proportionate change in demand
Proportionate change in price
Geometric (Point) method
– at any given point on the curve
= lower segment of demand curve
upper segment of demand curve
Factors affecting Elasticity of Demand
1. Availability of substitutes
2. Postponement of consumption
3. Proportion of expenditure (needles: inelastic; TV: elastic)
4. Nature of the commodity (necessity vs. luxury)
5. Different uses of the commodity (paper vs. ink)
6. Time period (elastic in the long term)
7. Change in income (necessaries: inelastic)
8. Habits
9. Joint demand
10. Distribution of income
11. Price level (very costly & very cheap goods: inelastic