7. Demand
This chapter explains the concept of demand, which is the willingness and ability of consumers to buy goods at different prices. The Law of Demand states that as price increases, quantity demanded decreases, due to substitution, income effects, and diminishing marginal utility. It covers various types of demand—individual, market, joint, derived, and composite—and identifies key determinants such as income, prices of related goods, tastes, and expectations. The demand curve illustrates the inverse price-demand relationship. Movements along the curve reflect price changes, while shifts result from non-price factors. It also explores demand elasticity and types of goods, emphasizing demand’s role in economic planning.
Revision Notes on Demand
1. Meaning of Demand
- Demand refers to the desire, willingness, and ability of consumers to purchase goods or services at various price levels.
- It must be backed by purchasing power (ability to pay).
2. Law of Demand
- States that when the price of a good increases, the quantity demanded decreases, and vice versa, assuming other factors remain constant (ceteris paribus).
- Reasons for the law of demand:
- Substitution effect: Consumers switch to cheaper alternatives.
- Income effect: A lower price increases purchasing power, allowing consumers to buy more.
- Diminishing marginal utility: The additional satisfaction from consuming one more unit decreases, reducing willingness to buy more at the same price.
3. Types of Demand
- Individual Demand: Demand of a single consumer.
- Market Demand: Total demand of all consumers for a product.
- Joint Demand: Demand for complementary goods (e.g., cars and petrol).
- Derived Demand: Demand for a product that arises from the demand for another (e.g., demand for tires depends on car production).
- Composite Demand: Demand for a product that has multiple uses (e.g., milk for cheese, butter, and yogurt).
4. Determinants of Demand
Several factors influence demand apart from price:
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Price of the good: Higher price = lower demand (law of demand).
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Income of the consumer:
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Normal goods: Demand increases with income (e.g., branded clothing).
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Inferior goods: Demand decreases with higher income (e.g., second-hand goods).
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- Price of related goods:
- Substitutes: If the price of coffee increases, demand for tea rises.
- Complements: If the price of petrol rises, demand for cars falls.
- Tastes and preferences: Fashion, trends, and advertisements influence demand.
- Consumer expectations: If consumers expect a price increase, they buy more now.
- Seasonal factors: Demand for winter clothes rises in winter.
- Government policies: Taxes and subsidies affect demand.
5. Demand Curve and Demand Schedule
- Demand Schedule: A table showing the quantity demanded at different prices.
- Demand Curve: A graphical representation of the demand schedule, usually downward sloping from left to right due to the inverse relationship between price and demand.
6. Movements and Shifts in Demand Curve
- Movement along the demand curve (due to price changes):
- Expansion (Extension): Demand increases when the price falls.
- Contraction: Demand decreases when the price rises.
- Shift in the demand curve (due to non-price factors):
- Rightward shift (Increase in demand): Due to higher income, better preferences, or lower substitute prices.
- Leftward shift (Decrease in demand): Due to lower income, unfavorable preferences, or higher substitute prices.
7. Elasticity of Demand
Elasticity measures how much demand responds to price, income, or other factors.
- Price Elasticity of Demand (PED):
- Elastic (>1): Large change in demand for a small price change (luxury goods).
- Inelastic (<1): Small change in demand for a large price change (necessities).
- Unitary Elastic (=1): Proportional change in demand to price.
- Income Elasticity of Demand (YED):
- Positive: Normal goods.
- Negative: Inferior goods.
- Cross Elasticity of Demand (XED):
- Positive: Substitutes.
- Negative: Complements.
8. Types of Goods Based on Demand Behavior
- Normal Goods: Demand increases with income (e.g., electronics).
- Inferior Goods: Demand decreases as income rises (e.g., instant noodles).
- Giffen Goods: Demand increases when price rises due to lack of substitutes (e.g., staple foods in poverty-stricken areas).
- Veblen Goods: Luxury goods where demand rises as price increases (e.g., designer brands).
9. Importance of Demand in Economics
- Helps businesses set prices and predict revenue.
- Guides government policies on taxation and subsidies.
- Affects market equilibrium and economic growth.
Definition of Demand
Demand is the willingness and ability of consumers to buy goods or services at different prices within a specific period, assuming other factors remain constant (ceteris paribus).
Law of Demand
The law of demand states that when the price of a good increases, the quantity demanded decreases, and vice versa, assuming other factors remain unchanged.
Factors that Shift the Demand Curve
Income changes, prices of substitutes or complements, consumer preferences, future expectations, seasonal changes, and government policies. A rightward shift means an increase in demand, while a leftward shift means a decrease in demand.