Unit 2.

Demand Analysis
 Session Objective
• Define Demand and its related Concepts
• List the factors effecting demand
• Assess market demand
• Derive individual and market demand
curves
• State law of Demand
• Analyse its assumption and Exceptions
 Meaning of Demand Analysis
• Means the study of factors which influence
the demand of a commodity or service.
• Only on the basis of determinants of
demand one can forecast demand
• Analysis of Demand enables the producer
to adjust his production to the demand to
maximize the objective functions.
 Objectives of Demand Analysis
• Analyze the Determinant of Demand
• To Measure the elasticity of Demand
• Prepare Sales or Demand Forecast
• Manipulate Demand
• Make Appropriate changes in allocation of
Resources
 Structure
• Concept of Demand
• Determinants of Demand
• Demand Schedule
• Demand Curve
• The Law of Demand
• Assumption Underlying the Law 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.” 
 Concept of Demand
• It refers to the quantity of a commodity that an individual
consumer or household buys at a given price.
• Demand may be defined as desire backed by
Purchasing Power
• Demand must be related to time period i.e. expressed in
terms of per unit of time.
• In Economics language to say Consumer demand for a
particular Commodity the following three conditions must
be fulfilled
A) Desire for Commodity
B) Ability to Pay
C) Willingness to Pay
 Kinds of Demand 
• Individual demand
• Market demand
• Income demand
• Demand for normal goods (price –ve, income +ve)
• Demand for inferior goods (eg., coarse grain)
• Cross demand
• Demand for substitutes or competitive goods (eg.,tea &
coffee, bread and rice)
• Demand for complementary goods (eg., pen & ink)
• Joint demand (same as complementary, eg., pen & ink)
• Composite demand (eg., coal & electricity)
• Direct demand (eg., ice-creams)
• Derived demand (eg., TV & TV mechanics)
• Competitive demand (eg., desi ghee and vegetable oils)
• Demand of unrelated goods
 Determinants of Demand
• Factors Influencing Individual Demand
• Factors Influencing Market Demand
 Factors Influencing Individual Demand

• PRICE: demand is inversely proportional to price. when price

increases demand decreases and vice versa

• income: A rise in income would result in the people demanding

more of normal goods. in case of inferior goods rise in income
causes a fall in demand. demand for godds of necessities
remains the same with change in price.

• Price of related goods: related goods may be in the form of

substitute or complementary goods

• Substitute goods: these goods satisfy the same type of demand

and hence can be used in place of each other eg tea and
coffee. With a rise in price of tea people will shift their
consumption to the relatively cheaper coffee. hence demand for
coffee will rise. they have a positive relationship
• Complementary goods: these goods are jointly used or
consumed together e.g. ; petrol and cars. increase in the price of
petrol would cause a decrease in the demand for cars. hence the
price of petrol has a negative relationship with the quantity
demanded of cars.

• Tastes and preferences : These depend upon the social

customs, habits and general lifestyle. Some of these like fashion
keep on changing as a result their demand keeps on changing.
For eg : the craze of being fit has increased the demand for cycles

• -Consumer's expectations : If consumers expect a rise in price

of goods in future the demand for thesegoods will increase,
similarly if they expect a rise in in come they will buy more. an
expectation of scarcity of a commodity will lead to a fall in its
demand.

• - Consumer credit facility: with the availability of credits and

loans from banks consumers have been able to afford
commodities they would have otherwise not purchased. the
demand for cars has increased due to bank loans.
 Factors Influencing Market Demand
• Size and composition of Population : larger the population larger
will be the number of consumers. Also the composition of population
has an effect on the demand. eg : A higher number of females will
have an increased demand for saris. These are the demographic
effects on demand for the commodities.

• Distribution of income: If the distribution of income in the country is

unequal the demand for luxurious goods will increase. On the other
hand if the distribution of income is equal the demand for basic goods
of necessities will increase whereas demand for luxurious goods will
decrease
• .
Government policy : If government imposes taxes on commodities
their price will increase and demand will decrease while in case if
granting subsidies the price will decrease and hence the demand will
increase.
•
Season and weather : demand for woolen clothes goes up in winter
whereas their demand is extremely less in summer .
 Demand Function
• In Mathematical Lang. function is a
symbolic statement of relationship
between the dependant and the
independent variable
• The Demand Function is an algebric
expression of the relationship between
demand for a commodity and its various
determinants that effect this quantity.
 Demand Function:Types
• Individual demand Function; refers to the quantities of a
commodity demanded at various prices, given his Income, price
of related goods and tastes. It is expressed as
• D=f(P)
• Market Demand Function
• Dx=f(Px,Pr,Y,C,T)
• Where Dx is Demand for Commodity X
• Px is Price for Commodity X
• Y is Income of the Consumer
• Pr is Price of Related Commodity
• C is Climate
• T is taste and preference of the Consumer
• f stands for functional relationship
• When Other things remaining Constant Cetris Paribus Demand
must vary inversely to the price. Thus Demand function can be
written as: D=f(Px)
 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
 
 Law of Demand
• The law of demand explains the inverse relation between
quantity and price in general. It can be stated as follows:

• "Ceteris Paribus (other things remaining equal), the quantity of

a good demanded will rise (expand) with every fall in its price
and the quantity of a good demanded will fall (contract) with
every rise in its price.“

• In a functional form this can be stated as,

• qd = f (P) [ Y, Ps, N, Z ]const.
• This explains that qd, the quantity of a good demanded
functionally depends on its price P. However, the quantity
demanded is also causally related to other factors such as
income of an individual (Y), prices of substitutes (Ps), number
of members in the family (N) and the tastes of the consumer
(Z). In order to satisfy price-demand relation, the effect of these
other variables has been restrained by assuming them to be
constant.
 Law of Demand
• Initially, the law of demand was based on the principle of
diminishing marginal utility (DMU). But in that case it
was implied that utility is cardinally or absolutely
measurable. There were other practical difficulties in the
DMU approach as well.

• Therefore recently attempts have been made to place

the law of demand on the empirical and realistic basis.
One such attempt is in the form of Indifference Curve
(IC) analysis. Under the IC approach it is enough to
measure utility in ordinal or relative terms.
• Exceptions:
• Inferior goods
• Articles of snob appeal.
• Expectation regarding future prices
• Emergencies
• Quality-price relationship
• Conspicuous necessities.
• Ignorance
• Change in fashion, habits, attitudes, etc..
•  
Importance:
• Price determination.
• To Finance Minister
• To farmers
• In the field of Planning.
 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. 
Market Demand Schedule
• Shows the various commodities that would
be purchased at different prices by all the
buyers of that commodityIt is composed of
the demand schedules of all the individuals
purchasing that commodity.
 Demand Shedule
• A Tabular Statement D(demand)
qd (In Kg.)
Schedule
P in Rs
of Price-Quantity
relationship is known
as demand Shedule

10 0

8 1
4 2
1 3
0 4
• Demand Schedule : The various quantities
demanded of a particular commodity are
presented here in a schedule.
• At arbitrarily chosen prices, the quantity of a
commodity an individual consumer is expected
to demand, is explained by the schedule.
• Since quantity demanded (qd) depends on the
relevant prices of goods, the two can be
expressed in the form of an algebraic function as
well. The schedule shows that as price goes on
rising (from zero to 4) the quantity demanded
goes on falling (from 10 to zero).
 Demand Curve
• A Demand curve is a graphical depiction
of the law of demand.
• The picturization or the plotting of Demand
Schedule is called Demand Curve.
• It is the curve showing different quantities
demanded at alternative prices
 Figure 1: The Demand Curve
Price per
Bottle

When the price is $4.00

per bottle, 40,000 bottles
are demanded (point A).
A
$4.00
At $2.00 per bottle,
60,000 bottles are
B demanded (point B).
2.00

40,000 60,000 Number of Bottles

per Month
 Demand Curve
• The scheduled information has been presented in the form of a
demand curve in Figure above.
• In the figure, the units of quantity of the goods have been
measured along the horizontal axis (OX) and the respective
prices have been shown along the vertical axis (OY). The curve
intersects OY axis at point A which shows highest price at
which quantity demanded is zero.
• On the contrary the curve intersects OX axis at point B
showing largest quantity demanded where price is zero. Both
OA and OB are said to be intercept quantities when one of
the variables assumes zero value.
• Note that demand curve is sloping downward. This follows the
law of demand (given below). But the demand curve of such a
shape is obvious from the fact that quantities demanded and
price in the demand schedule hold an inverse relationship
 The Demand Curve
• The demand curve is the graphic representation of the
law of demand.
• The demand curve slopes downward and to the right.
• As the price goes up, the quantity demanded goes
down.
• The slope of the Demand Curve is negative and
inversely related as seen above
 Why Demand Curve Slope Downward
• (1) Substitution effect: When the price of a commodity falls, it becomes
relatively cheaper than other substitute commodities. This induces the
consumer to substitute the commodity whose price has fallen for other
commodities, which have now become relatively expensive. As a result of
this substitution effect, the quantity demanded of the commodity, whose
price has fallen, rises.

• (2) Income effect: When the price of a commodity falls, the consumer can
buy more quantity of the commodity with his given income, as a result of a
fall in the price of the commodity, consumer's real income or purchasing
power increases. This increase induces the consumer to buy more of that
commodity. This is called income effect.

• (3) Number of consumers: When price of a commodity is relatively high,

only few consumers can afford to buy it, And when its price falls, more
numbers of consumers would start buying it because some of those who
previously could not afford to buy may now afford to buy it, Thus, when the
price of a commodity falls, the number of its consumers increases and this
also tends to raise the market demand for the commodity.
• law of diminishing marginal utility – According to this law ,when a consumer buys more
units of a commodity ,the MU of that commodity continues to decline . therefore the
consumer will buy more units of that commodity only when price falls. When less units of
that commodity are available ,utility will be high and consumer will be prepared to pay more
for the commodity. This proves that demand will be more at a lower price and it will be less
at a higher price. That is why the demand curve will be more at a lower price and it will be
less at a higher price. That is why the demand curve is downward sloping.
• There are different uses of certain commodities and services that are responsible for the
negative slope of the demand curve. With the increase in the price of such products they
will be used only for important uses and their demand will fall. On the contrary ,with the fall
in the price ,they will be put to various uses and their demand will rise. For instance ,with
the increase in the electricity charges ,power will be used primarily for domestic lighting but
if the charges are reduced ,people will use power for cooking ,fans , heaters etc.
• Every commodity has certain consumers but when its price falls ,new consumers start
consuming it , as a result demand increases. On the contrary ,with the increase in the price
of the product ,many consumers will either reduce or stop its consumptio and the demand
will be reduced. Thus due to the price effect when consumers consume more or less of the
commodity ,the demand curve slopes downward.
 Exceptions to the Law of Demand
• Giffen goods: these are those inferior goods on which the consumer
spends a large part of his income and the demand for which falls with a fall
in their price. The demand curve for these has a positive slope. the
consumers of such goods are mostly the poor. a rise in their price drains
their resources and the poor have to shift their consumption from the more
expensive goods to the giffen goods, while a fall in the price would spare the
household some money for more expensive goods. which still remain
cheaper. These goods have no closely related substitutes, hence income
effect is higher than substitution effect.
• -Articles of snob appeal: Goods which serve ' status symbol ' do not
follow the law of demand. these are goods of ' conspicuous consumption
'.they give their possessor utility in the sense of their ownership. rich buy
diamond as their possession is prestigious. when their price rises the
prestige value goes up.
• Expectations regarding future prices: If the price of a commodity is rising
and is expected to rise in future the demand for the commodity will increase.
•
Emergency: At times of war, famine etc. consumers have an abnormal
behavior. If they expect shortage in goods they would buy and hoard goods
even at higher prices. In depression they will buy less at even low prices .
• Quality-price relationship: some people assume that expensive goods are
of a higher quality then the low priced goods. In this case more goods are
demanded at higher prices.
 “Change in Quantity Demanded” vs.
“Change in Demand”
• Language is important when discussing demand
– “Quantity demanded” means
• A particular amount that buyers would choose to buy at a
specific price
• It is a number represented by a single point on a demand
curve
• When a change in the price of a good moves us along a
demand curve, it is a change in quantity demand
– The term demand means
• The entire relationship between price and quantity
demanded—and represented by the entire demand curve
• When something other than price changes, causing the
entire demand curve to shift, it is a change in demand
 Income: Factors That Shift The
Demand Curve
• An increase in income has effect of shifting
demand for normal goods to the right
– However, a rise in income shifts demand for
inferior goods to the left
• A rise in income will increase the demand for
a normal good, and decrease the demand for
an inferior good
• Normal good and inferior good are defined by
the relation between demand and income
 Wealth: Factors That Shift The
Demand Curve
• Your wealth—at any point in time—is the
total value of everything you own minus the
total dollar amount you owe
- Example
• An increase in wealth will
– Increase demand (shift the curve rightward) for
a normal good
– Decrease demand (shift the curve leftward) for
an inferior good
 Prices of Related Goods: Factors
that Shift the Demand Curve
• Substitute—good that can be used in place of
some other good and that fulfills more or less the
same purpose
– Example
– A rise in the price of a substitute increases the demand
for a good, shifting the demand curve to the right
• Complement—used together with the good we are
interested in
– Example
– A rise in the price of a complement decreases the
demand for a good, shifting the demand curve to the left
 Other Factors That Shift the
Demand Curve
• Population
– As the population increases in an area
• Number of buyers will ordinarily increase
• Demand for a good will increase
• Expected Price
– An expectation that price will rise (fall) in the future shifts the
current demand curve rightward (leftward)
• Tastes
– Combination of all the personal factors that go into
determining how a buyer feels about a good
– When tastes change toward a good, demand increases, and
the demand curve shifts to the right
– When tastes change away from a good, demand decreases,
and the demand curve shifts to the left
 Activity
• Which of the following statement depicyting
demand are correct.Give Reasons
• A)In Faridpur village the population is two lakh
• B)A vegetable seller sells 20 vegetables of
different varieties in a day
• C)A toy shop selling different types of toys each
priced at Rs. 10 at a hill station makes a
business of 2000 each day.
• A farmer gets a bumper crop this season
and makes a lot of money. He goes to the
market and buys a lot of things for his
family. This is Expansion of demand or
not. Elaborate with reasons
 Key words
• Demand: Desire backed by adequate purchasing
power
• Giffen Goods: Inferior goods contradicting the law of
Demand
• Shift in the demand curve: Demand increases or
decreases because of factors other than price
• Law of demand: Consumerial behaviour towards
demanding a commodity in relation to price changes
• Demand Schedule: Tabular representation of price
quantity relationship
• Demand Curve: Graphical relationship of the demand
schedule
Change in demand
 Change in Quantity Demanded
(Movement Along the Demand Curve)

 A movement along the demand curve is caused by a change in the price of

the good only other things remaining constant. It is also called change in
quantity demanded of the good. Movement is always along the same
demand curve and is of the following types:
 1. Expansion of demand, and
 2. Contraction of demand
 Expansion of Demand: It refers to rise in demand due to fall in the
price of the good.
 Contraction of Demand: It refers to fall in demand due to rise in the
price of the good..
Figure 3(a): Movements Along and
Shifts of The Demand Curve
Price
Price increase moves us
leftward along demand
curve
P2
Price decreasese moves
us rightward along
demand curve
P1

P3

Q2 Q1 Q3 Quantity
 Shifts of the Demand Curve

 When the amount purchased of a commodity rises or falls because of the change in
factors other than the price of the commodity. It is called change in Demand or shift in
demand curve.
 It is of two types:
 Increase in demand: The demand curve shifts UPWARD or to the right, so that
the individual demands more of the commodity at each commodity price, provided the
good is a normal good. If the price of a substitute commodity increases or the price of
a complementary commodity falls, or if the consumer’s taste for the commodity
changes, the demand curve shifts upward to the right.
 Decrease in demand : if the income of the consumer falls or that product goes out of
fashion ,then the quantity demanded falls for every given price and the demand
curve shifts upward or to the left.
 Figure 2: A Shift of The Demand
Curve
Price per
Bottle An increase in income
shifts the demand curve for
maple syrup from D1 to D2.

At each price, more bottles

are demanded after the
shift

B C
$2.00

D1 D2

60,000 80,000 Number of Bottles

per Month
Figure 3(b): Movements Along and
Shifts of The Demand Curve
Price
Entire demand curve shifts
rightward when:
• income or wealth ↑
• price of substitute ↑
• price of complement ↓
• population ↑
• expected price ↑
• tastes shift toward good

D2
D1

Quantity
Figure 3(c): Movements Along and
Shifts of The Demand Curve
Price
Entire demand curve shifts
leftward when:
• income or wealth ↓
• price of substitute ↓
• price of complement ↑
• population ↓
• expected price ↓
• tastes shift toward good

D1
D2

Quantity